1 U.S. and European Debt Crises Lim Mah-Hui October 19, 2011 PwC Seminar Penang.
U.S. and European Debt Crises
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Transcript of U.S. and European Debt Crises
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U.S. and European Debt Crises
Lim Mah-Hui October 19, 2011
PwC SeminarPenang
Debt Profile of Spain, Portugal, Greece, 2009
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Spanish Debt by Sector of Issuer, % of Total, 1995 – 2009
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Portuguese Debt by Sector of Issuer, % Total, 1998 - 2009
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Greek Debt by Sector of Issuer, % of Total, 1997 -2009
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Sovereign Debt Crisis OR Banking Crisis ?
Similarities and links btw Global Finance Crisis & European Crisis
Both are banking crises European Crisis is Act II of the Global
Financial Crisis
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Global Financial Crisis U.S. economy growth slowed after 1970s Growth supported by economy taking on
more debt > debt driven economy Financial debt grew fastest, followed by
household debt Total U.S. Debt 350% of GDP Finance now dominates the real economy –
financialization of economy – tail wagging the dog
Financial derivatives & transactions multiple of real ecy
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Inverted Liquidity Pyramid - $607 trillion - 13 x world GDP
European Union
Biased nature of EU. Core and peripheral countries
different productivity and inflation rates but still same currency and monetary policies
Peripheral countries unable to compete with core > worsening current account imbalance
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Current Account Imbalance
Current account deficits financed by debt creating financial flows – bank loans and portfolio investments from core countries
Increase in external debt Increase in domestic debt through
financialization – increase in household debt and financial debt
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Bank Crisis of Core Countries
Banks from core ctries esp Germany and France lent to peripheral countries at low interest rates because of EU – mispriced risks
Most of the debt was private sector debt
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European Crisis Act II of GFC
Problems worsened with Global Financial Crisis
State revenue plunged, expenses rose due to fiscal prime pumping
Fiscal and monetary loosening created a new set of bubble
Greek sovereign debt – equivalent of U.S. subprime loans
Contagion effect on other countries12
Rescue of Banks not Countries
E.U. rescue plan not to rescue the peripheral countries but to rescue the banks from core countries that are heavily exposed
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THANK YOU
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