Transcript old wine in new bottle

U.S. and European Debt
Crises
Lim Mah-Hui
October 19, 2011
PwC Seminar
Penang
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Debt Profile of Spain, Portugal,
Greece, 2009
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Spanish Debt by Sector of
Issuer, % of Total, 1995 –
2009
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Portuguese Debt by Sector of
Issuer, % Total, 1998 - 2009
4
Greek Debt by Sector of Issuer,
% of Total, 1997 -2009
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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
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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
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Financial derivatives &
transactions multiple of real ecy
Inverted Liquidity Pyramid - $607
trillion - 13 x world GDP
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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
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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
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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
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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
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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
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THANK YOU
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