A

PRESENTATION
ON
EURO
SOVEREIGN
DEBT CRISIS
Presented by : Dodiya Shakti

What is Euro zone?

It is an economic and monetary union of 17
European union members. Adopted EURO
currency as their sole legal tender.
The European Central Bank (ECB) is the
institution of the European Union (EU)
tasked with administrating the monetary
policy of the 17 EU member states taking
part in the Euro zone.
MembersAUSTRIA,BELGIUM,CYPRUS,FINLAND,FRANCE,
GERMANY,GREECE,IRELAND,LUXEMBOURG,
MALTA,NETHERLAS,PORTUGAL,SLOVAKIA

Eropean union

Established in 1993.
Currently has 27 members.
Committed to regional integration.
Ensures the free movement of goods,
services, people and capital in all
member states.

Simply what is crisis?

In its most basic form, it's just this: Some

countries in Europe have way too much
debt, and now they risk not being able to
pay it all back. Simple!
The possibility also looms that one or
more countries will pull out of the
eurozone -- the 17-nation bloc that use
the euro currency, which has been
around since 1999. Should any of the
eurozone nations drop out of this group

Sovereign debt crisis

Sovereign debt crisis is a situation

wherein a country with a powerful higher
authority enters the state of not being
able to repay its debts and obligations.

This leads to higher fiscal deficit of the

economy and lower growth.

What is PIIGS?

Portugal, Ireland,
Italy, Greece and
Spain are some of
the most highly
leveraged
eurozone
countries.

The PIIGS took different paths to this scenario. Ireland, for example,
underwent a massive real estate bubble, and its banks sustained giant
losses. The Irish government wound up rescuing its banks, and now the
country is burdened under a huge debt load.
Spain, which now has a 22 percent unemployment rate, also experienced
a huge housing bubble. The country didn't indulge in excessive borrowing
-- rather, it ended up with high deficits because it couldn't collect enough
tax revenue to cover its expenses.
Greece, on the other hand, not only borrowed beyond its means, but
exacerbated the problem with lots of overspending, little economic
production to make up the difference, and some creative bookkeeping to
prevent eurozone authorities from realizing the true extent of the
situation.
The deficits weren't piling up everywhere. Countries with strong
economies like Germany and France were keeping their output high and
their debt at a manageable level. But when 17 nations use the same
currency, trouble spreads quickly.

CAUSES

In 1992, members of the European Union signed the

Maastricht Treaty, under which they pledged to limit their
deficit spending and debt levels.

Germany had a considerably better public debt and fiscal deficit relative to
GDP than the most affected eurozone members. In the same period, these
countries (Portugal, Ireland, Italy and Spain) had far worse balance of
payments positions.Whereas German trade surpluses increased as a
percentage of GDP after 1999, the deficits of Italy, France and Spain all
worsened.

Monetary policy inflexibility

Since membership of the eurozone

establishes a single monetary policy,
individual member states can no longer
act independently. Paradoxically, this
situation creates a higher default risk
than faced by smaller non-eurozone
economies, like the United Kingdom,
which are able to "print money" in order
to pay creditors and ease their risk of
default. (Such an option is not available
to a state such as France.)

Loss of confidence

Sovereign CDS prices of selected

European countries (20102011). The
left axis is in basis points; a level of
1,000 means it costs $1million to
protect $10million of debt for five
years

A credit default swap (CDS) is a financial swap agreement that the

seller of the CDS will compensate the buyer in the event of a loan
default or other credit event. The buyer of the CDS makes a series of
payments (the CDS "fee" or "spread") to the seller and, in exchange,
receives a payoff if the loan defaults.
In the event of default the buyer of the CDS receives compensation
(usually the face value of the loan), and the seller of the CDS takes
possession of the defaulted loan. However, anyone can purchase a
CDS, even buyers who do not hold the loan instrument and who have
no direct insurable interest in the loan (these are called "naked"
CDSs). If there are more CDS contracts outstanding than bonds in
existence, a protocol exists to hold a credit event auction; the
payment received is usually substantially less than the face value of
the loan. The European Parliament has approved a ban on naked
CDSs, since 1 December 2011, but the ban only applies to debt for
sovereign nations.

Current Crisis - Debt Overhand

and Weak Banking Sector
The sovereign debt crisis is now also
finely interwoven with the banking
system and the prospect of a financial
system crisis because many of the
institutions that own sovereign bonds
are European banks. What the ECB
has done most recently is provide
cheap refinancing to the European
banking system via its long-term
refinance operations - "LTRO". The
most recent version of this policy
came in December 2011, as the
central
bank
offered
3-year
loans
at
Banks were eager to take on
those
loans
as they
needed
to rollover
saw
a big
uptake
debts that were coming due1%
in interest
the earlywhich
part of
2012
and
in the- later
around
500
billion
euro.a financial freeze in
part of 2011, many European
banks
were
facing
terms of finding funding

In the debt restructuring deal currently under discussion,

private creditors would swap out their current bond
holdings for those with longer maturities and smaller
coupons, with the end result being that about 100 billion
of the 205 billion will come off the books. The private
creditors are doing this on a voluntary basis because it
could be worse and Greece could default on the full amount
of debt, and the various EU countries will offer "sweeteners"
to participants to accept the deal.
By making it a voluntary restructuring, it would also avoid
being labeled a "credit event" by credit rating agencies
meaning that credit default swaps - insurance against a
country not meetings its obligations - would not be paid
out.

Thank you