The Global Financial

Crisis of 2007-9 and

Greek debt crisis

Framed by : Realized by :
• Mme.CHOUJTANI  
Khadija • ABERSI Anass
• SEMMANI Fatima Zahra
01 INTRODUCTION

02 Global Financial crisis of 2009

 Causes of the GFC
 Spread and Unfold of
the GFC

03 Debt crisis of 2011 in Greece

 Reasons
 Aid from the EU and IMF and austerity
measures
 implications
 Future Challenges for Greece and
Eurozone
 Introduction
For many years prior to the global financial crisis, the
world economy had been subject to large
macroeconomic imbalances.

Several countries, ran large By contrast, others, ran large

surpluses on their current
accounts. These countries
channeled a high proportion of
the revenues earned from
exports into savings, rather
than current consumption.
current account deficits, so that
the value of their imports exceeded
the value of exports. Current
account deficits were typically
financed by borrowing.

so can this practice lead to the crisis ? which type of crisis ?

and how can spread from one country to another ?
 The Global Financial Crisis of 2007-9

PRESENTATION

The global financial crisis (GFC) refers to the period of extreme stress in global
financial markets and banking systems between mid-2007 and early 2009. During
the GFC, the excessive distribution of loans was a catalyst for a financial crisis that
spread from the United States to the rest of the world through linkages in the
global financial system. Many banks around the world incurred large losses and
relied on government support to avoid bankruptcy.
 The main causes of the GFC
1_Excessive Risk-taking

the US had an increase in

the share of mortgage
loans, especially subprime,
among all loans category
offered by the banking sec-
tor.
Between 2000/2003 the
share of subprime loans in
total US mortgage loans
was below 10%, this figure
increased to achieve more
than 20% between 2004-
2006 when the house
prices reached their peak
 The main causes of the GFC
1_Excessive Risk-taking

subprime

Subprime: is a mortgage loan extended chiefly to a borrower who has

a poor credit rating or is judged to be a potentially high risk for default
(as due to low income) it takes the form of Adjustable-Rate Mortgages,
ARMs with an initial ‘teaser’ fixed rate of interest that would reset to a
higher, flexible rate after two years.
 The main causes of the GFC
1_Excessive Risk-taking

Between 1997 and 2006 the

price of the average US house
increased by 124 per cent.
Expectations that house prices
would continue to rise led
households, in the United States
especially, to borrow
imprudently to purchase and
build houses. A similar
expectation on house prices
also led property developers
and households in European
countries (such as Iceland,
Ireland, Spain and some
countries in Eastern Europe) to
borrow excessively.
 The main causes of the GFC
2_Role of banks in this GFC

To finance its assets extension and release funds for new investments, banks used the securitization
technique to convert illiquid mortgages into marketable securities by slicing streams of anticipated
income streams into low, medium and high-risk tranches by using Financial Engineering.
 The main causes of the GFC
2_Role of banks in this GFC
This financial technique was
used, also, to transfer risk to
those investors most willing or
equipped to bear the risk of credit
default, but it weakened the
incentive for originating lenders,
banks, to screen borrowers prior
to lending and monitor their
performance subsequently. For
banks, all securitized loans would
be repackaged and passed on to
other investors who would bear
the credit risk.
Most of MBS products became increasingly complex
and opaque, but continued to be rated by external
agencies as if they were very safe, because of their
complicity with issuers.
Investors who purchased MBS products mistakenly
thought that they were buying a very low-risk asset:
even if some mortgage loans in the package were not
repaid, it was assumed that most loans would
continue to be repaid. These investors included large
US banks, as well as foreign banks from Europe and
other economies that sought higher returns than
could be achieved in their local markets
 3_The emergence of Liquidity Risk
01
Increasing leverage
in the lead-up to the GFC, banks and other
investors in the United States and abroad
borrowed increasing amounts to expand
their lending and purchase MBS products,
increase in leverage, which magnifies profits
potential.
02
Increasing of liquidity risk
Banks and some investors increasingly
borrowed money for very short periods,
including overnight, to purchase assets that
could not be sold quickly which create a
mismatch between the short time horizons of
banks’ liabilities, and the long time-horizons of
their assets. exposed to the system liquidity risk
How the GFC Unfolded

Fell of US house prices

Stresses in the financial

system
 How the GFC Unfolded
1_ Fell of US house prices
Before 2006, borrowers would
accumulate sufficient equity in their
houses to refinance their mortgages
after two years, repaying the old
ARM to avoid the higher rate of
interest, and taking out a new ARM
for the same or an even larger
principal. By increasing the size of
the loan, the borrower could extract
the gain in equity in the form of a
lump sum.
After the fall of house prices, the refinancing option
would not be available, and the mortgage would be
likely to default when the teaser rate expired. In the
US, in some cases a homeowner who is unable to
service a mortgage can simply vacate the house and
return the keys to the mortgage lender. The house is
repossessed and the lender assumes responsibility for
recovering the loan by selling the house.
Serious delinquencies (mortgages with payments
more than ninety days overdue or in foreclosure) may
have accounted for more than 40 per cent of all
subprime ARMs in the US by the end of 2009.
 How the GFC Unfolded
2_ Stresses in the financial system

Since mid-2007. Some lenders and investors began to incur

large losses because many of the houses they repossessed
after the borrowers missed repayments could only be sold at as a result, The investment
prices below the loan balance. Relatedly, investors became bank Bear Stearns liquidated
less willing to purchase MBS products and were actively two hedge funds with large
trying to sell their holdings. As a result, MBS prices declined, MBS portfolios, several large
mortgage lenders filed for
which reduced the value of MBS and thus the net worth of
bankruptcy protection and
MBS investors. In turn, investors who had purchased MBS overnight interbank lending
with short-term loans found it much more difficult to roll rates increased sharply.
over these loans, which further exacerbated MBS selling and
declines in MBS prices and increased the cost of insuring
MBS against default.
Spread of the GFC in the world
 Spread of the GFC in the world
Many European banks incurred losses on investments in MBS and other securities that
were backed by loans that turned out to be delinquent as a consequence of the US
subprime crisis. For example, In Germany, IKB Deutsche Industrie bank was an early
victim of the crisis. Between 2002 and 2007 IKB accumulated a €12.7bn portfolio of
asset-backed securities, held off balance sheet by its SIV, Rhineland Funding.

foreign banks were active participants in the US housing market during

the boom, including purchasing MBS (with short-term US dollar funding).
US banks also had substantial operations in other countries. These
interconnections provided a channel for the problems in the US housing
market to spill over to financial systems and economies in other
countries.
 Dysfunction of international financial markets

Financial stresses peaked following the failure of the US financial

firm Lehman Brothers in September 2008. Together with the failure
or near failure of a range of other financial firms around that time,
this triggered a panic in financial markets globally. Investors began
pulling their money out of banks and investment funds around the
world as they did not know who might be next to fail and how
exposed each institution was to subprime and other distressed
loans. Consequently, financial markets became dysfunctional as
everyone tried to sell at the same time and many institutions
wanting new financing could not obtain it. Businesses also became
much less willing to invest and households less willing to spend as
confidence collapsed. As a result, the United States and some other
economies fell into their deepest recessions since the Great
Depression.
debt crisis in
Greece
 Greece is a country in southern Europe and until 2001 its currency was the
drachma but in 2001 Greece joined the Eurozone and began using the euro as its
currency
 Reasons
False reporting of fiscal data : in
1999s the Greek government had
been reporting deficits and debt that
were much lower than the actual
deficits and debts
Greece they've been able to borrow
money at low interest rates ever since
joining the euro because People
figured they were a safe
Economic policy programme :
government implemented an
economic policy programme based
on inducing the income of the
average Greek household through
extensive borrowing from the
markets) This process was also
fuelled by the incoming capital flows
from the EU
there was a huge problem with tax
evasion in Greece,
Greece’s government credibility:
when the 2008 US recession in October 2009, the newly
became global ,Greece was elected government announced
affected because two of its biggest the budget deficit for 2009 was
industries are shipping and tourism estimated to be 12.7% of GDP
while the previous government was
arguing in September 2009 that
deficit would not be higher than
6.5% of GDP)
 RATINGS AGENCIES
Greece has been recently downgraded to
BBB- because of the high budget deficit
and the perceived by the markets,
unsustainable level of public debt. by the
main ratings agencies (Moody’s, S&P, Fitch
and R&I)
assess the solvency of States or
companies and their risk of non payment

That obliged Greece to issue new bonds at short

maturity periods and at higher interest rates

Between 2001/2009 the interest rates was
between 10%, and 2% but in the period of crisis
the interest rates increased to achieve more
than 25%
Eurozone average debt in 2010
was under than 100 percent of
GDP while Greek debt was more
than 175 percent of GDP
 Aid from the EU and IMF and austerity measures

the European commission and the

international monetary fund came to
Greece's aid with a 110 billion euro
bailout
 €80 billion provided by the EMU
 €30 billion from the IMF)
the European central bank also
helped out by buying some greek debt,
and giving greek banks access to
capital
 austerity measures
a 10% cut in general
government expenditure on
a recruitment freeze in the salary allowances
public sector for 2010 and
increase of property
reductions on total salary
taxes, taxes on luxury
payments to employees of
goods and several
the public sector
types of indirect taxes

reduction in the budget

item linked to social measures to reduce tax
security and pension evasion and improve tax
funds by 10% collection
 implications
this kind of worked insofar as Greece did decrease
their budget deficit from 25 billion euro in 2009 to
just 5.2 billion euro in 2011
But caused a substantial decrease in demand for
goods and services pushing the Greek economy to
a deep recession people had less money to spend,
unemployment is still over 25 percent
30 percent of people in Greece live in poverty

so in 2012 the EU and IMF loaned

them another 130 billion euro
 Future Challenges for Greece and Eurozone
it is not in the interest of any country to let one member of the EMU to run
away from its debt obligations, because the consequences political and
economic would be substantial for everyone:

There will be a general confidence loss in ability of EU to deal

with its fiscal and wider economic challenges

if Greece forced to default, contagion to other Eurozone

bond markets and Eurozone financial institutions is a strong possibility

Debt crisis in one member country of the Eurozone

can be general crisis involving other Eurozone countries have similar
budgetary problems (like Spain, Ireland, Portugal) via trade and financial
links
if Greece voluntarily leaves EMU, and establishes a national
currency :

 it will face larger debt payments due to devaluation of the

national currency.

 international capital markets for new borrowing will be

closed for Greece for a number of years and it would not
be possible to borrow money to finance budget deficits
THANK YOU