Team Firesale

College: NITIE Hari Naidu (9167588178) Rahul Kaushik (9865321475) Vivek Prakash (9587643241)

Eurozone Crisis
Government Bond Yield Spreads

Jan 2010: EU found severe irregularities in Greeces accounting procedures. Greeces 2009 government deficit revised from 3.7% of GDP to 12.7% (and later to 13.6%). Apr 2010: Greece ask the EU/ECB/IMF (Troika) for assistance. The Troika agreed on a EUR110bn bailout package(followed by second bailout package worth EUR109bn in July 2011) EU sets up a temporary EUR440bn bailout fund called the European Financial Stability Facility(EFSF), to tackle danger of contagion. Portuguese & Irish governments ask for EU aid(EUR190bn). EU decides to enlarge the Facility to EUR780bn in July 2011 in the wake of the second bailout package for Greece.

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Greece Exit Strategy

The decision to leave the euro should be announced without warning late on a Friday evening once US markets are closed. The aim is to act with stealth and to seek to limit capital flight. Impose immediate trade controls to limit capital outflows also impose immediate border controls to prevent a flight of cash

Implement a bank holiday to prevent a run on the bank.

Announce a new exchange rate (presumably not floating at the beginning, given capital and exchange controls) so that trade could continue. Convert all euro-denominated notes and coins to a new currency and facilitate cash less money transactions

Recapitalize the insolvent banks to make up for losses from defaults.

Determine how to handle commercial contracts that are written and denominated in euros and now may be in the new currency.

Future Roadmap For EU: Immediate Concerns

European Public Sector Exposure to Greece EUR / USD Through the Crisis

Channels of Contagion

Future Roadmap For EU: Immediate Concerns

Containing the Contagion

Italy & Spain need to be protected from defaulting as they contribute 28.5% of Eurozone GDP.

Future Roadmap For EU: Structural Reforms

Structural Issues to be Resolved Diverging competitiveness Over-reliance on debt

Current account balance (US$ billion)

Public debt and deficit estimates for 2011 (%

Imperfect union
The 17 members of the European Monetary Union remain sovereign nations.

Impact on India

Rupee may depreciate further if Greece exits from the euro bloc. Greek exit may weaken the euro and strengthen the US dollar, thus leading to a weak demand for the rupee. Indias trade with Greece is negligible and devaluation of Greek currency will not impact the Indian economy. However, Indias trade with Europe may continue as the movement of rupee against the euro will not be impacted much.18% of total tradeoff India is with Europe, which is worth $13.6 billion. India exports to 27 nations of Europe and deepening of Eurozone crisis may have considerable effects on the country. Software industry could get hurt as 30% of IT services and software are exported to Europe. Europe comprised of 25% of total revenue of TCS, 28% of Wipro and 22% of Infosys in the year 2011-12. So, turmoil in Europe may hit the IT companies adversely. Banking sector is expected to remain unaffected as Indian banks have only 37 branches in Europe, and no bank has an exposure to Greek, Spanish or Portuguese bonds.

Capital flows into the country may decline as investors would back off from riskier assets. Greek exit may lead to further decline in the foreign investment into the Indian markets.

Future Roadmap For India

Breaking of Greece from Eurozone will lead to weakening of euro which will lead to appreciation of dollar with respect to other currencies as FIIs will find investing in dollar more attractive. This will lead to outflow of capital from the Indian economy. In order to counter this situation Indian govt need to take steps so as to spur domestic investments.

This can be done through financial policy and administrative steps. CRR ratio need to be reduced so as to increase liquidity in the market which will spur domestic investments.
Interest rates in India are one of the highest which can also be addressed appropriately. This steps are need to be backed up by supportive administrative policies which are unequivocal and lucid

In order to isolate forex reserves invested in european debt market from the fluctuation in euro, proper hedging mechanism should be employed.
Fiscal stimulus package can be a viable option but the scale of package should be smaller in comparision to stimulus package rolled our during Lehman Brother crisis(due to high fiscal deficit).

Also this time around focus should be on stimulating investment demand rather than boosting consumption demand.

Thank You