Impact of Global Debt

&
Current Global Imbalances
on Growth

Presented to:
Prof. N K Gupta
Group 9
MMS Finance
 Abhishek Sinha (03)
 Emaad Patel (19)
 Humaid Shaikh (34)
 Mezbon Dsouza (54)
 Suken Shah (102)
 Vijay Udayar (115)

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Introduction

Debt Levels
accelerated To recover Now most Probability
2008: Reduce
in countries economies of Double
Financial GDP
developed took more plan to Dip
Crisis Growth
economies Debt Deleverage Recession
after 2000

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 External Debt (In Bn $)
Brazil 216
India 224
Turkey 274
Source: CIA
Korea South 334
China 347
Finland 365
Russia 369
Portugal 507
Norway 548
Greece 553
Denmark 607
Hong Kong 655
Sweden 669
Austria 809
Canada 834
Australia 920
Switzerland 1,339
Luxembourg 1,994
Japan 2,132
Ireland 2,287
Spain 2,410
Netherlands 3,733
France 5,021
Germany 5,208
United Kingdom 9,088
United States 13,450

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Increased Debt in Developed
Economies

 Dot Com Bubble

 Fed’s Low interest Rate
policy
 Housing Bubble
 Advanced economies
 Household debt
increased significantly
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Debt across Emerging Economies

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Problems

 Weaker Countries get hit first

 Stronger Nations have limited
capacity
 Without deleveraging
economy cannot return to its
real growth
 But deleveraging results in
below average growth
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The Debt Cycle

JUSTIFY
Adding
new debt

NEED TAKE
To relieve
New debt
stress

STRESS
Caused by
new debt

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Recent developments in the US
 Obama proposed a
package of $180 bn in
tax breaks &
infrastructure outlays
 Last year $814 bn
stimulus was added
 Outstanding debt is
$13.5 tn
 Stop excess incentives
on interest payments!!
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What to Do??

“The crisis came from debt and you don’t escape

it with more debt…

Governments will only bring about an end to the

credit crisis through the “blood, sweat and
tears” of cutting the amount of public debt”

Nassim Nicholas Taleb

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Dubai Debt Crisis
• Dubai World (Govt. owned investment company)
• Launched in March 2006 and the chairman was Sultan

Ahmed bin Sulayem.

• Operates in 12 countries around the world
• Some famous real estate included The Palm Islands and The

World (Nakheel Properties)

• In March 2008 Dubai world threatened to withdraw funds

from Europe (as EU demanded transparency)

Continued…

 Dubai World had a total of around $60 billion debt of

the total of $80 billion of Emirates.
 On November 26, 2009, Dubai World proposed to delay
repayment of its debt worth $26 billion for 6 months.
 Both Moody’s and Standard and Poor's Investors
Services heavily downgraded the debt of various Dubai
government-related entities.
Effects of the crisis

• On November 30, shares dropped in Dubai and Abu

Dhabi by 7.3% and 8.3%, respectively.
• U.S. stocks fell sharply, The Dow Jones industrial
average lost about 155 points. Oil prices plunged as
much as 7 percent, European stock indexes fell over 3%
• European banks’ debt exposure in Dubai World’s Debt
amounts to USD24.1bn.
Continued…

 The company laid around 10,500 employees

around the world .
 Individual Indians are more likely to be affected by
the Dubai financial fiasco as 4.5 million Indians live
and work in the Gulf region and they remit around
10 billion dollars every year to the country.
Steps taken by Dubai World

• Restructuring the debt worth $23.5 billion

• Converted debt of 8.9 billion into equity

• Abu Dhabi, decided to assist Dubai World,

they gave the a aid of $10 billion
 The Palm Jumeirah
The World
Greek Debt Crisis

 May 2010
 Greek Govt’s budget deficit estimated to be more
than 13.6% , one of the highest in the world relative
to GDP. Government debt expected to exceed 120%
of GDP, in 2010
 The news sends shockwaves across the investor
community
 May 2, 2010:
Euro zone and International Monetary fund agree on a £110 billion
rescue package for Greece, conditional on implementation of harsh
Greek austerity measures.

 Proposed spending cuts of 11% of GDP in 2010, 4.3% in 2011, 2% in

2012 and 2013.

 According to Daniel Gros, eminent economist on Eurozone issues,

1% of GDP decline in Greek govt’ spending lowers demand by 2.5%,
hence proposed high spending cuts, would lead to recession.
 Loss of investor confidence, in Greece as well as other EURO zone
economies, with high budget deficits, as they appear risky to lenders
like:
 IRELAND
 SPAIN
 PORTUGAL

Loss of confidence due to:

i. widening of bond yield spreads
ii. credit default swaps

Bailout package implies loss of credibility for GREECE, and may cause
Euro to fall against major currencies
Economic causes
 Initially, currency devaluation helped finance borrowings.

 With the introduction of EURO, lower interest rates, allowed

Greece to borrow.

 The Global financial crisis which began in 2008, affected 2 of

Greece's largest industries:
A) TOURISM
B) SHIPPING

 Consequently, revenues in 2009 fell by 15%.

Misreporting

 To comply with Monetary Union guidelines,

Government of Greece, consistently, and
deliberately misreported the country’s official
economic statistics, hiding actual level of
borrowing.
 In 2009, govt’ raised deficit estimates, alarmingly,
from 6% to 12.7%.
 In 2001, Greek govt’ paid hefty fees to Goldman
Sachs for arranging transactions that hid
borrowings.
Effects on other Economies

 Greek debt market is reliant on foreign investors to the

extent of 70%, hence posing the risk of a sovereign risk
contagion, especially to banking system, including that of
Italy, and UK.

 80% of budget savings of Greece go to Germany, France and

other foreign debt holders (banks)

 April 2010, Greek debt rating downgraded to ‘junk’ status, by

S&P.
 Bond yields increase in absolute and relative terms to
German government bonds.

 Downgrading of rating of Spain, Ireland, and Portugal.

 Higher yields on government debt would cause concern of

potential bank runs in many European nations.
Global Imbalance

 Deficit and Surplus

 Bilateral issue
 Multilateral problem
 IMF Current Account
 Deficit $1.45 Trillion
 Surplus $1.67 Trillion
Conceal Flows

 Imported Technology

 Capacities for global market

 Increase in Export

 Current Account Surpluses

China Current Account Surpluses
$ Billion
500
426.3

400 371.8

300

200 160.8

100 68.7
35.4 45.9
20.5 17.4
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Regional Imbalances

 Uneven Development

 Germany Surplus

 Backward member

 Rebalancing adjustment

 Providing financial support

Euro-Zone
Current Account Balances as a Percentage of GDP

2005 2006 2007 2008 2009

Germany 5.1 6.5 7.9 6.6 4.0

Greece -7.3 -11.3 -14.4 -14.6 -11.1

Ireland -3.5 -3.6 -5.2 -5.4 -2.8

Italy -1.7 -2.6 -2.5 -3.4 -2.7

Portugal -9.5 -10.0 -9.4 -12.1 -9.7

Thank You

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