...European Debt Crisis Adelina Valencia Dr.Huang BUS 5200 April 27, 2013 European Debt Crisis On-line Mini Project The Eurozone debt crises all began when a newly elected government official took office in Greece in 2009. The prime minister announced that the deficit for Greece was 12.7% of GDP not 5% and said that the previous government had lied about this. This is what first started the European Debt Crisis. The government in Greece in May of 2010 announced that the budget deficit was much larger than what the previous government had predicted. Greece realized that they were not able to issue new debt to cover the new debt and its deficit. This is when the European debt crises all began and they requested help from the International Monetary Fund and the European Union and received a three year loan and 110 billion in euros. After two years, Greece still required assistance and the parliament approved another round of a second bailout of 130 billion euro’s. They deficit originally of 110 was actually not enough to cover their actual deficit and is why they had to ask for more help. The second year bail out required the private sector bond holders to take a reduction of the value of their bonds. The European central bank, European Union, and the International Monetary Funds stated that Greece had met the terms of the second bailout and Greece was running out of money. The Eurozone is a group of 17 members of the European Union. The European Union has over 27 members in the...
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...The European Debt Crisis In 2009, Greece came forward and announced that their financial management of their economy had gone awry. Greece's revealed their budget to be 12.7 percent of gross domestic product (GDP), in addition, its debt-to-GDP ratio at 120% was twice the limit allowed in the Maastricht treaty. This triggered what is now known as the European Debt Crisis, and led to similar announcements by Portugal, Italy, Ireland, Spain and most recently Cyprus. In the next pages we will attempt to explain the events leading up to the crisis and potential next steps for the European community. On February 7th, 1992 the 13 member nations of the European Council came together to sign the Maastricht Treaty. The treaty was designed to create financial stability throughout the Euro Zone by laying out fundamental fiscal policies for each country to follow. The treaty primarily encompasses four points: 1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the European Union (EU). 2. Government finance: Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. 3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the...
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...European debt crisis and its impact on worldwide economy Shanika Mitchell-Gregg April 30, 2012 Dr. Tzu-Man Huang BUS 5200 Strategic Finance for Executives EMBA, 2011-12 (Stockton Cohort #7) “The European Union only takes action after the facts. They only address a situation when it has already become a problem.” Zdeneil Kudrna, political economist The European debt crisis was brought on by several Eurozone countries running large budget deficits and borrowing money from central European banks. Out of 27 member states, 17 of those countries use the euro as their currency. The larger countries involved were; Italy (the worst effected), Germany, Spain, Portugal, Greece, Switzerland, Britain and Ireland. The European economic debt crisis has resulted from a combination of complex factors including; the interconnection in the global financial system, that if one nation defaults on its sovereign debt or enters into recession putting some of the external private debt at risk. Easy credit conditions, during the 2002–2008 were a period ones were encouraged of high-risk lending and borrowing practices. International trade imbalances or international interconnection of debt protection, institutions entered into contracts called credit default swaps (CDS) that result in payment should default occur on a particular debt instrument (including government issued bonds). But, since multiple CDS's can be purchased on the same security, it is unclear what exposure each country's...
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... 2012 The European Sovereign-debt Crisis Throughout history, debt has been an issue and a concern for many countries around the world. Nations borrowing money, unnecessarily spending, corruption, inability to pay back loans and a variety of other factors have contributed to the devastating and lasting effects of monetary absolution. In recent years, some of the most significant and devastating economic occurrences that have taken place were released to the general public. One that has received a great deal of attention is known as the European Sovereign- debt Crisis or the Euro zone crisis. The European Sovereign Debt crisis is an ongoing financial crisis that has made it impossible for some countries in the Europe to repay or refinance their government debt without the assistance of third parties (Wikimedia). Countries across the European Continent are struggling to find ways to cope with the crisis and the impact that it has taken on debt stricken nations. Europe’s politicians, regulators, and market players are trying different approaches to deal with the problems at hand (Bloomberg LLP). Due to the number of countries that are involved this financial crisis is not only affecting these countries but the entire world. The Euro zone crisis had a variety of origins that grew their roots over a course of many years, but the situation was not released to the general public until back in late 2009 when the concerns intensified. Fears of a Sovereign Debt Crisis arose among...
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...What is the European Debt Crisis? By Thomas Kenny, About.com Guide See More About: * economics * europe * bonds ------------------------------------------------- Ads LIC Pension 1.45 करोड़छोटा निवेश जो आपको करोड़पति बनाये = PensionPolicyBazaar.com/PureInvestment Mobile Trading On-the-GoTrade Forex, Commodities, CFDs. Low Fixed Spread, Start Now!www.4xp.com/Mobile What is Sensex?You don’t need tuitions to learn. The First Step Kit teaches enough.Sharekhan.Sharekhan-Firststep.com Bonds Ads * Bonds * Debt * European Crisis * Type of Bonds * AAA Corporate Bonds ------------------------------------------------- Ads Investment CalculatorA Free, Safe & Simplified Tool for Managing Your Money. Try It Now!www.perfios.com/managingyourmoney Looking for Major Debt?Find Major Debt on Facebook. Sign Up Free Now!www.Facebook.com The European debt crisis is the shorthand term for the region’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it’s intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. In fact, the head of the Bank of England referred to it as “the most serious financial...
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...Does history really repeat itself? After reading the article on “Surviving A Debt Crisis: 5 Lessons for Europe from Latin America” by Samuel George from Bertelsmann Foundation, it seems very convincing that European leaders may have an opportunities to learn from the Latin American on how to handle and survive a debt crisis. The fundamental causes of these two debt crisis are highly similar. When the global economy was in good shape, massive lending was made to countries with unstable macroeconomic histories. Investors saw the lucrative opportunities to achieve high returns in some low-credibility nations but decided to take risks since there were no signs indicating any sort of recession. However, the second oil shock in 1979 led to spike in oil prices. As a result, the US went into recession, which drove commodities prices down significantly. Latin America countries import oil and export commodities, a deteriorated international trade situation slowed down their GDP growth. They were not able to pay for their loans which associated with floating interest rates. In 21st century European, the global financial crisis trigged a series of events. The Greek government had to spend heavily through debt to subsidize shipping and tourism industries which were harmed by the business cycle. Real-estate bubble in Spain and Ireland forced their governments to bailout private banks via national debts. It is, therefore, clear that in "sunny days", countries should be cautious...
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...The contagious impact of the European sovereign debt crisis on the foreign exchange market 1. Introduction In 2010, the debt crisis caused the euro to go down 10% in a three-month period. Some largest hedge funds in America discovered this opportunity and short euro in groups to an enormous scale. Later on, the British pound is being infected. It continuously dropped for six days, which wrote the longest dropping period record. In this paper, the objective is to critically analyse how the European sovereign debt crisis affects foreign exchange markets. The theme focuses on the contagion on the markets. The contagion phenomenon exists between foreign exchange spot and derivative markets. One of the channels is the investor sentiment, which makes large scale of influences on both markets and volatility dynamics (Corredor, P., Ferrer, E., Santamaria, R., 2015). It makes sense on aspects like trading volume, effective transaction costs and so on. This paper has two main parts. The first part is to evaluate impacts on foreign exchange spot market through analysing the political channel, bank channel and financial markert channel. The second part is to investigate impacts on foreign exchange derivatives, especially on the foreign exchange swap. 2. Contagious impact on the foreign exchange market 2-1 Impacts on foreign exchange spot (impacts on euro) In this part, we explain how the debt crisis makes impacts on the foreign exchange spot market, especially, we focus...
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...REPORTS ON GLOBAL FINANCIAL CRISIS – 9 SESRIC REPORTS ON THE GLOBAL FINANCIAL CRISIS European Debt Crisis and Impacts on Developing Countries STATISTICAL ECONOMIC AND SOCIAL RESEARCH AND TRAINING CENTRE FOR ISLAMIC COUNTRIES (SESRIC) 1 SESRIC REPORTS ON GLOBAL FINANCIAL CRISIS – 9 2011‐2 Issue EUROPEAN DEBT CRISIS AND IMPACTS ON DEVELOPING COUNTRIES July – December 2011 SESRIC Reports on Global Financial Crisis : The financial crisis which started in July 2007, when investors lost their confidence in the mortgage‐ and asset‐based securities in the United States, has deepened during 2008‐2009 with a global reach and affecting a wide range of financial and economic activities and institutions in both developed and developing countries around the world. As the crisis deepened, the governments of major developed and developing countries as well as international financial regulators attempted to take some mitigation actions and coordinate efforts to contain the crisis. Given this state of affairs, the SESRIC has been preparing short reports since May 2009 with the aim of monitoring the developments related to the current global financial crisis at the global, regional and national levels. In particular, these reports focus on the impact of the crisis on the economies of ...
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...Not a single year has gone by in the past two centuries where there was not a financial crisis somewhere in the world (see figure 1). Arguably, the world witnessed its first international financial crisis in 1825. The opening up of Latin America after the overthrow of the Spanish empire led to the opening up of international trade between England and the Latin American republics. The result was massive capital flows from London to finance infrastructure, mining and government spending. But once the capital outflows impinged on the Bank of England’s (BoE) gold reserves, the policy rate was raised, leading to a banking crisis. A sudden stop of capital flow from London resulted in banking panics in the US and currency crashes across Latin America. Figure 1: The history of financial crises Indeed, the crisis in 1825 marked the first of seven clusters of sovereign defaults in the period 1800 to 2010 In the first cluster of defaults, which happened during 1824-1834, 13 Latin American countries defaulted. The following period (1835–1866) was relatively tranquil. But a lending boom developed in this period, which soon resulted in a new series of default episodes. The global crisis of 1873 started with the collapse of a property boom in Germany and Austria, then spread through the continent and affected the US as European investors dumped US railroad stocks . The...
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...The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts Silvia Ardagna and Francesco Caselli First draft: February 2012; Final version: January 2014 Abstract We review the events that led to the May 2010 and July 2011 bailout agreements. We interpret the bailouts as outcomes of political-economy equilibria. We argue that these equilibria were likely not on the Pareto frontier, and sketch political-economy arguments for why collective policy making in the Euro area may lead to suboptimal outcomes. Most modern sovereign debt crises have been managed in Washington, DC, through the combined e¤orts of the International Monetary Fund (IMF) and the US government. A distinctive feature of the crisis that has engulfed European sovereign-debt markets since the fall of 2009 has been that the IMF has played only a supporting (albeit important) role, while the management of the crisis has been driven by European institutions: the council of …nance ministers (ECOFIN), the European Council (EC, made up by all the heads of government of the European Union) and the European Central Bank (ECB). To the extent that the IMF is largely a technocratic institution (though of course not entirely immune from political in‡ uence) while ECOFIN and the EC are made up of politicians, one may expect the management of the crisis by the EC to be more a¤ected by electoral concerns. Furthermore, since there are 27 members to the EC, representing countries with potentially di¤erent interests, one...
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...Topic: PIIGS (European debt crisis) 吳宇綸D0131292 劉昱顯D0131156 王謙 周雋彥D0125599 Contents 1. Introduction 2. Overview of the European sovereign debt problem 3. Relief measures of the European sovereign debt crisis 4. European debt crisis 5. Conclusion 6. References I. Introduction The PIIGS is a group that composed of five countries that have some commonality in location and economic environments. In this case, PIIGS includes Portugal, Italy, Ireland, Greece and Spain. The countries which be mentioned are all part of European Union members and have been noted for having weak economics and bad situation of financial problems. In 2008, economic crisis came to all over the world, during the worldwide economic crisis, Portugal, Italy, Ireland, Greece and Spain began to come out the grave and serious concern in the European Union refer to the enormous amount of sovereign debt that they were carrying. The problem with the PIIGS is that speculators dropped, compounding their debt issues and the situation might be much more worse. Many European Union members were also unwilling to rescue these struggling nations although when it became very clear that assistance would be needed. The sovereign debt crisis sparked a number of conversations about reforming financial policy in the European Union to prevent similar problems in the future. The members of PIIGS felt displeasure at the negative allusions and some have...
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...Date: The European sovereign debt crisis Introduction At the beginning of 2010, its emerged that the sovereign debt crisis would drastically spread through the entire European Union since Portugal, Greece, Spain, Italy and Ireland, which are jointly known as the PIIGS were in facing the significant increase in their deficit as well as public debt. The events about the crisis were closely tied to Greece since there were doubts about its ability to offset the huge sovereign debt it owed as well as government deficits. This crisis of confidence in Greece resulted in the significant downgrade of the Greek bonds into a junk status as well as the Greek bond yield spreads notably rose (Brutti and Sauré, 2016). The financial unrest gradually spread to the entire European Union zone and the European stocks tumbled, and the euro currency reached 2-year lows. Nonetheless, Greece was not the only stressed economy in The Euro Zone, in fact, it turned out to be a tip of the iceberg since other nations in the European Union were trailing on the Same road. Spain, Italy, Portugal and Ireland had accumulated huge budget deficits as well as increased public debt to the Gross Domestic product ratios. Portugal had an economic boom that was being sustained by the significantly lower borrowing rates. Nevertheless, it was hit by expeditious wage inflation which adversely affected the local companies’ competition with other foreign firms (CAI and LI, 2012). The sovereign debt crisis in European region has...
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...in responding to the debt crisis. It was in the end of 2009, when the EU debt crisis began and appeared as a major threat in 2010. The following reasons can be summarized which participated in the debt crisis. Violation of EU Rules- The beginning of the story of the debt crisis is related to the earlier stages of the time, when many European nations wanted to form a monetary union which lead to the inception of “Euro” as many participants violated the conditions needed under the Maastricht treaty. Countries like Greece and Cyprus didn’t had real data about the financial and economic conditions and EU ignored it. EU also accepted heavy debts by many countries at the time of crisis. Banking Sector Problem- The banking sector was collapsed when it got involved in the global financial chain which dragged down in 2007 financial crisis. The Banks were in a weak position because of the financial instruments of high risk will collapse in the debt crisis scenario and as the money they had was used for financing Government budget deficit rather than doing its important role of providing the money to Businesses and households which could have given them return for their ending amount. Rating Agencies- Tensions in bond market and increasing bond yields, difficulty in raising money by the government due to low trust of the creditors had after rating agencies continued downgrading the troubled euro nations because of the risk arising from the debt crisis. Political Conflict ...
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...EUROPEAN DEBT CRISIS – ORIGIN, CONSEQUENCES AND POTENTIAL SOLUTIONS F RA N TI Š E K N E M E T H Abstract What is the European debt crisis? As the head of the Bank of England referred to it in October 2011, it is “the most serious financial crisis at least since the 1930s, if not ever.”1 In fact, the European debt crisis is the shorthand term for the region’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it’s intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. Introduction The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues – making high budget deficits unsustainable. Greece's economy has struggled since the country joined the euro in 2001. In 2004, it admitted its budget deficit was higher than allowed under rules of entry. By 2008 the government had narrowly passed a belt-tightening budget...
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...contained to the big banks and investment firms based mostly in New York City. By the time bailouts were implemented by the United States government, the effects of the financial crisis were exported to Europe. States similar, but not limited to Portugal, Ireland, Italy, Greece, and Spain (PIIGS) have each been in the media spotlight in recent years as attempts to rescue their respective financial markets are implemented. Unfortunately, many efforts made by Eurozone member states and other international actors have failed in alleviating the financial stresses of the region. Considering this, then, is there really a permanent solution that can not only relieve financial markets but also prevent the crises from spreading? To date, the European Unions’ collective response up to this point has been insufficient in order to curb the further slide into Europe’s second recession. I contend, then, that Europe and the Euro would greatly benefit from following many if not all of Germany’s internal budgetary constraints in order to fix the overall problem of debt and spending. One of original intentions of the euro when it was established in 1992 was to limit the amount of budget deficit a sovereign member state could have. Furthermore, the euro was designed to prevent a “bailout” should a state be unable to meet its debt obligations. Consequently, the euro indirectly served as a scare tactic for member states to “pay their bills” or face a default. However, as the credit boom of 2003 – 2007...
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