IMPACT OF

USA Crisis & Euro Crisis

ON GLOBAL ECONOMY

SHUBHAM BHATIA

USA Debt crisis• Also known as Global Financial Crisis.• It was the worst financial crisis since the Great Depression of 1930.• It threatened the collapse of large financial institutions, which was

prevented by the bailout of banks by national governments.• But stocks were dropped worldwide.• It played a significant role in Great Recession of 2008-12.• It also contributed in European Debt Crisis.

European Debt Crisis• Multi layer debt crisis taking place in EU since 2009.• Portugal, Ireland, Greece, Spain & Cyprus were unable to replay their

government debt.• Structure of Eurozone as currency union without fiscal union contributed to the

crisis.• Leading European nations implemented a series of financial support measures

such as the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM).• The European Central Bank (ECB) also contributed by lowering interest rates in

order to maintain money flows between European banks.• Its impact indirectly led to Britain leaving EU.

USA Debt CrisisStarted in 2001 resulted in 2008.

• In May 2000, the federal interest rate was 6.5%.• George W. Bush became the president in Jan 2001.• He made it to 1.75% in Dec 2001.• It created the flood of liquidity.• People became interested in taking loans.

Increased Liquidity• People with no or less income,

no or lower jobs & without assets started taking loans.• They fulfilled their wish of

having their own houses, expensive cars and stores etc.• Almost every American Citizen

became debtor of bank.

• It caused inflation in the market.• Price of assets

became higher.

Increase in prices of houses/other assets

+Easy Credit Availability

=High Yield Debt.

• Federal rate continued to be reduced.• In June,2003 it became 1% (lowest in 45 years).• Bankers started repackaging loan into collateral debt application

to investors.• People became more interested in taking more loans for their

personal needs and demands.• The whole debt was increased to more than $1 trillion.

• Government asked their banks to leverage their capitalization to overcome this situation.• It was estimated that they need to capitalize their banks with 30-

40 times.• They instantly increased their interest rates.• Supreme borrowers couldn’t afford to pay such rates &

eventually they made their payments default.• Many of the debtors announced their bankruptcy.

• Till Feb 2007, More than $1 Trillion bankruptcy was announced.• In Aug 2007, NASDAQ, NYSE, CHX showed their incapability of

solving this issue.• Problem became bigger and banks collapsed their interest rates

to create flow of funds.• The whole economy went down.• Because of having world bank and being universal trader, global

economy got effected.• Even low rates couldn’t stop bankruptcy applications.

Impact on Global Economy• If the liquidity crisis continues, an extended recession could occur.• Investment bank UBS stated in 2007that 2008 would see a clear global

recession, with recovery unlikely for at least two years.• Three days later UBS economists announced that the "beginning of the end"

of the crisis had begun.• Capital injection by governments, interest rate cuttings were started.• Eventually every economy collapsed.• Stock market of almost every relative country dropped.• International trade imbalanced.• Resulted in big contribution to European Debt Crisis.

European Debt CrisisEuro Debt Crisis is combination of different factors.• Easy credit conditions.• Financial crisis of 2008.• International trade imbalances.• Approaches used by states to

bail out, troubled banking industries.

Evolution of Crisis• Greece• Portugal• Ireland• Spain• Cyprus

Greece• Greece is facing debt crisis since it accumulated high level of debt.

• Reasons- Excessive Expenditures- Mismanagement- Unregulated Labor Market- Obsolete Pension System

Impact of USA crisis on Greece• Income and savings had a downward trend worldwide after the Sub-

Prime Crisis unleashed.• Volatile Capital market due to liquidity crunch resulted in lower

capital flows.• Strict norms were made for banks to grant loans & rates were also

increased thereby making borrowings costlier for Greece compared to earlier.• Overall Effect on Prime Sectors (Tourism, Shipping) contributing GDP.

The Boom in the Market• Greece borrowed heavily in international capital market to fund

government budget and current account deficit.

• Accumulated high level of debts during the decade before the crisis, when capital market were highly liquid.

Significant Problems• Government expenditures increased by 87%, revenues grew by only

31%.• Rising Unemployment.• Insufficient Bureaucracy.• Tax Evasion.• Corruption.

Impact of crisis on India

• Trade• Markets• Liquidity Situation• Rupee Value• Borrowings

Portugal• European structural funds were mismanaged almost across 4 decades.

•Portugal was one of the first economies to succumb and was affected very deeply.

2010• Financial support measures by Leading European countries.

• ECB lowered interest rates and provide cheap loans of more than one trillion euros.

• Moody’s investors service providers cut portugal’s sovereign bond rating which led to an increase in pressure on portuguese govt. bonds.

2011•Portugal requested a 78 billion euros IMF-EU Bailout

package in a bid.

2012• ECB announced free unlimited support for all eurozone countries

involved in a soverign state bailout/ precautionary programme from EFSF/ESM.• After the bailout was announced, Portuguese govt. managed to

implement measures to improve state’s financial situation.• Increase of unemployment rate to over 15% in the second quarter of

2012.• Recession in economy was projected to last until 2013, followed by

return to positive real growth in 2014.

2012• In October, Portugal was able to regain partial market access by

selling a bond series with 3 year maturity. • It was a part of bailout programme to regain complete access to

financial markets by september 2013.• On 3rd October was able to regain partial market access by selling a

bond series with 3 year maturity. It was a part of bailout programme to regain complete access to financial markets by september 2013.

2014• On 18th May, Portugal left the EU bailout programme mechanism. • It had already regained a complete access to lending market back in

May 2013 and with its latest issuing of a 10 year govt. bond being successfully completed with a rate a low as 3.59%.• On 3rd August, it was announced that the country’s second biggest

bank BES would split into two after losing the equivalent of $4.8 billion in first 6 months of 2014, selling its shares down by 89%.

MAJOR TRADERS EXPORT:

RANK COUNTRY TRADE VALUE(THOUSANDS)

1 SPAIN 13,468,585

2 GERMANY 6,382,499

3 FRANCE 57,37,820

4 UK 2,628,048

5 ITALY 1,735,532

IMPORTS:

RANK COUNTRY TRADE VALUE (THOUSANDS)

1 SPAIN 2,43,58,252

2 GERMANY 96,33,827

3 FRANCE 65,64,065

4 ITALY 38,43,730

5 NETHERLAND 33,44,610

PRESENT PICTURE• GDP – 0.2 Trillion Euros• Foreign Debt – 0.4 Trillion Euros• Foreign Debt per person – 38,081 Euros

IMPACT • Rate of 1 Euro has fallen from 1.4866 to 1.0837 (2008-2016).• Unemployment rate has gone up to 17.50% in 2013-14, is now

reduced to 10.80% in 2016.• Total debt remains very high at 128.2%• Fall in exports of India from 20% to 18.6%.• Stock market also affected, foreign investors had pulled out money

from India.

BREXITGreat Britain decided to leave the EU

EU is an organisation of 28 countries as its members.

• It provides a “Single Market”.• It guarantees, citizen of any member country can live, trade, work in

any other EU member country.• Integration of members create one big economy.

Why UK offered voters a referendum on UK’s exit from European Union ?

UK Independence Party Leader Said :

“EU imposed too many rules of business and charged billions of pounds yearly for very little return.”

What UK paid ?

• EU membership costs 24 million pounds per day.• No full control on their own borders.• High immigration rate.• Lesser jobs for domestic people.• Few conflicts between UK supreme & EU officers.

What UK earned ?

• Free trade.• More jobs opportunities.• Single market economy.

• A referendum takes place on a particular issue and is resolved through public voting.• More than 30 Million people voted for EU referendum.• 51.9% voted to leave where on other hand 48.1% voted to stay.• Result was in favour of BREXIT.

Now What ?• Financial instability.• Pound saw 10% fall to US Dollar.• No free trade & single market.• More cost on imports & exports.• Price rises or inflation.• Unemployment & cutbacks.• Lesser or expensive resources.• More paperwork in immigration.

How other countries will be affected ?

• Mutual trades can face rise in prices.• Foreign companies operating there might leave because of no free

trade.• Less trade means less globalisation.• Immigrant will move back or to other countries for jobs.• India might get benefit because of “Make in India” scheme attracting

foreign companies.

THANK YOU