Three steps to resolving the eurozone crisis A comprehensive solution to the euro crisis must have three major components: reform and recapitalisation of the banking system; a eurobond regime; and an exit mechanism. First, the banking system. The European Union’s Maastricht treaty was designed to deal only with imbalances in the public sector; but excesses in the banking sector have been far worse. The euro’s introduction led to housing booms in countries such as Spain and Ireland. Eurozone banks became among the world’s most over-leveraged, and they remain in need of protection from counterparty risks.
1. Introduction The financial crisis since 2008 has been a real phenomenon in the recent years. It has negatively impacted the countries` national economies as increased their deficits, public and private debts, significantly declined the GDP rates, etc. Moreover, the crisis has also deepened the social discontent and mistrust to the politicians and to the public institutions after millions people in the world remained unemployed and others lost their businesses, as well. Considered that the financial crisis has started from the USA, its effects were quickly and strongly felt beyond the country, too.
Figure [ 1 ]. A Possible Liquidity Trap (credit: Krugman). There is a grave danger, therefore, of a liquidity trap for the Eurozone. If indeed, banks do not lend to businesses (because of the expectations stated previous) and instead invest in capital markets (i.e. spending in the economy does not increase), we have some dangerous ramifications.
This number is 25.1% of total Greece employment. The age group which was affected the most were people from 15-24 years of age (bbc.co.uk, 11-OCT-12). The reason why banks went bankrupt is because people don’t play taxes so when banks need help from governments the governments doesn’t have enough money to fund the banks. The economy of Greece is only surviving on international bailouts which doesn’t seems to last longer so Athens will be imposed using austerity measures for the return of money. This Greece can be a very serious threat to globalization.
Of these, I believe two in particular depict the role of accounting in the financial crisis, these being the effects of fair values and the overly complex (and thus allegedly detrimental) nature of financial reporting. Let us first consider the issue foremost in the criticism against the accounting profession: that of fair values. According to Laux and Leuz (2010), the main allegations against fair value accounting in relation to the financial crisis were that they reported overstated leverage prior to the crisis and overstated losses during it, leading to excessive write-downs. These write-downs depleted the capital of banks and investment institutions, which consequently resulted in them making fire sales (selling their assets at very low prices) in order to meet their capital adequacy requirements. This then offset a downward spiral as a result of the contagion effects of the
The heart of this case is revolved around interest rates and to whether it shall cause a great impact on the financial sector of the economy, as the UK largest revenue resource is from there banking sector. A currency union is where more than two economies share the same currency, without having any additional economic and monetary union, in which resulting in a single market and custom union. The Eurozone is the economic region formed by those member countries of the European Union that have adopted the euro. (Perry, S. 1994). Optimum currency union is a theory published by Mundell in 1961, the theory is used to debate is a certain area has the requirements to become a currency union, one of the final stages in economic integration, in which a monetary unions benefits compensate the costs.
It may seem obvious to state it, but the nations of the eurozone are not equal. Such a statement should not seem surprising nor immediately be any cause for concern; no two economies will ever be precisely the same and many types of inequality are manageable in a functioning currency union. However, in some contexts there are certain manifestations of inequality that can have far reaching and disturbing implications. The eurozone is one such context; its manifestations of inequality and imbalance are at the core of its current crisis. There are three imbalances that are of crucial importance: these are the real effective exchange rates, the unemployment rates and the current account balances among different eurozone countries.
Case Analysis: How to survive the Euro INTRODUCTION The situation that the case presents is the mismanagement of foreign exchange risk by Paul Bannerman of General Mills in Europe. The strategy chosen by Mr. Bannerman generated a long lasting concern due to the firm’s dominating liabilities in Euros leading to significant losses. On February 16th 2004, he has to explain to the U.S. CFO the reasoning behind his strategy and what he is estimating for the rest of the year. Mr. Bannerman considered that it was extremely difficult to predict the persistent dollar devaluation and that the financial analysis had not predicted all those events. 1.
Furthermore, LA’s inventory turnover (5.1) is the lowest one within the industry, indicating inability to successfully manage inventory. From a financial perspective, the large outstanding debt imposes budget constraints on the firm, and interest payments, amounting to 39 millions in 1999, can be hardly met because of the insufficiency of cash generated from the core activities. Another issue is also the problem of raising additional funds, as banks would impose prohibitive interest rates to such a highly levered company. In conclusion, after analyzing Laura Ashley’s performance, we believe that the situation the company is experiencing is very problematic and it raises some doubts about its ability to continue as a going concern, unless its inherent weaknesses are properly addressed. 2) As we are able to see from the statements provided, GB markets definitely influences LA's sales, while data from US and
The credit crisis has revealed glaring gaps in the risk management processes of even the biggest players in the financials sector. After the demise of Lehman Brothers and the near-collapse of AIG in September 2008, credit markets became dysfunctional and capital flows that had already slowed ground to a halt. As global banks continued to reduce leverage, the impact of the crisis began to engulf households and businesses around the world. By the end of 2008, most advanced economies were simultaneously in recession for the first time since World War II, reducing growth prospects in emerging markets due to lower demand for export goods. As a consequence, global growth is expected to remain below potential in 2009 and 2010.