You are on page 1of 53

EUROCRISIS

&
DOUBLE DIP RECESSION

Presented By
George Paul

60

Jithin KV

71

Joseph Cherian

73

Kushagra Saxena

83

Anandkumar S. Lotlikar

85

Manmeet Kaur

86

Yogesh Marakani

87

Zafar Imran

90

What is Eurozone
It is an economic and monetary union (EMU) of 16
European Union (EU) member states
They have adopted the euro as their sole trading currency.
Euro became a reality on Jan 1, 1999 , but came for the
European consumers on Jan 1 2002.
It currently consists of Austria, Belgium, Cyprus, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia, Slovenia and
Spain.

Countries in Euro area


Euro area: Austria,
Belgium, Cyprus, Finland,
France, Germany, Greece,
Ireland, Italy, Luxembourg,
Malta, Netherlands,
Portugal, Slovakia,
Slovenia, Spain.
EU Member States
obliged to adopt the euro
eventually: Bulgaria,
Czech Republic, Estonia,
Hungary, Latvia, Lithuania,
Poland, Romania, Sweden.
EU Member States with
an opt out from adopting
the euro: Denmark, United
Kingdom.

The original goal behind the integration of Europe was to


prevent the devastating wars of the first half of the twentieth
century from ever happening again

Dresden, Germany, 1945.

Parts of EMU?
1) The euro countries give up their own
currency when they join the euro area. The
ECB sets interest rates for the euro area (16)

2) The single market all countries


participate in the single market, with free
movement of goods, services, capital and
people (27)
3) Enhanced policy coordination
countries retain sovereignty over other
economic policies but commit to coordinate
more closely at the European level (27/16)

Introduction to Euro Zone


crisis
It is the biggest challenge Europe has faced since
1990.

Due to global financial crisis that began in 2007-08


the euro zone entered its first official recession in
third quarter of 2008.
The official figures were released in 2009 Jan.
On 11 Oct 2008, a summit was held in Paris by the
Euro group heads of state and Govt. , to define a
joint action plan for euro zone and central banks
of Europe to stabilize the economy.

Greece

What Happened in Greece?


Sharp Budget Deficit
Large government and External Debts in PIIGS.

Credit rating downgraded.


Interest rates surged on government bonds.

Need for external aid from EU and IMF


The high debts and rising rate of interests was a

matter of concern.

Power of Data
GDP - $360 billion
Debt-GDP ratio 113% of GDP

Budget Deficit 12.9% of GDP


Current Account Deficit- 11.0% of GDP
Net Foreign Debt 70% of GDP

Total Outstanding Public Debt- 290 billion euro

Greek Economy-Significant
Problems
Government Expenditure increased by
87%, Revenues grew by only 31%

Why Greece?
Foremost, Greece did not take its EMU
membership seriously
It forged budget figures in order to be admitted
in 2001
By this it deceived the other EMU member as
well as itself
It first enjoyed the benefits of its EMU
membership by financing Govt. debt at much
lower rate than before.
Led to extended Govt. debt and was used to
preserve existing economic structure
Made the country less competitive internationally

Causes of the debt crisis


Both Domestic &
International
Domestic

Internationally

The adoption of the euro


Lax enforcement of EU
rules aimed at limiting the
accumulation of debt.

High Govt. Spending


Tax evasion
Corruption
Over-staffing and poor
productivity of public
sector
Aging population

Reforms for the Recovery


Average value added tax from 19% to
21%
5:1 retirement/recruitment ratio that too
from 2011
A freeze on state pension
Raising the average retirement age
Austerity drive

TIME LINE

What Happened When ?


What led to What ?

Sowing of the Euro Seeds


The euro, the dream of many a politician in
the years following World War II, was
established in Maastricht by the European
Union (EU) in 1992.
To join the currency, member states had to
qualify by meeting the terms of the treaty
in terms of budget deficits, inflation,
interest rates and other monetary
requirements

On 1 January 1999, the currency officially


comes into existence.
2001 Greece joins European Union.
2002 Notes and Coins are Introduced.
In April 2009, the EU orders France,
Spain, the Irish Republic and Greece to
reduce their budget deficits - the difference
between their spending and tax receipts.

In October, amid much anger towards the


previous government over corruption and
spending, George Papandreou's Socialists
win an emphatic snap general election
victory in Greece
In November, concerns about some EU
member states' debts start to grow
following the Dubai sovereign debt crisis.

In December, Greece admits that its debts


have reached 300bn euros - the highest in
modern history.
Greece is burdened with debt amounting
to 113% of GDP - nearly double the
eurozone limit of 60%. Ratings agencies
start to downgrade Greek bank and
government debt.

Mr. Papandreou insists that his country is


"not about to default on its debts.
In January 2010, an EU report condemns
"severe irregularities" in Greek accounting
procedures. Greece's budget deficit in
2009 is revised upwards to 12.7%, from
3.7%, and more than four times the
maximum allowed by EU rules.

In February 2010, Greece unveils a series


of austerity measures aimed at curbing the
deficit.
Concern starts to build about all the
heavily indebted countries in Europe Portugal, Ireland, Greece and Spain.

On 11 February 2010, the EU promises to


act over Greek debts and tells Greece to
make further spending cuts. The austerity
plans spark strikes and riots in the streets.
In March, the Euro zone and IMF agree a
safety net of 22bn Euros to help Greece but no loans.

In April 2010, following worsening


financial markets and more protests,
eurozone countries agree to provide up to
30bn euros in emergency loans.
In April, The EU announces that the Greek
deficit is even worse than thought after
reviewing its accounts - 13.6% of GDP, not
12.7%.

On 2 May 2010, the euro zone members


and the IMF agree a 110bn-euro bailout
package to rescue Greece.
In November, the EU and IMF agree to a
bailout package to the Irish Republic
totaling 85bn Euros. The Irish Republic
soon passes the toughest budget in the
country's history.

In February 2011, euro zone finance


ministers set up a permanent bailout fund,
called the European Stability Mechanism,
worth about 500bn Euros.
In April 2011, Portugal admits it cannot
deal with its finances itself and asks the
EU for help.

In May 2011, the euro zone and the IMF


approve a 78bn-euro bailout for Portugal.
In June, eurozone ministers say Greece
must impose new austerity measures
before it gets the next tranche of its loan,
without which the country will probably
default on its enormous debts.

Talk abounds that Greece will be forced to


become the first country to leave the euro zone,
hence in July 2011 Greece Parliament passed
fresh round of austerity measures.
A second bailout for Greece is agreed. The
eurozone agrees a comprehensive 109bn-euro
($155bn; 96.3bn) package designed to resolve
the Greek crisis and prevent contagion among
other European economies.

During September, Spain passes a


constitutional amendment to add in a
"golden rule," keeping future budget
deficits to a strict limit.
Italy has its debt rating cut by Standard
& Poor's, to A from A+. Italy says the
move was influenced by "political
considerations".

The gloomy mood continues on 22


September, with data showing that growth
in the eurozone's private sector shrank for
the first time in two years.
On 4 October, Eurozone finance ministers
delay a decision on giving Greece its next
instalment of bailout cash, sending
European shares down sharply.

On 10 October, an EU summit on the debt


crisis is delayed by a week so that
ministers can finalise plans that would
allow Greece its next bailout money and
bolster debt-laden banks.

CAUSES

Causes for Eurozone crisis


Introduction of Euro in 1999 led to a vast
boom in lending to European economies
Shared currency made investors believe
that Greek or Spanish debt is as safe as
German debt
The inflow of money was mainly fuelled by
huge booms in private spending mainly on
housing

Lending boom abruptly ended and it


resulted in economic and fiscal crisis
This drove down tax receipts pushing
budgets deep into red
Bank bailouts led to sudden increase in
public debt
This resulted in collapse of investor
confidence in European countries
government bonds

This led to higher interest rates for


government bonds which in turn led to
government defaults.
As countries banks are heavily invested in
government debts it became a banking
crisis as well
Countries with its own currencies can step
in by creating money but here its common
currency so its not possible

The Role of the Euro


Previous economic crises in Europe have led
to large devaluations of currencies.
Within Eurozone, single currency prevents
devaluation , provides automatic financial
support through capital markets.
Non-euro currencies depreciated sharply in
2008

Current Predicament
Private demand in debtor countries has
plunged with the end of debt financed boom
Now public sector spending is also reduced
as a part of austerity programs
So now growth and jobs now rely on exports
to other European countries
But the entire Europe is implementing
austerity policies and this can push Europe
back to recession

INDIA

Impact of Greece Crisis in


India

Trade
(As a result of the deepening global financial crisis in 2008,
Indias export growth rate started plummeting from the high 40
per cent to 63 per cent range witnessed during April to August
2008 to 26.1 per cent in September, turning negative from
October 2008 to October 2009 with a low 4.2 per cent. this
situation has not been witnessed in the last 24 years.)

Markets
(There will be negative impact on the Indian stock market and
lead to lower reserves as well as depreciation of the Indian
rupee denting the growth prospects in the export sector. From
an investment destination perspective, if the Euro zone
becomes unattractive given debt servicing and currency
concerns, India stands to gain. )

Impact Cont..
Currency
( The fair value of tangible assets, securities, intellectual
property is linked with the euro. Cash flows of banks and
companies have been impacted. For eg. the Indian rupee
has appreciated from Rs 70 to Rs 56 vis-a-vis the euro in
just a few months. In addition to trade-based earnings,
mark-to-market losses can have important ramifications. )

Measures
1. The European Union, the IMF and the ECB set up a tripartite
committee(the TROIKA)to prepare an appropriate program.

2. First round of crisis response(May 2010):3 years package of


110 billion, contributed by IMF(30 billion) and Euro
Zone( 80 billion)
3. ECB provided substantial liquidity support to Greeks private
banks(b/w Jan 2010 to May 2011- 51 billion)
4. Again Euro zone provided loan-July 2011 109 billion .

Measures
5.ECB starts buying government debt from secondary market to
reduce bond spread and to increase the confidence of investor.
Between May 2010 to June 2011 ECB purchased 78 billion bonds out
of which 45billion from Greece government.
6. EFSF(European Financial Stability Fund)
The EFSF is intended to consist of a fund of 750 billion, which would
be made up as follows(a) 440 billion would be made available in loan guarantees from Euro
zone member states.
(b) 60 billion would consist of emergency funds made available by the
European Union itself , and
(c) 250 billion would be provided under arrangements with the IMF.

DOUBLE-DIP
RECESSION

What is Double-Dip
Recession
A double-dip recession refers to a recession
followed by a short-lived recovery, followed
by another recession
A double-dip (or even triple-dip) is a worstcase scenario. Fear that the economy will
move back into a deeper and longer
recession makes recovery even more difficult.

CAUSES OF DOUBLE-DIP
DEPRESSION
Credit Crunch.- Banks lost billions through
mortgage defaults. The financial system has never
fully recovered - bad loans and loss of confidence.
Balance Sheet Recession- Fundamental
imbalances in the banking / housing sector. Banks
are concentrating on improving their balance
sheets, and there is a greater reluctances to lend,
and banks are being more cautious.
Global factors-The factors that influence due to
global crisis such as war, calamities ,oil spills etc.

Cont..
Poor government policies-The poor
economic policy taken by the government
also cause this negative recession.

Are we facing another


double-dip recession ?
John Velis, head of capital markets research ,
Russell Investments
While we dont believe a double dip
recession as likely, we do acknowledge that a
growth scare is entirely possible. The
current recovery will be marked by a much
more lacklustre rate of economic growth due
to on going deleveraging in the private sector,
very slow labour market activity and the
expiration of the government stimuli around
the world.

Past Recessions
US witnessed 11 recessions so far, after World
War II
1930-1939 Great Depression
Lack of high-growth new industries, high
consumer debt and bad loans given out by banks
and investors

In 2008, defaults on sub-prime mortgages led to a


major crisis in the US. Banks gave loans without
researching on the payback power of the clients

Impacts
Negative GDP growth
Lower standard of living
Low production and higher attrition rates in
firms
Disastrous for philanthropy and charities
Deflation

How it Affects India?


IT Enabled Services sector may be hit
The manufacturing sector has to ramp up
scale economies

tourism sector could be affected


loss of jobs

Conclusion
Will it really affects India?
Euro crisis not to affect Indian IT cos:
Infosys
Euro crisis wont hit Indian IT sector NASSCOM