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U.S. and European Debt Crises

U.S. and European Debt Crises. Lim Mah-Hui October 19, 2011 PwC Seminar Penang. Debt Profile of Spain, Portugal, Greece, 2009. Spanish Debt by Sector of Issuer, % of Total, 1995 – 2009. Portuguese Debt by Sector of Issuer, % Total, 1998 - 2009.

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U.S. and European Debt Crises

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  1. U.S. and European Debt Crises Lim Mah-Hui October 19, 2011 PwC Seminar Penang

  2. Debt Profile of Spain, Portugal, Greece, 2009

  3. Spanish Debt by Sector of Issuer, % of Total, 1995 – 2009

  4. Portuguese Debt by Sector of Issuer, % Total, 1998 - 2009

  5. Greek Debt by Sector of Issuer, % of Total, 1997 -2009

  6. Sovereign Debt Crisis OR Banking Crisis ? • Similarities and links btw Global Finance Crisis & European Crisis • Both are banking crises • European Crisis is Act II of the Global Financial Crisis

  7. Global Financial Crisis • U.S. economy growth slowed after 1970s • Growth supported by economy taking on more debt > debt driven economy • Financial debt grew fastest, followed by household debt • Total U.S. Debt 350% of GDP • Finance now dominates the real economy – financialization of economy – tail wagging the dog

  8. Financial derivatives & transactions multiple of real ecy Inverted Liquidity Pyramid - $607 trillion - 13 x world GDP

  9. European Union • Biased nature of EU. • Core and peripheral countries different productivity and inflation rates but still same currency and monetary policies • Peripheral countries unable to compete with core > worsening current account imbalance

  10. Current Account Imbalance • Current account deficits financed by debt creating financial flows – bank loans and portfolio investments from core countries • Increase in external debt • Increase in domestic debt through financialization – increase in household debt and financial debt

  11. Bank Crisis of Core Countries • Banks from core ctries esp Germany and France lent to peripheral countries at low interest rates because of EU – mispriced risks • Most of the debt was private sector debt

  12. European Crisis Act II of GFC • Problems worsened with Global Financial Crisis • State revenue plunged, expenses rose due to fiscal prime pumping • Fiscal and monetary loosening created a new set of bubble • Greek sovereign debt – equivalent of U.S. subprime loans • Contagion effect on other countries

  13. Rescue of Banks not Countries • E.U. rescue plan not to rescue the peripheral countries but to rescue the banks from core countries that are heavily exposed

  14. THANK YOU

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