Finance Panel_White Knights

8/4/2019 Finance Panel_White Knights

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Team White KnightsVarun Prasher(10P118)

Gaurav Anand(10P077)


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I

ntroduction

Debt- Deflation Theory Countries on Line of Fire

European Debt Crisis-Indicators

How it all began

Over-

Indebtedness

Liquidation Distress-Selling

Falling

Prices(Deflation)

Shrinkage of Banks

assets

PORTUGAL

ITALY

Economy, in EU: 15th largest

GDP: -0.6%

Gross debt - 93% of GDP

Unemployment rate: 10.4%

Equity performance (2010): -9.7%

Economy, in EU: 4th Largest

GDP : 0.8%

Gross debt: 119% of GDP



GREECE

Economy, in EU: 11

th

largest GDP: -5.5%

Gross debt: 142.8% of GDP



SPAIN

Economy, in EU: 5

th

largest GDP figure: 0.8%

Gross debt: 60.1% of GDP


Equity performance (2010): -13 %

IRELAND

Economy, in EU: 13th largest

GDP : 0.1%

Gross debt : 96.2% of GDP



Rising bond yields & high debt as % of GDP makes euro zone countries susceptible to sovereigndowngrade.


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Poss

ibilityof

Downgra

de

SPAIN

IRELAND

ITALY

PORT

UGAL

Irish yields fallen markedly (the 10-yearyields from almost 15% to now 8.7%).Rise of trust in Ireland due to itsmeeting all the EU and IMFrequirements relating to the rescuepackage

Massive fiscal tightening and the globalgrowth pause still a concern

Irish banking sector practically

nationalized

The banks dependence on ECB to raise

capital.

Housing prices have fallen by almost

40% and the downturn is not over yet.

Imminent worry is Greece, while most of the countries look safe due to improving fundamentals.The mostimportant concern is the fear of contagion due to nervousness and illiquid bond markets.

Lowest debt among the vulnerablecountries (66% of GDP in 2010)High current budget deficits are stillhigh.

High unemployment rate (20.9%)

Housing market, in the aftermath of

the housing bubble

Strong political resolveEconomic preconditions of stimulus

programs looks achievableNo collapse of housing markets

Large budget deficit

Poor growth potential

Low productivity and demographicchallenges

High debts(127% of GDP in 2010)About half of government bonds heldby Italians and, also, duration isrelatively long .Low private debt levels

Poor growth potential

Low productivity and demographic

challenges

FRANC

E High debtLarge budget deficitOvervalued housing marketsFrances bank strong exposure toGreece and other crisis-ridden countries

Credit ratings agencies view Frances

rating as stable

Any downgrade possibility will cause

the crisis to spin out of control

Different Crisis, Different SolutionsCountry Crisis

Greece Solvency

Ireland Solvency

Portugal Solvency

Italy Liquidity

Spain Liquidity

France Liquidity

Liquidity Crisis

Lend it by purchasing its debt to contain

contagion

Solvency Crisis

Restructure its debt and put in place

structural policies


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Resc

ueEffort

andGlob

alImpact

Saviors and the saved The EU rescue fund EFSF approved by lawmakers to grant pre-cautionary loans (a potential benefit for Italy

and Spain), to recapitalize European banks and buy distressed countries bond in secondary markets

Having spent almost half of the funds, if Italy and Spain are also to be included, a tripling is required ofpresent 440 billion euro fund

EFSF

The E.C.B. has spent more than 150 billion, or $200 billion, on peripheral government bonds through its

Securities Markets Program, starting from May 2010Positive reaction from markets if the ECB purchasing of government bonds will continue until the rescue fund is

prepared to take over the task along with an interest-rate cut on borrowingsECB

Playing second fiddle by now but needs to play a proactive role

Setting up a special vehicle which will be capitalized by a first-loss layer from EFSF and a second layer of IMFs

own capital,to lend to illiquid countries like Italy as suggested by Raghuram RajanIMF

Global ImpactGlobal investors cutting their exposures to troubled euro zone countries across the board

due to credit downgrade

EMEs have suffered the most due to risk-off and growth-off strategy given gloomy

economic forecasts. Emerging-market currencies suffered across the board.

Emerging-market debt weakened shown by higher yields as investors looked for safety into

assets such as the U.S. dollar and Treasurys

With continuing fears over eurozone sovereign debt problems and doubts about U.S. and

global economic growth, commodities see less upside possibility, but more room foranother sell-off.

EURO Zone Industrial

Production

Consistently decreasing Industrial

Production shows the poor state of

the economies


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Resc

ueEffort

andGlob

alImpact

Global ImpactBanking Sector is a major challengeStrengthening of the banking sector through more capital to

support confidence from investors and depositors should be a

priority.

Prospects of low growthDue to direct effects from the significant fiscal tighteningmeasures in Southern Europe and Ireland, these countries will

struggle with low growth/recession in a long time.

Indirect effect on crisis-struck countries as well as core

countries from the sharp declines in confidence indicators, the

financial crisis and the pressure on the banks

Swap used to transfer the credit exposure of fixedincome products between parties.

Credit Default Swap Rates

Web of Debt


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R

oadAhead

Alternatives

Massive Bail-out

Package

Default

Orderly debt

restructuring

Economic stimulus with strict austerity measure and debt reduction targets will lead to low growth

and eventual default

Dissolution into original currencies of sick countries fissioning the European union into northernhard-currency and southern soft-currency blocks can potentially destabilize markets and

threatening the European integrity

According to the Economist, restructuring will cause Greeces debt to halve their values to 80% of

GDP. European banks are capitalized enough to absorb losses and avert the crisis.

Way to GoWe support orderly debt restructuring with ways to contain contagion as a proper solution due to following

reasons:

1. Greece has a solvency crisis. Very little economic sense in lending money to Greece so that the

government can pay back private investors at high interest rates

2. Markets have already factored in Greece default in its expectation. Selective default will last a few days

causing no severe market panic.3. Orderly debt restructuring would signal that there is leadership and there is a plan ,boosting investor

confidence.

4. Greece can choose from options of reprofiling of bonds to steep write-down of assets

5. Provide easy borrowing facility to other illiquid and more promising countries to prevent contagion

It only makes sense to accept a fair solution that shares the pain more equally. It would be excruciating and

expensive in short-term, but the alternative of a long-term inflation and depression would be muchworse.


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Documents

Finance Panel_White Knights