European sovereign debt crisis and lessons for vietnam,

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty GRADUATION THESIS EUROPEAN SOVEREIGN DEBT CRISIS AND LESSONS FOR VIETNAM Student: Ngo Thu Ngan Lecturer: Nguyen Phuong Lan (M.A) 20th May 2015 ii ACKNOWLEDGEMENT This graduation thesis is the result of twelve weeks of research and writing during the spring of 2015 It has been an interesting and learning experience In fulfilling this thesis, I would like to give my special thanks to many people for their significant help, contribution, and recommendations during my writing process First and foremost, special mentions and thanks must go to Ms Nguyen Phuong Lan, my supervisor at Banking Academy With her master knowledge and experience in writing thesis, she has wholeheartedly helped me in writing this thesis I could not have been able to complete this thesis without her positive suggestions and guidance Secondly, I would like to give my heartfelt thanks to the authors who provided me with valuable books for my thesis My appreciation is to my family and my friends for their supports and encouragements Gratefulness is to the readers also, whose feedback will help much in improving the thesis Hanoi, May 2015 Ngo Thu Ngan i EUROPEAN SOVEREIGN DEBT CRISIS AND LESSONS FOR VIETNAM BY NGO THU NGAN MAY 2015 Supervisor: Ms NGUYEN PHUONG LAN (M.A) Abstract The European sovereign debt crisis is a financial crisis started in late 2009 in Greece as some Eurozone member states failed to repay their debt obligations The thesis analyzed the evolution, the causes and the impacts of this crisis on global economy as well as on the economy of Vietnam It also studied the current situation of sovereign debt in Vietnam and drew the lessons from the European sovereign debt crisis for Vietnam to avoid the risks of similar crisis The research was conducted by means of the qualitative research method using different theories, together with gathering and analyzing facts and figures The major of used data in this was secondary based on books, working papers, reports, online-material, etc of the world’s major economic and development organizations, governments, governments’ departments, etc ii TABLE OF CONTENT Page ACKNOWLEDGEMENT i Abstract ii TABLE OF CONTENT iii LIST OF TABLES AND FIGURES v LIST OF ABBREVIATION vi CHAPTER I – INTRODUCTION 1.1 Study background 1.2 The objectives of study 1.3 Research questions 1.4 Structure of the thesis 1.5 Research methodology CHAPTER II - LITERATURE REVIEW 2.1 Overview 2.2 Definition of the sovereign debt crisis 2.2.1 Definition of the soveregin debt 2.2.2 Classification of sovereign debt 2.2.3 Definition of the sovereign debt crisis 2.3 Causes of the sovereign debt crisis 2.4 Impacts of the sovereign debt crisis on the economy 2.5 Solutions to the sovereign debt crisis 10 CHAPTER III - RESEARCH ANALYSIS AND RECOMMENDATION 12 3.1 Overview 12 3.2 European sovereign debt crisis 12 iii 3.2.1 Evolution of the European sovereign debt crisis 12 3.2.2 Causes of the European sovereign debt crisis 16 3.2.2.1 Root causes 17 3.2.2.2 Direct causes 17 3.2.3 Impacts of the European sovereign debt crisis on the global economy 20 3.3 Sovereign debt in Vietnam 24 3.3.1 Current situation 24 3.3.2 Risks related to Vietnam sovereign debt 24 3.3.3 Impacts of the European sovereign debt crisis on the Vietnamese economy 25 3.3.4 Lessons for Vietnam in public debt crisis prevention 27 3.3.4.1 Having an effective governmental regulatory mechanism 27 3.3.4.2 Increasing the transperancy of sovereign debt information 28 3.3.4.3 Improving efficiency of state investment 29 3.3.4.4 Ensuring the financial security of the region 30 CHAPTER IV – CONCLUSION 32 4.2 Limitation of research 32 4.1 Conclusion 32 REFERENCES 34 iv LIST OF TABLES AND FIGURES FIGURE S&P rating of PIIGS’s government bonds 1999 – 2012 19 FIGURE 10-year bond yield of US, Italy and Spain 2009-2014 (%) 21 FIGURE EUR/JPY exchange rate 10 Nov 2007 – Nov 2012 (¥) 22 FIGURE China exports to EU and EU imports from China 2010-2012 (%Y/Y) 23 TABLE Budget deficit and sovereign debt of Vietnam from 2000-2011 (%/GDP) 24 v LIST OF ABBREVIATION Abbreviation Full name ECB European Central Bank EU European Union EUR Euro FDI Foreign Direct Investment GDP Gross Domestic Product IMF International Monetary Fund JPY The Japanese Yen ODA Official Development Assistance PIIGS Portugal, Ireland, Italy, Greece, and Spain SOE State Owned Enterprise UNCTAD The United Nations Conference on Trade and Development vi Gradution Thesis Banking Academy CHAPTER I: INTRODUCTION 1.1 Study background The European sovereign debt crisis originating in Greece since 2009 and quickly spread to other European countries in 2011 is a burning issue and attracts the attention of many economic researchers as well as policy makers around the world Caused by several factors, the crisis led to detrimental effects on the global economy, including Vietnam However, the causes and consequences of this problem as well as the impacts of it on our country have not been fully aware of in Vietnam After a period of rapid development, Vietnam’s ecnomy has shown signs of slow down in recent years Economic growth kept falling while inflation remained high Moreover, sovereign debt kept increasing as the consequences of long period, stimulating economic growth through public investment Many organizations and economic experts, including the International Monetary Fund – IMF has warned that Vietnam is at high risk of debt crisis in next ten years if this situation still persists Sovereign debt is currently one of the greatest concerns of the government Therefore, I chose the topic “European sovereign debt crisis and lessons for Vietnam” as my graduation thesis topic in the hope that some findings and recommendations from the study could be a reference to help Vietnam prevent a sovereign debt crisis similar to the European one 1.2 The objectives of study Ngo Thu Ngan – Foreign Language Faculty Gradution Thesis Banking Academy The study aims to: i Get deeper understanding of the European sovereign debt crisis ii Understand current situation of Vietnam and risks related to Vietnam sovereign debt iii Draw some lessons for Vietnam from the European sovereign debt crisis to prevent the same problem in our country 1.3 Research questions The key question of the study is: “What are the lessons for Vietnam from the European sovereign debt crisis?” To answer this research question, it is necessary to answer the following sub questions: i What is sovereign debt and sovereign debt crisis? ii What is European sovereign debt crisis? What caused it and what were the consequences? iii How is the current situation in Vietnam? What can we learn from the European sovereign debt crisis? 1.4 Structure of the thesis The thesis includes four chapters: Chapter 1: Introduction It identifies the statement of aims and objectives with clear indication of the issues, problems and hypothesis being considered Ngo Thu Ngan – Foreign Language Faculty Gradution Thesis Banking Academy Chapter 2: Literature review The fundamental concepts of the research which are sovereign debt and sovereign debt crisis can be found in this chapter Then, the causes, impacts and solutions to the sovereign debt crisis were explained Chapter 3: Analysis and recommendation This chapter involved the main research part First, the work was to analyze the European sovereign debt crisis with its evolution, causes and consequences Second, it concentrated on the issues of Vietnam’s sovereign debt, including the current status of debt level and sovereign debt risks Third, lessons for Vietnam were drawn Chapter 4: Conclusion The conclusion should be a brief resume of the investigation design and results and an overall, personal evaluation of the whole study This chapter also includes the limitation of the study 1.5 Research methodology The methodology uses in this research that is qualitative research Qualitative research is a type of scientific research In general terms, scientific research consists of an investigation that: • seeks answers to a question • systematically uses a predefined set of procedures to answer the question • collects evidence • produces findings that were not determined in advance Ngo Thu Ngan – Foreign Language Faculty Gradution Thesis Banking Academy economic chaos also damaged banks and pension funds all over the world As a domino effect, a widespread panic swept over the global financial markets, including bond, equity and many other types of market In particular, European bank stocks – and the European markets as a whole – performed much worse than their global counterparts during the times when the crisis was on center stage The bond markets of the affected nations also performed poorly, as the rise in bond yields means that prices are falling Higher bond yields reflect unsustainable public finances of its issuers Investors don’t believe that the issuer will be able to service its liabilities in the short run and the costs of borrowing rises At the same time, by contrast, yields on U.S Treasuries fell to historically low levels in a reflection of investors’ "flight to safety." In the Figure 2, it is clear that in 2011 and 2012, when the European sovereign debt crisis reached its climax, U.S 10-year bond yield was at the lowest level in the year period On the contrary, during the same time, Italian and Spanish yield reached an all time high of approximately 7% Ngo Thu Ngan – Foreign Language Faculty 21 Gradution Thesis Banking Academy FIGURE 10-year bond yield of US, Italy and Spain 2009-2014 (%) (Bloomberg, U.S Global Investors 2014) Second, bail-out packages of IMF and European Central Bank in order to pull Europe out of the crisis and the tremendous uncertainties and volatility of the economic circumstances in developed countries also contributed to the mass financial havoc for the time being Third, the crisis is also the reason that many European countries had to implement austerity measures, resulting in the decline in most economic activities including production, investment and import In addition, austerity measures are the causes of many anti-austerity movements in Europe which turned into riots in some places, leading to instability in the society FIGURE EUR/JPY exchange rate 10 Nov 2007 – Nov 2012 (¥) (XE.com) Ngo Thu Ngan – Foreign Language Faculty 22 Gradution Thesis Banking Academy Fourth, European debt crisis made the euro slip continuously against other currencies This caused a severe damage to all member countries in the eurozone Movements in exchange rates had a direct effect on the trade balance because the cost of imported goods from Europe went down with the decline of the euro In figure 3, the EUR/JPY rate decreased remarkably in the year period From roughly 160 JPY per EUR in 2008, when the crisis had not started, the number dropped dramatically to just about 100 in 2012, years after the beginning of the crisis FIGURE China exports to EU and EU imports from China 2010-2012 (%Y/Y) (China Customs, Datastream, Eurostat, The Wilder View) Fifth, as one of the major economies in the world, the substantial decrease in the production, investment and import actitivies of European countries had a serious Ngo Thu Ngan – Foreign Language Faculty 23 Gradution Thesis Banking Academy effect on the economies of their overseas business partners The decline in commodity prices and rise in umemployment rate were seen in US, China, Japan, who are the important economic partners of Eurozone state members In the figure 4, it can be seen that during the worst days of the debt crisis, the amount of exports to EU from China kept going down and reached a trough in 2012 3.3 Sovereign debt in Vietnam 3.3.1 Current situation TABLE Budget deficit and sovereign debt of Vietnam from 2000-2011 (%/GDP) (Ministry of Finance, IMF, ADB and The Economist Intelligence Unit) In recent years, Vietnam's sovereign debt has increased rapidly both in absolute terms as well as in relative terms sovereign debt over GDP According IMF, in 2006, sovereign debt accounted for 42.9 percent of GDP and by 2011, the figure increased to 58.7 percent Economist expected that sovereign debt of Vietnam in 2015 would drop to 88.9 billion dollar, making 46.6 percent of GDP 3.3.2 Risks related to Vietnam sovereign debt Ngo Thu Ngan – Foreign Language Faculty 24 Gradution Thesis Banking Academy Although in Vietnam the rate of sovereign debt remains under control, it is still too high compared to the average level in developing economies As recommended by Caner, Grennes and Koehler - Geib (2011), the threshold of public debt for developing countries like Vietnam was 64% Thereby, Vietnam’s public debt was close to the threshold With the aforemention situation, Vietnamese government may face a number of risks related to the sovereign debt, notably including the following: First, Vietnamese government can hardly rely on increasing revenues from taxes in order to tackle public debt On the other hand, it may face the decline in the rate of economic growth if it is to cut down government spending Second, the percentage of Vietnam's public debt has tended to increase, both domestic debt and foreign debt, at 5-7% of GDP per year With the current rising rate of sovereign debt, it is estimated that in to 10 years, Vietnam's public debt will exceed 100% of GDP and at that time, a debt crisis is very likely to occur Third, the volatility in interest rates and exchange rates toward a depreciation of the Vietnamese Dong has created pressure on interest rates for domestic debt and pressure on exchange rate for foreign debt Fourth, the international monitoring capability on the safety of debt through the monitoring indicators of Vietnam is limited due to the fact that the accounting of governement budget has not been standardized and publicized 3.3.3 Impacts of the European sovereign debt crisis on the Vietnamese economy Ngo Thu Ngan – Foreign Language Faculty 25 Gradution Thesis Banking Academy In addition to the current issues of Vietnamese economy, The European sovereign debt crisis had some negative impacts on it First, exporting to the EU market became more difficult According to the Vietnam custom, in 2012 and 2013, EU overtook the US to become Vietnam’s largest export market with the total export of 20.3 and 24.3 billion dollar respectively However, the growth of export to the EU market had the tendency to decrease From 21.79 percent in 2011, the rate dropped to 19 percent in 2013 and by 2014, the figure was just 14.7 percent In these years, difficulties in the Eurozone economies (high inflation, lowered income, increase in unemployment) gave rise to a general tendency to cut spending among EU consumers As a result, the demand for goods and services – including those from Vietnam – did not rise significantly Besides, several EU countries have implemented protectionist policies to protect the goods and services produced domestically, leading to greater dificulties for Vietnamese exports, in addition to competition from other exporters Vietnam’s main export product items are farm, forestry and seafood products, which always have stable consumption levels and experienced a low drop in demand On the other hand, the export of products which are not daily necessities such as steel, wooden furniture, textile and footwear suffered a major demand hit because European citizens had to tighten their belts in the context of the far-reaching debt crisis In the first four months of 2013, export revenue of footwear to the EU was just $457 million, a sharp decrease of 24.9 percent compared the same period in 2012 Second, as Europe is one of the biggest investors in Vietnam, the debt crisis which weakened European economies had strong effects on FDI flows to Vietnam In 2009, Europe’s FDI into Vietnam accounted for 18% of total FDI This figure Ngo Thu Ngan – Foreign Language Faculty 26 Gradution Thesis Banking Academy reduced to 11% in 2011 Besides, the crisis also affected FDI in Vietnam indirectly through its impacts on the global FDI prospects According to UNCTAD, global FDI flows, after recovering strongly in 2011 to $1.6 trillion, decreased strongly to $1.3 trillion in 2012 due to escalating debt crisis A rise of 4.5% was recorded in 2013, followed by a drop of 8% to $1.26 trillion in 2014 Thus, Vietnam needs to make significant improvement in its investment environment in order to prevent further decline in FDI inflows EU is also a big ODA donor for Vietnam so ODA for Vietnam was under the negative impacts of the debt crisis as well The total registered ODA for Vietnam decreased from $8.06 billion in 2010 to $ 6.485 billion in 2013 3.3.4 Lessons for Vietnam in public debt crisis prevention Although Vietnam has not yet fallen into a debt crisis like the aforementioned European countries, it is possible that one will arise if we not have appropriate remedies to address the sovereign debt issues In this section, we will discuss the lessons that can be drawn from the European sovereign debt crisis 3.3.4.1 Having an effective governmental regulatory mechanism In order to manage and prevent sovereign debt crisis, the most essential requirement is an effective governmental regulatory mechanism to control financial activities and the flows of financial sources This includes completing the legal document and the mechanism of sovereign debt management Ngo Thu Ngan – Foreign Language Faculty 27 Gradution Thesis Banking Academy The issuance of Law on Public debt management is considered a big progress of Vietnam as a step to complete the law system Nevertheless, the law is only an overview and in need of adjustment to comply with the international law Additionally, it is necessary to establish a committee of sovereign debt management with the participation of various ministries including Ministry of Finance, Ministry of Planning and Investment, State Bank of Vietnam, Government Office, and Ministry of Justice with Chairman as Prime Minister The committee is a part of the government and each member of it has equal right to develop policies In this way, macro-level supervisory mechanism would be more efficient It is also very important that sovereign debt management’s officers in this committee be capable of making statistics, classifying, summarizing, analyzing, evaluating and estimating all types of debt They should be well-trained by experts to acquire thorough knowledge about debt and sovereign debt management 3.3.4.2 Increasing the transperancy of sovereign debt information In Vietnam, the public seldom has access to the public debt bulletin gateway, especially debts of governmental corporation However, the transparency is a basic and common rule in public debt management around the world In 2007, the Manual on Fiscal Transparency issued by IMF discussing the international principles on this issue clearly stated that: “The government sector should be distinguished from the rest of the public sector and from the rest of the economy, and policy and management roles within the public sector should be clear and be publicly disclosed.” Ngo Thu Ngan – Foreign Language Faculty 28 Gradution Thesis Banking Academy Therefore, the government is required to clarify the debt and debt flow, including the government guarantee debt and present the information about the debt in annual reports of government, which will be released to the public In Greece, after the real facts and figures of the budget deficit were publicized, several investors quickly withdrew their capital from the banks of this country This pushed the country into a difficult situation, triggering the European debt crisis Thus, transparency and disclosure is always required by both domestic and foreign investors 3.3.4.3 Improving efficiency of state investment State investment generally refers to the use of state capital for investments aimed at fulfilling targets of public programs and projects in service of socioeconomic development State investment in Vietnam is generally referred to investment funded through the state budget, government bonds, state credit, ODA, development investment of state-owned enterprises (SOEs) and other state capital sources Greece, with easy access to the foreign capital, used its capital in an arbitrary way, leading to ineffective and unprofitable investment As a result, there was no money left to pay the debt, making Greece fall further into the crisis The 2004 Summer Olympics can serve as a stark example Billions of dollars was invested in the construction of stadiums and facilities for the event However, many of the oncegleaming Olympic venues which crackled with activity have been abandoned while others are used occasionally for non-sporting events such as conferences and weddings, bringing hardly any profit for the country Therefore, it is necessary to Ngo Thu Ngan – Foreign Language Faculty 29 Gradution Thesis Banking Academy plan projects and programs reasonably and carefully to ensure that investment capital is used with maximum efficiency In Vietnam, the fact that government debt and investment not yield adequate benefits is also one of the economy’s major issues This means that funds from government not function effectively, which leads to waste and loss of state capital This mismatching situation affects the economy tremendously Besides, many SOEs are having financial problems As a result, the government may have to use its budget to pay the debts of these companies, leading to more severe deficits In order to tackle this problem, a plan of using capitals, especially ODA capital, should be carefully developed so that the money will be spent efficiently for the society The state investment must primarily serve to promote and support sustainable development and impove the standard of living of the citizens Therefore, government investment in agricultural production, science, technology, infrastructure, education and health care should increase while the provision of the state budget for state corporations and business groups needs to be reduced Meanwhile, there should be a strong determination not to launch investment projects that fail to meet criteria of socio-economic efficiency and to focus budget resources on projects that could be completed within deadlines and exert a high level of efficiency 3.3.4.4 Ensuring the financial security of the region The European sovereign debt crisis started in Greece and quickly spread to other eurozone member states, causing severe damage to the economy of the whole euro area Vietnam is going to join the ASEAN Economic Community, which aims to Ngo Thu Ngan – Foreign Language Faculty 30 Gradution Thesis Banking Academy implement economic integration initiatives to create a single market across ASEAN nations, at the end of 2015 This means that financial difficulties of a member of this community could rapidly affect Vietnam’s economy and vice versa, just like the European debt crisis Because of that, it is suggested that Vietnam promote cooperation with other nations in order to ensure financial security of the region Proactive cooperation towards the region’s financial security would be a good orientation to enhance capacity of responding to relevant risks including those of public debt Ngo Thu Ngan – Foreign Language Faculty 31 Gradution Thesis Banking Academy CHAPTER IV – CONCLUSION 4.1 Conclusion The European sovereign debt crisis, which started in 2009 in Greece and immediately spread to the Euro area, has impacted not only on the Europe but also on the entire global economy The crisis, which was caused by several factors including internal and external ones, led to the weakened economic activities and instability in the society of Eurozone member states As a result, business partners of these countries suffered as well Vietnam was also affected negatively by the crisis Vietnam’s exporting activities to the EU market became more difficult and Europe’s FDI into Vietnam also decreased In recent years, Vietnam's sovereign debt has increased rapidly Although in Vietnam the rate of sovereign debt remains under control, Vietnamese government may face a number of risks related to this issue Some lessons from the European sovereign debt crisis have been drawn in order to help Vietnam avoid the risks of similar crisis, including building an effective governmental regulatory mechanism, increasing the transperancy of sovereign debt information, improving efficiency of state investment and ensuring the financial security of the region 4.2 Limitation of research Because the figures of government debts are not publicized in detail and sometimes being obsolete, this research is based on the data of some past years As a result, it limited the scope of recommendations given to current sovereign debt management Ngo Thu Ngan – Foreign Language Faculty 32 Gradution Thesis Banking Academy policies Furthermore, as data on debt in Vietnam being unclear and non-unified, it then became a challenge to access up-to-date and reliable information for the research However, the work based on data gathered from course materials and publications of the government’s departments and international financial organizations, so it is fairly reliable Ngo Thu Ngan – Foreign Language Faculty 33 Gradution Thesis Banking Academy REFERENCES Economic Committee of the National Assembly and UNDP in Vietnam 2013 Public debt and its sustainability in Vietnam: The past, present and the future Knowledge Publishing House Family Health International 2005 Qualitative Research Methods: A Data Collector’s Field Guide Government Portal Retrieved from World World Web: http://chinhphu.vn/portal/page/portal/chinhphu/ Harari, D 2014 Causes of the eurozone crisis: a summary Retrieved from World World Web: www.parliament.uk/briefing-papers/SN06831.pdf Mai, T 2012 The impacts of European Debt Crisis on the prospects of some economic areas in Vietnam Retrieved from World World Web: www.aseancenter.org.tw/upload/files/outlook007-06.pdf Ministry of Finance Portal – Bulletine Public Debt Retrieved from World World Web: http://www.mof.gov.vn/portal/page/portal/mof_en/md Ngo, C 2010 NỢ CÔNG VÀ NHỮNG TÁC ĐỘNG CỦA NÓ ĐẾN NỀN KINH TẾ Retrieved from World World Web: https://www.academia.edu/10106950/N%E1%BB%A3_c%C3%B4ng_v%C3%A0_ nh%E1%BB%AFng_t%C3%A1c_%C4%91%E1%BB%99ng_c%E1%BB%A7a_n Ngo Thu Ngan – Foreign Language Faculty 34 Gradution Thesis Banking Academy %C3%B3_%C4%91%E1%BA%BFn_n%E1%BB%81n_kinh_t%E1%BA%BF Nguyen, A & Nguyen, L 2014 The Ongoing Public Debt Crisis in the European Union: Impacts and Lessons for Vietnam Retrieved from World World Web: http://www.tnp.no/norway/global/4240-the-ongoing-public-debt-crisis-in-theeuropean-union-impacts-and-lessons-for-vietnam Phan, C & Chu, H 2013 Vietnam’s public debt management today and some solutions Retrieved from World World Web: http://vjol.info/index.php/ssirev/article/viewFile/18143/16051 Ullah, W & Ahmed, S 2014 A review of European sovereign debt crisis: Causes and consequences Retrieved from World World Web: http://www.sciencepublishinggroup.com/j/ijber Ngo Thu Ngan – Foreign Language Faculty 35