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

Debt Profile of Spain, Portugal, Greece,

Spanish Debt by Sector of Issuer, % of Total, 1995 –

Portuguese Debt by Sector of Issuer, % Total,

Greek Debt by Sector of Issuer, % of Total,

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 6

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

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

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 9

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 10

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 11

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 12

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 13

 THANK YOU 14