Using the Davies and Ng (2011) article on “the rise of sovereign credit risk: implications for financial stability” as the starting point , write a word business report on the following:
a. Discuss critically the background to the recent sovereign debt crisis in the EU.
b. How has the crisis impacted on banks’ credit risk exposures especially as it concerns making capital provisions for their credit portfolios?
c. What are the wider implications for policy makers both within the region and globally?
This study deals with the Sovereign debt crisis faced by the European Union. This debt crisis was noticed in the year 2009 (Wu and Hsu, 2012). In this particular study, sovereign debt crisis is explained with the convergence criteria in an overall manner. In the next section, impact of bank crisis is explained on capital exposures and risk portfolios. The last section comprises of policymakers and their relevance in global and regional basis. As far as sovereign crisis is concerned, it is important to find the percentage of contribution for the total risk premium for calculation of credit risk in an overall manner. Credit Default Swap Pricing is an insurance contract that provides protection to the seller on risk factors in the most appropriate way. These risks are ascertained on agreed terms for payment of premium especially for the protection buyer. The main role of the protection seller is to cover the loss pertaining from the credit event. On the contrary, protection buyer does not pay the premium for the credit event in an overall manner.
Sovereign Debt Crisis
Background on Sovereign Debt Crisis in European Union
European Sovereign debt crisis began on 5 November 2009 (Fekadu, 2015). During this particular time, Greece faced a budget deficit of 12.7% in terms of Gross Domestic Product. It is known that the emergence of the European Union was in the year 1992 in ratification of the Maastricht Treaty from past activities. In this particular treaty, provisions were mentioned for imposing stringent economic requirements in accordance with the convergence criteria (Duffie and Singleton, 2012). It is essential for the member states to gain admittance pertaining to common currency zone on an overall manner. Some of the convergence criteria are listed below with proper justification:
In these particular criteria, it is revealed that member nations need to have low as well as stable inflation rate in their activities. Inflation implies potential admittance for the Eurozone at the rate of 1.5% and is recognized as the best performing member states in the most appropriate way (McNeil et al. 2015). Inflation rate needs determination for 12-month average in relation with inflation index.
In these particular criteria, development of fiscal policy adheres with designing of prospective member state and has strong fiscal condition as well. It is important to consider the fact that budget deficit cannot exceed more than 3% of GDP. This is possible by the inclusion of exceptional as well as temporary circumstances (Van Deventer et al. 2013). Addition to that, Total Sovereign Debt cannot exceed more than 60% of GDP Growth Rate. In case of substantial and continuous declines, these criteria are used for exchange purpose in an overall manner.
In these particular criteria, it is required to design the stability pattern of member state in accordance with the currency exchange rate in an overall manner. In other words, prospective members do not have the right to devalue the currency rate from the preceding two years (Bessis, 2015). It is essential for the currency to trade in the narrow band in accordance with the member states currencies in an overall manner.
It is important reason for the entrance of the European Union at the most challenging times of history. The European Union crisis was a buzzword, which instilled fear in the minds of some countries on matters relating to payment of debt (Ciby, 2013). Debt is not an issue rather it is related with money earned in the economy in an overall manner. In the past, the Government faced no difficulty in borrowing as well as received in cheap prices as well. However, deficit in borrowing affected the stimulation pattern of the overall growth in the current economy. It is understood that governments can sell their bonds for raising money and adding interest (Fekadu, 2015). In addition to that, Government Bonds had low interest rate as it was considered as a secure investment on an overall manner.
It was a myth in the global markets that Government has the capacity to afford buying the security on regular terms. However, it is important to consider the fact that Governments can also default in their loans. For Instance, Argentina was found defaulting on their bank loans for almost $100 Billion in a year (Butaru et al. 2015). As far as unemployment is concerned, it soared 25% on the grave consequences pertaining in the global economy in an overall manner (Popov et al. 2013). European Leaders showed an avoiding attitude towards paying off debt in the year 2009 (Lane, 2012). It is important to view at the fact that Greece defaulted in pulling out of euro currency for the grave consequences especially in the global economy. In the year 2001, it is noticed that Greece failed to have grip on its financing status and adoption of euro currency from past activities (Lam, 2014). In addition to that, country moved towards attainment of democracy and needed to run on high government deficit. This prevailed in the large private sector offering high wages as well as generous pensions.
Impact of crisis on bank credit risk exposures in making the capital provisions for credit portfolio
Banks as well as regulators of the banks need to handle the bank risk exposures from the capital provisions and portfolios. In the global crisis of 2008, there was tight nexus revealed between banks and the sovereign. It is important to consider the fact that banks needs exposure towards credit risk for non-domestic sovereign (Wu and Hsu, 2012). There is several impact of crisis on the bank in accordance with the cross-sectional regressions that includes:
1. It is noticed that share in the bank credit risk was given consideration in accordance with the sovereign risk. This risk was increased for changing bank size as well as higher credit risk in an overall manner.
2. Systematic sovereign credit risk increased in accordance with the bank holdings for the non-domestic sovereign debt in the most appropriate way (Lane, 2012). This risk was associated with the non-domestic subsidy.
3. There was an increase in the bank country sovereign risk for the holdings of sovereign debt in the domestic sector. It is relevant to include in the domestic subsidy for the results associated with the zero risk weight in an overall manner.
4. It is noticed that higher government support connects with the higher probability of credit risk provisions and portfolio in the most appropriate way. These factors will affect the policies of the bank at the time of default of country and policies in an overall manner.
In addition to the above factors, it is important to consider the fact that monetary authorities help in increasing in the expected returns for future purpose. This credit risk helps the investors to bear the risk pertaining to defaultable bonds. Greece faced problems at hiding the actual level while entering into the Eurozone. It was noticed that public financing was horrible in nature during the Debt crisis of European Union. Moreover, Greece was irresponsible at handling its debt finances an appropriate way. They lied, hid the actual figures, and faced difficulty during the economic downturn.
In the year 2008, Greece faced economic shrinkage on matters relating to financial crisis (Beirne and Fratzscher, 2013). This particular country was not ready to face the income shrank as well as debt crisis now for future purpose. By the year 2010, Greece faced an increase of debt from 100 to 145 percent in accordance with the GDP growth rate (Arghyrou and Kontonikas, 2012). At that point, of time, raising money was difficult as well as expensive, which pledged bailouts in the year 2010 (Mink and De Haan, 2013). This particular country accepted 110 Billion Euros as bank loans that helped in taking drastic decision from the past activities. Most of the economists were of opinion that Greece should find ways to pull up the Euro Currency. In addition to that, Greece faced economic contraction of about 40 to 50 percent in accordance with the sudden economic changes. Most of the companies felt that Greece could not pay their debt in a timely manner and withdrew the loans. This action led to trickling out of business and found difficulty in raising capital from the Europe Economy. Finally, it was noticed that Banks were losing trust from one another because they lacked enough assets especially in the credit market.
Implications for policy makers for region on global and regional basis
It is important to consider the fact that implemmentaion of climate change policies helps in avoiding the negative effects from past activities. Some of the questions are as follows:
The first question relates with the implications of climate change in accordance with economic growth and development
The second question relates with the benefits from the mitigation policies
The third question arises to assure the cost pursued from the mitigation policies
From the above questions, it is relevant that these questions pertain to the developing nations. It is important to understand the effects on climate change on the economy of country. It is advisable to design a framework that will help in mitigating the risk factor at a global and regional level in an overall manner. Framework will help in the explicit level of treatment for associating the projections for the climatic change in European Country. Designing of framework will help in checking the temperature levels for uncertainties and concentration of policies for future purpose.
In the recent scenario, discussion on international trade and investment policy is subject to centrality action on global value chains on an overall manner. In addition to that, trade is referred as value-added policies, sharing of production and additional supply chains. Core International production reveals the outsourcing of materials, off shoring business as well as vertical integration for the same (Blundell-Wignall, 2012). International agencies, which are dealing the economic affairs, have better understanding on matters relating to policy makers dimensions on an overall manner. Global value chains help the policy makers in international cooperation for trade-related matters in the most appropriate way.
Policy makers need to check on the double counting trade as well as attribution to production level in an overall manner. This attribution should be placed in the right geographical locations in accordance with the technological aspect in the global and regional level. There is often misunderstanding in the true relationship between the exports as well as exports at national level from the past activities (Bofondi et al. 2013). It is advisable for the policy makers to keep a check on the nature of economic relations pertaining to countries and makes ways for policy implications in the most appropriate way.
Implications on the policy makers help in measuring the International report and report on domestic production (Popov and Van Horen, 2013). It is advisable to measure trade in gross terms as that will help in evaluating in the entire value of supply chain analysis from the past activities. It is advisable to identify the factors of production as well as other inputs that will help in contributing towards national location in the most appropriate way (Armingeon and Baccaro, 2012). Progress of policy makers is slow in nature because of measurement in trade activities and recording of gross value in relation to trade flow in an overall manner. In addition to that, policy makers need to coordinate with the bank regulators on matters relating to bring a check on the debt crisis on an urgent basis.
From the above study, it is easy to gather relevant information on sovereign debt crisis in the European Union. Policy makers have implications on business, management activities, and developmental channels. Process consideration is necessary for global value chain while helping mainstream policy thinking in the most appropriate form. Initial influence was taken from the world of statistics pertaining towards management practices in an overall manner. In other words, international and national agencies failed to identify the gross values and the bilateral trade balances affecting the economy in an adverse way. It is advantageous to use the model because it will help in estimating the credit risk distress with different horizons. It is easy to identify the distress risk from the different components of the credit risk pattern in an overall manner.
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