BIZFLUENCE

EXPLAINS

EUROZONE CRISIS

QUICK RECAP OF US DEBT CRISIS

TABLE OF CONTENTS

Euro zone and birth of Euro as a currency Crisis in Greece (Cause and Effect)

Contagion effect (Domino effect) on other Euro countries

Impact on India Impact on the world economy

EURO ZONE AND BIRTH OF EURO

Economic and monetary union (EMU) of 17 European Union (EU) member states have adopted the euro () as their common currency and sole legal tender. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) who has the sole authority to set monetary policy The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. As of July 2011 recently, with nearly 890 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the U.S. dollar.

HOW IT STARTED IN GREECE

Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. It started with the high debt accumulation by the Government of Greece. It borrowed abroad to finance its current account deficit (imports greater than exports) and that gave rise to a large private sector debt alongside its public sector debt. The debt levels and deficits that exceeded limits set by the Euro-zone were revealed & exposed. Coupled with lax macroeconomic management, slow growth of productivity and weak competitiveness, the issue took the shape of a crisis.

THE

DOMINO EFFECT

Italy has been deeply indebted for years, and recent fighting over the budget has rapidly increased borrowing costs as investors lose confidence in the countrys financial stability. Borrowing costs have also surged in Spain, and while the countrys debt burden isnt as pronounced as Italys, Spain runs a higher budget deficit.

Greece, Portugal and Ireland have received bailout funds from the IMF and the EU after agreeing to a series of austerity measures.

CURRENT STATE OF EURO ZONE

CURRENT STATUS (COUNTRY WISE)

Greece: The OECD sees Greeces economy contracting 3.5 % this year and growing 0.6 % in 2012. The European Commission estimates Greeces debt will peak at 161 % of gross domestic product in 2012 European leaders agreed on a second bail-out of Greece (109bn )under which private bondholders will be called on to participate for the first time, contributing a target of a further 37bn Italy: It had 1.6 trillion euros of debt at the end of last year It has announced a fresh round of austerity measures after an emergency cabinet meeting. The 45bn euro plan aims to balance Italy's budget by 2013 by slashing public spending and jobs Government plans to raise VAT from 20% to 21% which would generate 4.9 billion euros over a period Portugal: Bailout agreement was reached between Portugal, EU and IMF in may for about 78 billion euros In return for financial help from the EU and the IMF, the government has to slash its budget deficit from 9.1% of GDP to 5.9% this year, and then reduce it to 3% by 2013

CURRENT SCENARIO (CONT.)

Spain: More than a fifth of the population is unemployed, cut its 2012 growth forecast from 2.5% to 2.3% and its 2013 prediction from 2.7% to 2.4% auctioned 4.1bn euro of three-year government debt in April (average yield of 3.568% ) Moody's has its Aa2 credit rating on review for a possible downgrade

Ireland: Reached an agreement on a 85 billion euros ($119 billion) bailout package with the European Union and the International Monetary Fund in November 2010 Ireland's borrowing costs are already at levels once thought unimaginable, with five-year paper yielding over 15 % on the secondary market and 10-year paper close to euro-era highs of 13.86 % Moodys downgraded Irelands rating to Ba1 (Junk) in July while both Standard & Poor's and Fitch have maintained Ireland s ratings at BBBplus (three notches above junk status)

IMPACT ON INDIA
The EU (excluding UK) accounts for roughly 30% of the countrys merchandise foreign trade (export and import). Negative Impact on Foreign Trade and loss of revenue in export based companies (Service Sector mainly). Less inflow of capital and hence may impair the growth and development of emerging industries. Decline in Security and Commodities market and depreciation of currency(due to flight of capital). Slowdown in remittances and NRI deposits.

IMPACT ON THE WORLD ECONOMY

Shrinking markets and potential cuts in development aid, which followed the 2008 crisis, could repeat themselves. The weakness of the recovery in the advanced economies like US, EU and Japan is reflected in persistent high unemployment and fragility in the banking sectors. The impact on financial markets, with a bout of renewed volatility possibly dragging parts of the world economy back into a double-dip recession. The second recession in the same decade would be unbearable for the world.

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