FM303 Group Research Project

Common Currency and Financial Crisis

CHF/EUR

Name:
Kirata Tokanikai
Nadriva Joseva
Versoni Grace
Vuki Serupepeli

Student ID:
S11078420
S11099333
S11100093
S11074116

Tutorial Day and Time:

Wednesday 2-4pm
Wednesday 2-4pm
Wednesday 2-4pm
Wednesday 2-4pm

Declaration of originality
Course: FM303
Name

Kirata Tokanikai

ID
S11078420

Nadriva Joseva

S11099333

Versoni Grace

S11100093

Vuki Serupepeli

S11074116

Signature

We have read and understood the University of the South Pacifics, School of Accounting and
Finance policy on academic misconduct and plagiarism. We are aware of the following: The view
taken by the Head of the School of Accounting and Finance is that failure to acknowledge or
inadequate acknowledging the work of another will result in a student receiving an official written
warning and a mark of 0 for that piece of work. If the plagiarism case is regarded by the Head of
School of Accounting and Finance as substantial (for example a significant failure to acknowledge a
source) it will be forwarded to the Student Development Committee of Senate (the Discipline
Committee). The School of Accounting and Finance has introduced a database of those students
who have been reported to the Head of School for plagiarism and the penalty that was imposed
and that repeat offenders (regardless as to the extent of the plagiarism) will be automatically
referred to the Discipline Committee. All members contributed equally to the completion of this
assignment.
We confirm that the work contained in the attached item of assessment is entirely our own work
except where we have specifically acknowledged anothers work and the source of that others
work.
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Introduction
Following the exposure of its vast understated government debts when new Prime Minister
George Papandreou was elected into parliament in 2009, Greece launched into a financial crisis
that is ongoing to this day. Setup for failure right from the beginning, Greece joined the
Eurozone in 2001 despite its failure to meet the convergence criteria whereby one of the
entrance criterions required the nation to have sound and sustainable public finances and
national debt excessive deficit of not more than 3% (European Commission, 2014). Spurred by
government overspending, tax evasions and corruption, by 2009, the new Prime Minister
admitted the nations budget may be deficit of over 12% of GDP (The Telegraph, 2012)
Ensuing this, Fitch downgraded Greeces debt to the lowest credit rating of BBB+ (Amadeo,
2015). This sparked investors loss of confidence resulting higher bond yield spreads and cost
of risk insurance (The Economist, 2010). With Germany and France holding $22.6bn
(14.4bn) and $15bn of Greece's government debt respectively together with an estimated
private sector debt of $34bn and $56.7bn (The Telegraph, 2012), the surrounding Eurozone
nations are worried that the euro may face devaluation consequently losing investor confidence
resulting in higher borrowing costs and tainted equities (Kennedy, 2015).
Crisis Resolution Efforts
Over the years, efforts to resolve the crisis included the Greek nation given bailout funds from
the European Union, European Central Bank, and the International Monetary Fund colloquially
called the troika to help the fragile economy steeped in debt lower its budget deficit. Though
called bailout funds, these funds were basically loans given to the Greek nation at a subsidized
rate with allowance for delay of repayment. The bailout funds amounting to 300bn euros were
given out in exchange for the implementation of austere measures demanded by the troika
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(BBC News, 2012). These austere measures included severe tax hikes and rigid government
spending cuts leaving thousands jobless. In addition to this, a European Financial Stability
Facility (EFSF) was created to provide financial assistance to struggling Eurozone countries
(The Telegraph, 2012). Furthermore, in addition to the bailouts, private bondholders took a
50bn hit by accepting losses on their bonds without triggering CDS (The Telegraph, 2012).
Managing to barely sustain the economically fragile nation, the above efforts have not entirely
solved its financial crisis but have rather temporarily fixed it or in colloquial terms, kicked the
can down the road. In accepting the loans from the troika under the guise of bailout
funds, Greece has simply solved its debt crisis with more debt which is a highly contagious
situation whereby it will only occur more debt and an even more complex web of exposure
(The Telegraph, 2012). In addition to this, austere measures demanded by the troika have
only worked to slow the nations economic growth thus impeding its ability to repay its debt.
Crisis Effects on Currency
I. The Euro currency experienced a sudden shock on the 17th of December, 2009. On this day, the
Swiss-Franc appreciated against the Euro (EUR), Euro depreciated and the indirect Euro
exchange rate was CFH1.5012/EUR1.00. In comparison to the 16th December, CHF was
trading at CHF1.5092/EUR1.00, thus the sudden shock result in a percentage change of 0.53%.
Before the Shock:
In the week-leading before the shock, the Euro currency depreciates on four particular dates
against the Swiss-Franc. These happen on the 10th, 13th, 14th and on the 16st of December
whereby the changes were -0.04%, -0.03% on two dates and -0.23%1 respectively. Moreover,
during the week the lowest price was CHF1.5092/EUR1.00 on the 16thDecember which was
1

See Appendix Table 1.0

the day before the shock and the highest price was recorded on the 11thDecember of
CHF1.5128/EUR1.00.
After The Shock:
Immediately after the shock, the exchange rate dropped to a level below the usual price range
from March- 16thDecember 2009 which is CHF1.5018/EUR-CHF1.5403/EUR. The Euro
fluctuates a lot within the week as it depreciates three times against the Swiss-Franc. The
lowest rate was recorded on the 20th2 which was CHF1.4907/EUR1.00 while the highest rate in
the week was CHF1.4945/EUR1.00 on the 22ndDecember, 2009.
II. Major fluctuations were identified after the initial shock3 which caused by events that

adversely affects the Euro currency. Firstly, on the 27th April, 2010, Standard & Poor
downgraded Greeks credit rating to junk status (Richard Wachman, 2010). As a result, the
price change on this day was -0.20% and the Euro depreciated against the Swiss-franc by
CHF1.4329/EUR1.00. Secondly, the Euro rises on the 26th of May with a change of 0.15%
against the Swiss franc. Euro dollar bounced back from a 10 months low after the Eurozone
leaders and the International Monetary Fund agreed a rescue package for Greece (Kollewe,
2010). Finally, on the 13th January, 2012, Standard & Poor downgraded France for the first
time. Eight other Eurozone countries were downgraded on this day because of the euro zone
debt crisis and policy makers could not implement measures to contain the crisis (Matthias
Sobolewski, 2012). Therefore, the Euro depreciates against the Swiss-franc with a percentage
change of -0.26%.

2
3

See Appendix Table 2.0

See Appendix Table 3.0

Forecasting of Exchange Rates

Investors, central banks and governments are more concerned about the value of their
international portfolios, worth of debt and securities which are subject to fluctuations in
exchange rates. The exchange rate of CHF/EUR at the end of May (beginning of June) will be
forecasted using two forecasting techniques:
1. The Random Walk Approach:

This technique is chosen on the basis that other economic forecasting models cannot
outperform the random walk model (Moosa, 2010). It is better to use this model for short-term
forecasting (end of May) as there are only a few data sets whereby the deviation of the
forecasted rate from the actual rate can be clearly identified and conclusions regarding buy and
sell of currencies can be made accordingly. As per our forecast, the previous period spot rate is
used as the forecasted rate given the randomness of changes in exchange rates. As a result, our
forecasted rate at the end of May4 is CHF1.0437/EUR1.00 and when compared to FX Empire
forecast, CHF/EUR is expected to reach CHF1.05/EUR at the end of May (Lewis, 2015). The
12 ending days of May exchange rates does is random which confirms that the level of
exchange rate will differ from the actual spot rates.
2. Model:- Regression Analysis
As forecast information is an input for decision making, the accuracy of forecasting techniques
is highly regarded. The regression model is used to forecast the ending rates for CHF/EUR 5 at
the end of May because it records the lowest mean square6 and root mean square error
compared to the rest of the techniques. These two measures of accuracy tell us as forecaster

See Appendix : Figure 1 and 1.1: End of May Forecasted Exchange rates -Random Walk Model
See Appendix: Figure 2 and 2.1: End of May Forecasted Exchange Rates- Model: Regression.
6
See Appendix: Table 4.0: Measures of Forecasting Performance.
5

that this model is the best forecasting model for this data set. Using this model, the forecasted
rate is CHF1.0400/EUR1.00 which is slightly lower than the level forecasted by experts on FX
Empire which is CHF1.05/EUR. However, since exchange rates are random, the forecasted
rates are unpredictable. It may or may not reach the level forecasted by experts or by this
group.
Conclusion & Recommendations
In conclusion, our group has decided on two ways in which could help alleviate or minimize
the negative impact of the Greece debt crisis and those are:
I.

United Fiscal Policy

This is a method in which we feel could help minimize the negative impact of the Greece debt
crisis. We suggest that the Eurozone Countries should have a single fiscal policy that will
regulate countries who are members of the Eurozone. The main reason is that, all borrowings
and spending by all Euro countries are regulated and encompassed under this fiscal policy.
This method would avoid countries from excessive borrowings and spending which could
decrease their debt level. This method would also allow the whole of Europe to share the
current debt crisis that Greece is facing and would prevent future problems dealing with
excessive debts.

II.

Foreign Creditors To Forgive Greek Debts

Another method we have found simpler in theory yet controversial is, for the foreign creditors
of Greece to forgive a large amount of debt that Greece owes. In this way, Greece can improve
their financial accounts and would be able to implement economic growth developments in the
economy necessary for the economy survival in the Eurozone and financial markets.

Appendix
Table1.0: Before Shock Exchange Rates:

Date

Change Appreciate/Depreciate
%
(EUR)

Price

16-Dec-09 1.5092 -0.23%

15-Dec-09 1.5127
0.05%
14-Dec-09 1.5119 -0.03%
13-Dec-09 1.5123 -0.03%
11-Dec-09 1.5128
0.09%
10-Dec-09 1.5115 -0.04%
9-Dec-09 1.5121
0.14%
Source: (Investing.com, 2015).

EUR Depreciates
EUR Appreciates
EUR Depreciates
EUR Depreciates
EUR Appreciates
EUR Depreciates
EUR Appreciates

Table 2.0: After Shock Exchange rate:

Date

Price

25-Dec-09
24-Dec-09
23-Dec-09
22-Dec-09
21-Dec-09
20-Dec-09
18-Dec-09
17-Dec-09

1.4916
1.4916
1.4896
1.4945
1.4936
1.4907
1.495
1.5012

Change Appreciate/Depreciate
%
(EUR)
0.00%
EUR Appreciates
0.13%
EUR Appreciates
-0.33%
EUR Depreciates
0.06%
EUR Appreciates
0.19%
EUR Appreciates
-0.29%
EUR Depreciates
-0.41%
EUR Depreciates
-0.53%
EUR Depreciates

Table 3.0: Major Fluctuations after the shock

Date

Price

Event

27-Apr-10

1.4329

Greek Downgraded by S&P

26-Mar-10

1.4283

Euro Re-bounced

13-Jan-12

1.2073

S&P downgraded France and eight

other countries

Figure 1: End of May Forecasted Exchange rates -Random Walk Model

Random Walk Approach

20.0000

CHF/EUR

15.0000

Forecasting Error- Random

Walk Model

10.0000

Forecast (CHF/EUR)

5.0000
Actual (CHF/EUR)
0.0000
1

10 11 12

-5.0000

Figure 1.1 End of May Forecast of CHF1.0437/EUR

Random walk- Forecast

1.2500
1.2000
1.1500
1.1000
1.0500
1.0000
0.9500
0.9000

1.2200

1.2166

1.2143

1.2067

1.2061

1.2026

1.2061

1.2029
1.0673
1.0437

1.0398

10

Forecast (CHF/EUR)

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Figure 2: End of May Forecasted Exchange Rates- Model: Regression

Model: Regression Analysis

15.0000

Axis Title

10.0000

Actual (CHF/EUR)

5.0000

FORECAST: Spot t-1 * (1+

estimated change(number))

0.0000
1

10 11 12

-5.0000

Forecasting Error (%) Fundamental Model

-10.0000

Figure 2.1: End of May forecast CHF1.0400/EUR

Forecast-Regression
1.2500
1.2000

1.1932 1.1988
1.1988

1.1500

1.1935

1.1831

1.1951

1.1907

1.1535

1.1000

1.0576

1.0500
1.0000

1.0400

1.0188

FORECAST: Spot t-1 * (1+

estimated change(number))

0.9500
0.9000
1

10

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Table 4.0: Measures of Forecasting Performance

Observation

1
2
3
4
5
6
7
8
9
10

Squared error Squared error

Random Walk Forward Rate

Squared
error
MODEL

Squared error
COMPOSITE

0.2203
0.0357
0.7579
0.0025
0.0025
0.0847
0.0006
246.0415
6.6388
5.1130
0.0821

0.4561
0.2597
2.1780
0.2025
0.0624
0.3504
0.0306
228.2299
13.3097
1.2912
1.6480

3.0157
2.1478
0.3676
1.7636
1.0910
0.3845
16.8960
189.8245
20.6505
1.7746
0.4077

0.0389
0.1457
0.3364
0.0956
0.0617
0.0077
1.7428
220.7272
12.8860
2.4855
0.5421

Means
Square Error

23.544

22.547

21.666

21.734

Root Mean
Square Error

4.8522

4.7484

4.6547

4.6619

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12

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