European World Crisis (Portugal)

Presented by: Mustafa Shahid Affan Hussian Asim Farooq Hamza Khan Fehar Arshad

Introduction To Portugal
Located in South Western Europe
Capital is Lisbon Connected with Spain and Atlantic Ocean Governmental System is Parliamentary System, Unitary State &

Constitutional Republic A few Institutions:

European Commission European Parliament European Maritime Safety agency European Monitoring Center for Drugs & Drugs Addiction

Institutional Sense
Institutions are structures and mechanisms of Social Order
Prevailing for Individuals Behavioural patterns of a society Central Concern for Law Political Rule Making and Enforcement Evolution of Institutions Government needs Institutions

Banks are Institutions as well

School, Colleges & Universities are Institutions as well

PIIGS

To know what PIIGS stand for P- Portugal I-Italy I-Ireland G-Greece S-Spain Why are these countries called PIIGS? World Economic Recession of 2008-2009 They were the most unstable economies in European Union Popularity due to their National Debts

Governments Role in European Financial Crisis

Very Prominent role
Privatization Fiscal Austerity Foreign Direct Investments Trade Liberalization All done by IMF Implemented by Government through Institutions

Government bought loans from Germany, UK, France, Spain &Greece

Reasons For Portugal Crisis

A glance at EU loans (starting of Crisis) Greece owes $367 Billion mostly to other European Economies Ireland owes $865 Billion mostly to other European Economies Spain owes $1 Trillion Owes to France Britain &Germany Italy owes $1 Trillion Spain owes to Italy about $41 Billion Italy Owes to Spain about $27 Billion

 Serious Crisis after World Recession

Being a member of PIIGS survival was on Sovereign Debts Sovereign Debt = External Debt Debt obtained using Lenders Currency High risks involved for Defaulting Decrease in Value Power of Currency
For example one room to rent costs 400

Monthly Income about 485

Then how do you expect people to Survive?

 Increase in social security problems due to Crisis

Causing more threat of unemployment Decrease in public spending cuts in order to pay off loans Increase in Value Added Tax (VAT) Leading to more unemployment Removal of Subsidies Private Sector Debt

To Whom Portugal Owes?

Foreign debt amounts to 251% of GDP
Equivalent to about 38.000 Euros per person Owes to Spain about 67.5 Billion Euros Portugal owes Germany 26.6 Billion Euros Portugal owes France 19.1 Billion Euros Portugal owes UK 18.9 Billion Euros Portuguese banks owe 7.5 Billion Euros to Greece.

IMF and Euro Zone

IMF And Portugal

European Union a heavy Debtor of IMF
Greece, Ireland & Portugal given loan of more than $100 Billion Each Under Extended Fund Facility IMF approves a Loan of 1.48 Billion Euros Total EFF arrangement about 21.13 Billion Euros ( as of July, 2012) In May, 2011 IMF approves a loan of 26 Billion Euros 25.2 Billion Euros from European Union Total Bail out package of $100 Billion

A heavy influence of Portuguese Crisis by IMF and its Policies

Economic Downfall

Unemployment 10.4% Prices Rising Pensions cut Wages cut Collapse of housing market Drop in foreign Investments Floundering domestic industries Pumping Public Money into Banks Banks to meet European Banking Authority dead line Weakest growth rate in Euro Zone Number 46th in Economic Crisis Growth less than a 1% over the last decade Any bailout package or help will come with strings attached

European Government Efforts

Short Run Solutions
Focus more on Public Expenditures Fiscal Consolidation Structural Reform Fiscal Austerity Measure (Mostly) Financial Stability Writing down who owes what

How much debt has been paid in written form

Losses have to be allocated in a manner

 Euro states to provide upto 200 Billion Euros Bilaterally to IMF

150 Billion should be in Euro Currency Following Strict Fiscal Rules Correction of political tensions Containment of sovereign debts Print more money and pay off peripheral countries loan Mostly bailout packages by Government ECB buying Government bonds LTRO (Long Term Refinancing Operation)

Default a Problem?
Default risk tells about a bond holder might become insolvent and not honor

his/her debt obligations Defaulting would mean the whole economic ethos has broken down Banks to hold assets relative to the debt they hold Defaulting on Debt would mean decrease in Banks assets If banks collapses so does the economy Defaulting though is not as bad as it is termed USA defaulted 3 times in 20th century the world didnt end Default NOW or Suffer a More Expensive Crisis Later Defaulting does not End the World rather it pushes to form a new system of Economy

Start Fresh or Walk Away

A fresh start will only come by defaulting in present You cant rely on short term solutions for ever Sooner or later you will have to default Defaulting now would be painful but at a lesser expense than defaulting later Defaulting would result in Capital Flight but to where? You CANNOT walk away from DEBT Portugal in heavy terms & conditions of debt from both ECB and IMF Loans are given on the terms & conditions of Creditor & its will to speculate a certain economy The question of Walking Away has no place here

Political Issues
Economics and Politics two sides of a same coin Euro Zone ONE country away from dismantling Measures such has increasing Taxes and cutting budgets had, have and will

lead to great protests You CANNOT operate in the same circle and find answers Over lapping of interests of EU economies, participating in Political Issues Any country who quits EU will change the discourse of the Global Economy and World Financial Markets This constant threat is contributing to more crisis and is Political Racism Crisis is also increasing with the increase of Political Economic Financial Crisis

Fiscal Austerity The Answer?

According to Joseph Stieglitz Fiscal Austerity is a tool used by IMF
European Union Using the same Fiscal Austerity measures were used by all the 17 countries Led to more unemployment and political rupture Portugal in the terms of 2012 declined to apply Fiscal Austerity Measures Fiscal Austerity includes a decrease in spending and increase in Taxes When that happens Spending Shrinks which is against the logic of Short

Term Solution. It slows Economic Growth

 More problematic for high debt countries

Due to this measure of Fiscal Austerity the entire region slipped into

another recession in 2011 Euro Zone Fiscal Austerity measures are over lapping by its countries Euro Zone Fiscal Austerity measure could possibly create a new Crisis in 2013 The whole idea of Fiscal Austerity is to put burden on the consumers This can not work every time

Future Outlook
European Union ONE country away from a New Crisis
The collapse of any country can be delayed but not FINISHED Greece above all seems to be number one to collapse Euro Zone collapse will be a THREAT Globally Short Run Measures are DONE! Defaulting seems to be out of the way Other way out of can be if loans are Forgiven

Another way out of it would be through Gold Standard

 But Eventually only the country holding more Gold will survive Portugal holding 382 Tons of Gold The idea is not to sell the stuff. Instead, the proposal is to bring down

borrowing costs by using gold to guarantee the partial repayment of bonds to investors in case of a default

Broke Economies

Portugal Ireland Italy Greece Spain Germany France All of these are Broke Economies What are broke Economies? The ones that are already in debt and loaning out

QUESTIONS!
HOW CAN ONE BROKE ECONOMY LOAN OUT ANOTHER BROKE

ECONOMY? IF BROKE ECONOMIES CANT GIVE MONEY BACK HOW WILL THEY GET OUT OF IT? THROUGH BAIL! THINK AGAIN WHERE WILL THE MONEY FOR BAIL COME? WHERE IS PORTUGAL GOING TO GET MONEY THAT IT OWES TO GERMANY IF GERMANY CANT GET BACK THE MONEY THAT IT LENT TO ITALY?

Conclusion
Money is DEBT
Printing Money for Bailout Packages Broke Economies lent money to other Broke Economies

IMF and there 4 Policies played a role in Euro Zone Crisis

Fiscal Austerity Leading to a new Crisis in 2013 Portugal after Greece will be the second to Default This will change the whole ethos Modern Economics and Finance Interest Rates needs to be Broken