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Sovereign Debt Crisis
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Sovereignty
It is the quality of having supreme,
independent authority over a territory.
It can be found in a power to rule and make
law that rests on a political fact for which no
purely legal explanation can be provided.
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Government Debt Government debt (also known as public debt, national debt)is money (or
credit) owed by any level of government; either central government, federal
government, municipal government or local government.
Debt of a sovereign government is called sovereign debt.
Government debt can be categorized as
Internal debt (owed to lenders within the country)
External debt (owed to foreign lenders)
Governments usually borrow by issuing securities, government bonds and bills.
Less creditworthy countries sometimes borrow directly from supranational
institutions.
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Risk free
Government bonds are theoretically risk-free
bonds
Governments can, up to a point, raise taxes,
reduce spending, or simply print more money
to redeem the bond at maturity.
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Really? Sovereign Risk
It is the probability that the government of a country(or an agency backed by the government) will refuse to
economically difficult or politically volatile times.
Although sovereign nations don't "go broke," they can
assert their independence in any manner they choose,and cannot be sued without their assent.
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Risk In practice, the market interest rate tends to be
different for debts of different countries.Example: Borrowing by different Eurozone countries
A po itica y unsta e state is anyt ing ut ris - ree as itmay, being sovereign, cease its payments
Spain in the 16th and 17th centuries nullified its
government debt 7 times during a century
Revolutionary Russia of 1917 refused to accept theresponsibility for Imperial Russia's foreign debt
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Sovereign Debt Rating
Assessment of the international rating
agencies on the likelihood that a particularcountry will default on its loans.
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Forms it can take Outright default domestic or external debt
Eg: Russia, Spain, Ecuador
Debt Restructuring
Eg: Pakistan (1999), Ukraine (2000), Uruguay (2003)
Bailout (solvent but illiquid)
Eg: Mexico (1994-95), Korea/Thailand (1997-1998)
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Peru Debt Crisis
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Peru Debt Crisis
In 1980s the living standard of Peruvian
people was unbearable due to TWO reasons -
??
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Reasons
1. Unmanageable Debts
2. Hyper inflation
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Phases that led to CrisisExport led economy ofBelaunde
Administration took over by
Alvarado
De privatized many
aspects of economy
IMPORT SUBSITUTE
INDUSTRALIZATION
Led to heavy
BORROWING
More DEBT than
before
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Phases that led to Crisis : continued
Oil Crisis of 1973 Topped
the economic problem Inflation began in PeruAgricultural
industry Failed
Increased
overnment
In 1980 ,
Belaunde tookPrivatize 2/3 th
spending has ledto more Debts
over Alvarado
Money comes to
the Elite People
not to the poor
people
Belaunde policies
were on the edgeto work BUT ????
Suddenly Peru
suffered with the
NATURALDISASTERS LIKE
earthquakes in
1983
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Phases that led to Crisis : continued
Major exports,
potatoes &
sugar got
devastated
Per capita GDP
was reducedfrom $2,569
to$2.443
When Peru tookthe money from
IMF ?
Perubecome
RISKEST for
investors
In 1985,inflation
increased
further
Popularity of
GUERILLA group and
weak economy further
led to inflation
In 1991, after the
FUGIMORI government,
the condition become
little stable
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Argentine Debt Crisis
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Argentina Debt Crisis
Argentina's current economic crisis coming for along time, with economy worsened during currentgovernment's two years in power.
The country has been in recession for four years .
Situation is deteriorating fearing, it could default on its
90bn public debt and the currency may need to bedevalued.
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Timeline 1916 - Hipolito Yrigoyen of the Radical party is
elected president. He introduces a minimum wage tocounter the effects of inflation
1939 - Outbreak of World War II. Argentina proclaimsits neutrality.
From 1939 to 1998 ,there exist a lot of politicalinstability in Argentina (change in power)
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Recession Bites . . 1999 - Fernando de la Rua of the centre-left Alianza
opposition coalition wins the presidency, inherits 114billion-dollar public debt.
2000 - Strikes and fuel tax rotests
Beef exports slump after an outbreak of foot-and-mouth disease
The IMF grants Argentina an aid package ofnearly 40 billion dollars.
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2001 July - Much of the country is brought to a
standstill by a general strike in protest againstproposed government spending cuts
Return of the Peronists
2001 October - The opposition Peronists take
control of both houses of parliament inCongressional elections.
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Within days the government devalues the peso, ending10 years of parity with the US dollar
Banking and foreign exchange activity suspended
2002 November - Argentina defaults on an $800mdebt repayment to the World Bank, having failed to re-secure IMF aid. The World Bank says it will not considernew loans for the country
2003 September - After weeks of negotiations Argentinaand IMF agree on debt-refinancing deal
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2003 September - After weeks of negotiations
Argentina and IMF agree on debt-refinancingdeal under which Argentina will only pay intereston its loans.
2005 March - President Kirchner declares therestructuring of the country's debt to be asuccess
2006 January - Argentina repays its multi-billion-dollar debt to the IMF.
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Dubai Debt Crisis
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The Country
UAE consists of seven states (emirates)
Abu Dhabi, Dubai, Sharajah, Ajman, Ummal -Quwain, Rasal Khaimah and Fujairah
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Dubai World Vice President and Prime Minister of UAE and ruler of
Dubai - Sheikh Md bin Rashid Al Maktoum, holds the
majority stake in the company
An investment company that manages and supervises a
Promotes Dubai as a hub for commerce and trading
It is Emirates flag bearer in global investment
Plays a central role in the direction of Dubai economy.
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Assets of Dubai World Dubai Ports World
Jafza Nakheel
Tejari
Limitless Leisurecorp
Maritime City
Dubai Multi
Commodities Centre
Island Global Yachting
Inchcape Shipping
Services
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What Happened . . Dubai let its whole economy to rest on a single
sector i.e. real estate sector.
The property bubble which was created during
2005-2007, went bust because of the financialcrisis that engulfed almost the entire world.
Dubai fell victim even with massive levels ofgovernment involvement in its real estate sector.
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What Happened . .
By 2009, Dubai had debts amounting to $80 bn of whichDubai Worlds share was a staggering $59 bn.
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What Happened . .
The Dubai Government announced that the companywould delay all maturing payments to May 2010.
This raised risk of the largest government default since thergent ne e t restructur ng o .
Moodys and S&P immediately heavily downgraded thedebt of various government related entities.
Major stock exchange reacted immediately. Banking stocksled the tumble.
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What Happened . . On Dec 1, officials in UAE intervened by bringing
to notice that Dubai World was seeking tonegotiate only the$26 bn in obligations held byNakheel (its troubled real estate developer)
On Dec 14, Islamic bonds of Nakheel amountingto $4.1 bn were maturing
On the same day Dubai Govt received $10 bn insurprise aid from Abu Dhabi for debt laden DubaiWorld.
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What Happened . .
On May 2010, Dubai World had drawn an agreementwith most of its lender banks to restructure debts
worth $23.5 bn.
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European Financial Crisis
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Euro convergence criteria (also known as theMaastricht treaty)
Main criteria to enter the Eurozone (European
Conditions for entering into Eurozone
Inflation rates Government finance
Exchange rate
Long term interest rates
The purpose of setting the criteria is to maintain theprice stability within the Eurozone even with the
inclusion of new member states.
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Maastricht Treaty Inflation rates: No more than 1.5% higher than the
average of the three best performing (lowest inflation)
member states of the EU.
Government finance:
Annual government deficit: Annual government deficit toGDP must be less than 3% at the end of the precedingfiscal year.
Government debt: Gross government debt to GDP mustbe less than 60% at the end of the preceding fiscal year.
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Maastricht Treaty Exchange rate: should have joined ERM and
should not have devalued its currency for 2consecutive years.
Long-term interest rates: Long-term interest
rate must not be more than 2% higher than in
the three lowest inflation member states.
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Regulators of Eurozone
European Central Bank (ECB)
European commission
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The definition and implementation of monetary policy forthe euro area.
The conduct of foreign exchange operations.
ECB Powers
The holding and management of the official foreignreserves of the euro area countries (portfoliomanagement).
The promotion of the smooth operation of paymentsystems.
The ECB has the exclusive right to authorise the issuance of
banknotes within the euro area.
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As of Jan 19991. Austria
2. Finland
7. Italy
8. LUXEMBOURG
. e g um
4. France
5. Germany
6. Ireland
.
10. PORTUGAL
11. SPAIN
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By 200812. Greece -2000
13. Slovenia-2006
14. Cyprus-2007
15. Malta-2007
16. Slovekia - 2008
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PORTUGAL
IRELAND
Countries affected:
ITALY
GREECE
SPAIN
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If a country has its own currency, it can print it
according to its gold deposits and as per theprevailing needs of the economy.
Default by stealth
But as Greece was a part of the European Union,it could not print current as per its whims.
This led to cascading of its debts as it could neverprint enough currency to meet its obligations.
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WHY GREECE?
The Miniscule Greece
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The Miniscule Greece...
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So what if Greece defaults? Bank Runs
Sudden-stop to capital Inflows Firms and Banks in sibling countries- Capital
mar et access.
The Europe Inter Bank Market
The rest is history
Even Spiderman wont find the way out
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Even Spiderman won t find the way out
Th ( i bl ) d b
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The current (unsustainable) debt
levels!
So, when did it start?
Before joining Eurozone.
.
Impact of Global Recession.
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New government, New Deficits Change of government : George Papandreou
New deficit figures, from 6 % to 12.7 % to GDP.
Accumulated government debt is forecasted
at 120 % by 2010.
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The ratings fell! ! ! Who are Rating agencies?
Why do we need them?
How do they measure sovereign risk?
Determinants of Sovereign rating
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Determinants of Sovereign rating
Per capita income : GNP per capita
GDP growth : Average annual real GDP growthon a year-over-year basis
n at on: verage annua consumer pr ce
inflation rate
Fiscal balance : Average annual central
government budget surplus relative to GDP
Determinants of Sovereign rating
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Determinants of Sovereign rating
External balance: Average annual current
account surplus relative to GDP Indicator for economic development: IMF
Indicator for default history : Default on
foreign currency debt
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Judging the Judges
Total Debt Levels
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259 %259 %
466 %466 %
322 %322 %
286 %286 %
71 %71 %
158 %158 %
366 %366 % 315 %315 %
129 %129 %
471 %471 %
144 %144 %
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Goldman Sachs How does it makes money ?
The CEO says that they are Doing Gods
or
Is it really only an Investment Bank?
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Role of Speculators
Betting against theEuro.
Credit default swaps
on Greek debt
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The timeline of Greek Crisis
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IMF and EU Rescue package
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IMF and EU Rescue package
European Financial Stability Facility
Euro 440 billion from 27 Euro area memberstates
t ona uro on y .
And Up to Euro 250 billion by the IMF.
IMF: an unwarranted favor
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IMF: an unwarranted favor
IMF resources raised for low and middle
income countries Greeces problem is European
e was create to ea on y w t a ance
of payments problems.
Disciplining Greece
Interest subsidy
Greek Domestic policy Response
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Greek Domestic policy Response
Stability and Growth Programme
Fiscal Austerity:
Target to cut deficit from an estimated 13.6% of GDP
in 2009 to below 3% by 2012.
Hiked taxes on fuel, tobacco and alcohol, raised the
retirement age by two years, imposed public sector
pay cuts and applied tough new tax evasion
regulations.
Greek Domestic policy Response
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Greek Domestic policy Response
Structural Reforms
Wide-ranging reforms to the pension and health caresystems and to Greeces public administration.
competitiveness by enhancing employment andeconomic growth, fostering increased private sector
development, and supporting research, technology,
and innovation.
Broader Implications of Greeces
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Crisis
Contagion
Complex Financial Instruments and Financial
Regulation
European Integration
The impact on Euro.
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