A COMPARATIVE ANALYSIS OF THE CURRENT EURO ZONE CRISES WITH US CRISES IN 2007 JAPANESE CRASH IN 1990S AND SOUTH-EAST

ASIAN CRISES IN 1997

EURO ZONE CRISIS

EURO ZONE

It is an economic and monetary union of 16 European Union states. They have adapted the euro as their sole trading currency. Euro became a reality on Jan 1, 1998 but came for consumers on Jan 1 2002.

It currently consists of Austria, Belgium, Cyprus, Finland, France, Germany , Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia And Spain.

INTRODUCTION TO EURO ZONE CRISES

The European debt crisis is the shorthand term for Europes struggle to pay the debts it has built up in recent decades. Five of the regions countries Greece, Portugal, Ireland, Italy, and Spain have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has farreaching consequences that extend beyond their borders to the world as a whole.

WHY DID THE EZ CRISIS SPREAD?

Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. The debt levels and deficits that exceeded limits set by the Euro-zone were revealed & exposed In the first quarter of 2010, the national debt of Greece was put at 300 billion ($413.6 billion), which is bigger than the country's economy. The country's deficit (its expenditure in comparison to its revenue) is 12.7%.

CONTD.

Greeces current economic problems have been caused by a mix of domestic and international factors. Domestically, high government spending, structural rigidities, tax evasion, and corruption have all contributed to Greeces accumulation of debt over the past decade.

Internationally , the adoption of the euro and lax enforcement of EU rules aimed at limiting the accumulation of debt are also believed to have contributed to Greeces current crisis.

IMPACT ON

EUROPEAN ECONOMY

Rising household and government debt levels Trade imbalances

Structural problem of Euro zone system

Monetary policy inflexibility Loss of confidence

IMPACT ON INDIAN ECONOMY

Money probably tries to come to places where it gets better returns. So from the point of view of capital flows, you do have the likelihood of more uncertainty in the rest of the world and therefore more money coming to India

The quantum of impact of Euro zone crisis on markets here is yet to be measured
The recent development in the euro zone has heightened uncertainty in financial markets. India's short-term growth prospects have been adversely impacted.

Though India is primarily a domestic economy, Indias exports are positively linked to the global economic growth. This is likely to adversely impact Indias export growth in the coming months. However, growth will be only marginally affected by the slowdown in the euro region debt stricken countries as our exposure is low. Software services and other export oriented sectors would benefit from the rupee depreciation. FDI has not been significantly affected by the crisis while the FIIs are showing outflow in the last couple of months.

ECONOMIC REFORMS AND RECOVERY

PROPOSALS

Direct loans to banks and banking regulation Increase investment Increase competitiveness Address current account imbalances

Mobilization of credit
Commentary

CONCLUSION

Cautious Euro zone response to Financial Crisis Interest rate policy reaction delayed: concentration on inflation target Fiscal policy reaction muted: Stability & Growth Pact Common currency members avoided large devaluations and foreign currency debt. European governments have tried to act together, not always successfully. Limited impact of falling exports due to extensive internal trade relationships. Greece facing difficult adjustment problems, European banks avoiding losses on Greek bonds.

US CRISIS IN 2007

INTRODUCTION

The U.S. subprime mortgage crisis was a set of events and conditions that led to the late-2000s financial crisis. The percentage of new lower-quality subprime mortgages rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S. After U.S. house sales prices peaked in mid-2006 and began their steep decline forthwith, refinancing became more difficult

CAUSES OF US CRISIS 2007

o

Boom and bust in the housing market Homeowner speculation

o o

High-risk mortgage loans and lending/borrowing practices

Mortgage fraud Securitization practices Inaccurate credit ratings

o o o

CONTINUED
o o o o o o

Government policies Policies of central banks Financial institution debt levels and incentives Credit default swaps Globalization, technology and the trade deficit Boom and collapse of the shadow banking system

WHY DID THE US CRISIS SPREAD?

Subprime Debt Obligations made in USA held around the world caused global financial shock. Housing bubbles burst in UK , Ireland, Spain as well as US. Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

CONTINUED..

Stress on banks around the world led to shrinking credit availability. Shadow off-balance-sheet banking sector collapsed as short-term funding vanished.

Falling demand spread from US to all countries; as US imports dropped, other countries exports fell.

IMPACT OF US CRISIS
o

Impact in the U.S.

Financial market impacts, 2007 Financial market impacts, 2008 Sustained effects

Japanese crash in 1990

History
The robust growth that japan had experienced since the end of world war II came to an end when japans bubble economy collapsed at the beginning of the 1990s In 1989 the bank of japan changed to a money policy.

In 1990 the ministry of finance requested banks restrict their financing of property assets.
Financial institutions suffered from nonperforming loans .

Deflationary spiral and higher unemployment

This period is often called the Lost Decade

Introduction
japan had a lost decade. The reason is that the authorities began to work on the banking sector problem seriously and decisively only after the country suffered from a systemic banking crisis in 19971998. In fact, the crisis began in 1991, when a small commercial bankwhich was insured by the Japanese government's deposit insurance systemwent into bankruptcy for the first time in post-war era Japan, and it ended in 2005 when the nonperforming loan (NPL) ratio of major banks declined to a level below the target set by the government. While the crisis was eventually resolved, this process took about fifteen years after the bursting of Japan's asset price bubbles. The early 1990s when the asset bubble burst, Japan has suffered a slow and even negative growth coupled with price deflation

The asset bubble of the late 1980s:

The Japanese stock price index began to rise in the early 1980s and continued to rise to more than five times the 1980 level. Then, from 1990 it started a long period of decline with mediumterm fluctuations.

Contd.
The Japanese land price also rose throughout the 1980s and peaked in 1991. The average land price more than doubled. The turning point for the land price came one year later than the stock market, in 1991. Since then, the land price index has continued to decline even to date.

Urban land prices rose more and fell harder. Rural land saw similar price movements but with a smaller amplitude.

CAUSES OF BUBBLE ASSETS

bank loans were overextended particularly in risky areas with inadequate supervision and regulation over banks during the bubble period In 1985 there was a sharp yen appreciation, and the Bank of Japan lowered short-term interest rates and eased money in response. Price inflation was close to zero at that time, the Bank of Japan could not find a good reason to tighten money

The economic slowdown and price deflation in the 1990s also led to the growing levels of Non performing loans

The decade-long recession and deflation

Lost Years (19911997) Decisive Policy Action (19982001) Recovery Phase (20022005) Costs of Resolving the Banking Crisis

Conclusion
The Japanese government failed to tackle the banking sector problem in the 1990s in a prompt and decisive manner because the crisis was slow to develop, its severity was underestimated, growth expectations were too optimistic, no major domestic and external pressure existed, and a legal framework for resolving distressed banks was lacking.
A financial crisis damages the real economy, and the worsening of the real economy can also create new NPLs and may eventually deplete bank capital. Essentially, deterioration of the real economy can lead to another round of financial crisis, which can further damage the real economy. If the authorities do not address the banking sector problem promptly, then the crisis may prolong, and a full-fledged economic recovery will be significantly delayed. This could result in a lost decade for the economy.

SOUTH EAST ASIAN CRISES

INTRODUCTION

The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997. Indonesia, South Korea and Thailand were the countries most affected by the crisis. Although most of the governments of Asia had seemingly sound fiscal policies, the (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis.

DYNAMICS

Paul Krugman argued that East Asia's economic growth had historically been the result of increasing the level of investment in capital.
Thailand's economy developed into a bubble fueled by "hot money".

The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism".

CONTD.

major factor was that these countries became excessively dependent upon exports for their economy.
Indonesia, Philippines and Thailand had seen their exports to GDP ratio grow from average 35% in 1996 to over 55% in 1998.

Such huge dependence upon trade made these countries susceptible to currency movements.

Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lenderborrower relationship. Another possible cause of the sudden risk shock may also be attributable to the handover of Hong Kong sovereignty on 1 July 1997.

crisis could be seen as the failure to adequately build capacity in time to prevent Currency Manipulation.

IMF ROLE

The IMF created a series of bailouts.

The IMF's support was conditional on a series of drastic economic reforms influenced by neoliberal economic principles called a "structural adjustment package" (SAP). The SAPs called on crisis-struck nations to reduce government spending and deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates.

CONTD.

However, the greatest criticism of the IMF's role in the crisis was targeted towards its response.
As country after country fell into crisis, many local businesses and governments that had taken out loans in US dollars, which became expensive relative to the local currency. The role of the International Monetary Fund was so controversial during the crisis that many locals called the financial crisis the "IMF crisis".

 Asia

Outside

Asia