Transcript Document

It’s the End of the World as We
Know It
The European Debt Crisis, Greece
and the Interconnectivity of
Financial Markets
Michael Arpey
October 25th, 2012
FRPG 187M - Saint Lawrence University
Table of Contents
I.
Overview
II.
European Debt Crisis
III.
Boomerang – Greece in Financial Crisis
IV. Why worry?
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Overview

Michael Arpey is currently a Managing Director with The
Carlyle Group, an alternative asset manager based in
Washington, D.C.

Born and raised in Saratoga Springs, New York, Mr.
Arpey is an alumnus of Saint Lawrence University,
having completed a double major in Government and
Pyschology. Mike also participated as a student delegate
to the board of trustees and was an active member of
Thelmo.

After graduating with honors from SLU, Mr. Arpey
attended the Dickinson School of Law and was
appointed as General Counsel to the State Treasurer of
Pennsylvania.

Prior to joining Carlyle, Mr. Arpey served as Global Head
of Private Equity for Prudential and then as Head of DLJ
Merchant Banking’s Customized Fund Investment Group
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Overview
What is Private Equity?
 Private equity consists of investors and funds that make investments
directly into private companies
 Capital for private equity is raised from retail and institutional investors,
including public pension funds
 Private equity capital helps:
•
Fund new technologies
•
Strengthen balance sheets
•
Create jobs
 All kinds of companies receive private equity capital
Private Equity Backed Companies Include:
4
Overview
The Carlyle Group
 Established in Washington, D.C. in 1987, Carlyle is one of the world’s largest global alternative asset
management firms:
• Carlyle has over 1,300 employees in 32 offices in Africa, Asia, Australia, Europe, Japan, the Middle East, Latin
America and North America
 More than 1,400 investors from 75 countries rely on Carlyle to achieve premium returns on their
invested capital
Denotes Carlyle office
Note: As of June 30, 2012.
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Overview
It’s The End of the World as We Know It
 There has been an increased focus on “end of time” narratives in recent
years due to a confluence of factors
•
Global Financial Crisis
•
Civil Unrest
•
Climate change and natural disasters
•
Nuclear proliferation
 Every day the media tells stories of ways in which humanity is just one step
away from destruction
•
Whether it’s the upcoming ‘fiscal cliff’, the ongoing European debt crisis, or tensions in the
Middle East – We are constantly reminded of the possibility of our own demise
 However imminent our demise may or may not be, mankind has been
resilient throughout time to existential threats and catastrophes
 Of the current threats we are facing, the European debt crisis, exemplified
by the current situation in Greece, may represent an existential threat to
the very foundations of our society
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Table of Contents
I.
Overview
II.
European Debt Crisis
III.
Boomerang – Greece in Financial Crisis
IV. Why worry?
7
The European Debt Crisis
 The European debt crisis is an ongoing financial crisis that has made it
difficult or impossible for some countries in the Euro area to repay or refinance government debt
 Crisis due to several factors, including:
•
Private debts arising from property bubbles becoming sovereign debt as a result of banking
system bailouts (i.e. Ireland bailout)
•
Unsustainable public sector wage and pension commitments, corruption and economic
mismanagement drive massive debt increase
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The European Debt Crisis
 Despite having a monetary union, the EU has had a very difficult time
containing the crisis
•
EU is NOT a fiscal union  Each country has own tax and pension laws
•
Cultural differences between countries result in varied reactions and proposed solutions to
the problem
•
PIIGS (Portugal, Italy, Ireland, Greece Spain) continue to face the steepest challenges
 Among the PIIGS, Greece has had the most difficult time recovering from the
crisis
•
Lack of political will and inability to effectively implement austerity measures have created
an on-going crisis in Greece
•
Greece has become a hotbed for civil unrest as protesters and rioters take to the streets to
protest austerity reforms
9
Table of Contents
I.
Overview
II.
European Debt Crisis
III.
Boomerang – Greece in Financial Crisis
IV. Why worry?
10
Boomerang
“And they Invented Math?”
 Michael Lewis, noted financial journalist, traveled to Greece to explore the
reasons for the crisis firsthand
 Lewis met with government officials, tax collectors and Greek orthodox
priests
•



As a financial disaster tourist Lewis discovered greed, corruption, and mismanagement
throughout Greece
“Greek public school system is
the site of breathtaking
inefficiency”
“Its simply assumed that
anyone who is working for the
government is meant to be
bribed”

“We had no Congressional
Budget Office”

“The party in power simply
gins up whatever numbers it
likes, for its own purposes.”

“Greece has no working land
registry”
An estimated two thirds of
Greek doctors reported
incomes under 12,000 Euros
per year
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Boomerang
“And they Invented Math?”
 Lewis determines several factors led to Greek crisis
•
Economic Mismanagement: Greek government continued to provide generous social programs
despite lower government revenues
•
Inefficient Operations: Greece’s education system is ranked one of the worst in Europe
despite having a higher proportion of teachers
•
Corruption: Culture of corruption permeates through entire social structure where bribes are
necessary for almost everything
—
—
Transparency International ranks Greece the most corrupt country in Europe
Greeks spend an estimated $2,355 a year in bribes to lawyers, doctors and banks
 For a country that invented math, simple arithmetic was seemingly absent in
Greek budgets leading up to the crisis
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Greece in Financial Crisis
 In response to the deepening debt crisis, Greece was forced to accept
bailout funds from the EU and IMF
 Acceptance of these funds required Greece to reduce its spending and
implement austerity measures
 These measures combined
•
Tax Increases: Implementation of property tax, excises taxes on fuel, sales tax and luxury
levis on pool, yachts and cars
•
Spending Cuts: Pensions cut up to 40 percent. Education spending slashed and schools closed.
$3 billion taken out of healthcare spending and thousands of public sector works laid off.
 Austerity measures were meant to lower the deficit and save the country but
they resulted in …
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Greece in Financial Crisis
2009 - Present
 Civil unrest as youths and public sector workers protest against austerity
measures
14
October 18th, 2012
General Strike in Greece Turns Violent
 http://worldnews.nbcnews.com/_news/2012/10/18/14537638-general-
strike-in-greece-turns-violent-enough-is-enough-says-austerity-protester?lite
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Table of Contents
I.
Overview
II.
European Debt Crisis
III.
Boomerang – Greece in Financial Crisis
IV. Why worry?
16
Why not let Greece default on its debt?
 Since 2008 Greece has suffered mightily with the economy continuing to
contract with lightening speed as the austerity measures take hold
•
Unemployment almost 20%
•
Hospitals facing shortages
•
Increased homelessness, suicide, crime and cases of HIV
 Just let Greece default..
•
Greece is 5,000 miles away from the United States. and has a GDP 50 times smaller than that
of the United States1.
•
Give Greece a clean slate, only a few bondholders and Europeans will lose money, right?
•
This is a European problem, let the Europeans worry about it
 Problem with letting Greece default is… we are ALL affected
1) International Monetary Fund GDP Data – 2011. Based on United States GDP of $15 trillion and Greece GDP of$300 billion
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Interconnectivity of Financial Markets
Golden Arches Theory of Conflict Prevention
 Globalization has created a world in which countries are more
interconnected than ever before
•
Turmoil can spill from one economy to another quickly
 Historical and geographical boundaries are becoming less and less relevant as
countries globalize
 As a result of globalization Thomas Friedman introduced the Golden Arches
Theory of Conflict Prevention
•
When a country reaches a certain level of economic development and has a middle class
strong enough to support a McDonalds they become a McDonalds country
•
NO country with a McDonalds has ever fought a war with another McDonalds country
 Having a McDonalds represents integration into world economy
 Interconnectedness of world economy fosters mutual cooperation and
economic prosperity
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Greek Default: We are all affected
Possibility of contagion

Downside of integration – turmoil can spill from one economy to another economy
quickly

Allowing Greece to default would create a domino effect

A euro exit by Greece, Spain, Portugal and Italy could be contagious and devastating
to the rest of the world
•

The result could catapult the world into a recession and chop $22.26 trillion out of global gross domestic
product by 2020, according to a new German think tank study.
While most industry observers believe a Greek default to be unlikely, unpredictable
events DO happen and can greatly influence our world
Greece could be the first domino
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Why Worry? Unpredictable Events Happen
Fall of the Berlin Wall Collapse of the Soviet Union
September 11, 2001 &
Global Terrorism
2011: A Year of Revolution
US invasion of
Afghanistan and Iraq
Natural Disasters
Invasion of Kuwait by Iraq
Technology
Rise of China
Global Financial Crisis
Chaos in Syria Iranian Nuclear Showdown
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Greece Defaults: Why Care?
 The dominoes begin to fall
•
Greek creditors, among them the United States, lose billions
•
Bond yields increase for all countries with sovereign debt risk including the United States
•
World economy plunges into recession
 Worst case scenario: United States defaults
•
United States financial markets lose trillions
•
GDP shrinks
•
Unemployment increases
•
Public services cut
•
Possible civil unrest
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Hope for the future
 Despite the many threats to the existence of man the resilience of humans
to existential threats cannot be denied
 In the face of innumerable challenges countries have already begun banding
together to find solutions to complex problems such as global warming,
conflict resolution and economic instability
•
European Union
•
United Nations
•
NATO
 Armed with a strong knowledge of global challenges, a new group of capable
young leaders will emerge in the coming years
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Top 10 Things I’ve Learned
 Relationships Matter
 Pay attention to the details
 If you can’t trust somebody, no legal agreement will protect you
 Make the most of the things others don’t want to do
 Under promise and over deliver
 Persistence pays off
 Don’t be afraid to fail…..too many people sacrifice good on the altar of
greatness
 In all you do act like an owner
 Never stop exploring
 Maintain balance in your life
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Questions?
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Further Reading:

“Greek Debt Crisis: How Did Greek Economy Get into such a Mess?” Dan Roberts, The
Guardian, May 6, 2010.

“Tackling Corruption in Greece.” Transparency International, 2011.

“On Average Greeks Pay €1,355 a Year in Bribes!” Bild, September 3, 2010.

“How Did the Eurozone Get into its Debt Mess?” Reuters, September 20, 2011.

“Belatedly, Europe Finds a Quick Fix to its Financial Woes.” Eric Reguly, Globe and
Mail, October 28, 2011.

“Q & A: Greek Debt Crisis.” BBC News, October 27, 2011.

“COLUMN-Dexia: Stop Press or Deja Vu? John Manley, Reuters, October 6, 2011.

“Greek Austerity: New Measures ‘Catastrophic’ Say Protesters.” Helena Smith, The
Guardian, September 22, 2011.

“Opposition Grows in Germany to Bailout for Greece.” Nicholas Kulish, New York
Times, February 15, 2010.
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