Briefing Note on Euro Zone Crisis and its Impact on India July 2012
Contents Briefing Note on Euro Zone Crisis and its Impact on India Executive summary. 3 Section 1 Global economic scenario 4 Gross Domestic Product 4 Debt to GDP ratio.6 Current Account Balance (CAB) 7 Section 2 Global uncertainty and its impact on India 9 Impact on exports..9 Relationship between FIIs, Sensex and Exchange Rate.12 Annexure..17 Time lines: Euro zone crisis 17 2
Briefing Note on Euro Zone Crisis and its Impact on India Section 1 Global economic scenario The weakness that is being seen in major developed economies poses a risk to world economic stability. The abysmal fiscal deficit situation has also now evolved into a source of political contention. According to certain sections the prime reason behind the increasing deficits has been falling government revenues and rising social benefit payments. The rise in the borrowings cost has further compounded this situation. This rising public debt has engendered political and financial stress in a number of European countries and, more broadly, has undermined support for further fiscal stimuli. A much weaker recovery of the world economy is far from a remote possibility, especially as continued high unemployment, financial fragility, enhanced perceptions of sovereign debt distress and inadequate policy responses could further undermine business and consumer confidence in the developed countries. Economic growth may remain moderate over coming quarters owing to weak global outlook in general and contagion of the Euro Zone crisis in particular. Primarily talking about the slowdown that is being seen in the Euro Area, one can see that it is spreading through the channels of trade, finance and business and investor confidence sentiments to other emerging economies as well. Moreover, the recent talks about possible fiscal consolidation measures being undertaken by some of the advanced economies could further impact demand and growth adversely. We try and assess the global situation by looking at primarily three parameters: 3
Gross Domestic Product Gross Debt to GDP Ratio Capital Account Deficit Gross Domestic Product The developed economies (excluding Euro Zone): In 2011 most of the developed economies witnessed a slowdown in GDP growth rates vis-à-vis 2010. As the data shows the US economy growth declined from 3.0 per cent in 2010 to 1.7 per cent in 2011. Similarly UK s GDP growth slowed down to 0.7 per cent in 2011 from the 2.1 per cent that was seen in 2010. Japan s economy saw a deceleration with its growth falling by 0.7 per cent in 2011 vis-à-vis the 4.4 per cent growth that was recorded in 2010. Euro Zone: The IMF data suggests that the GDP growth for the European Union in 2011 was 1.6 per cent as against a higher growth of 2.0 per cent that was there in the year 2010. Within the EU we see that Greece, which has been at the center of everyone s attention, has seen its economy decelerating right from the year 2008. Further, owing to demand that has been seen of lately for an austerity drive to be adopted by the troubled Euro countries to bring down their rather precarious debt position has led to a sharp downturn in economic activities thereby resulting in the Euro Zone demand dwindling. Developing economies: As against this the developing countries were able to show greater resilience. Apart from Brazil most of the other BRICS nations did not witness a major change in their GDP growth rates. South Africa in fact registered a higher growth rate of 3.1 per cent in 2011 as against 2.9 per cent that was there in 2010. Russia too was able to hold on to its growth rate. Although China and India did see slight moderation in their respective growths but that was there as they had been growing at very high rates for consistently for the past few years. Refer table 1 for trend in GDP growth rates over the last few years for major economies. Table 1 GDP growth rate at constant price 2006 2007 2008 2009 2010 2011 2012 Japan 1.7 2.2-1.0-5.5 4.4-0.7 2.0 United Kingdom 2.6 3.5-1.1-4.4 2.1 0.7 0.8 United States 2.7 1.9-0.3-3.5 3.0 1.7 2.1 Austria 3.7 3.7 1.4-3.8 2.3 3.1 0.9 Belgium 2.7 2.9 1.0-2.8 2.3 1.9 0.0 Cyprus 4.1 5.1 3.6-1.9 1.1 0.5-1.2 Estonia 10.1 7.5-3.7-14.3 2.3 7.6 2.0 4
Finland 4.4 5.3 0.3-8.4 3.7 2.9 0.6 France 2.7 2.2-0.2-2.6 1.4 1.7 0.5 Germany 3.9 3.4 0.8-5.1 3.6 3.1 0.6 Greece 4.6 3.0-0.1-3.3-3.5-6.9-4.7 Ireland 5.3 5.2-3.0-7.0-0.4 0.7 0.5 Italy 2.2 1.7-1.2-5.5 1.8 0.4-1.9 Luxembourg 5.0 6.6 0.8-5.3 2.7 1.0-0.2 Malta 2.9 4.3 4.1-2.7 2.3 2.1 1.2 Netherlands 3.4 3.9 1.8-3.5 1.6 1.3-0.5 Portugal 1.4 2.4 0.0-2.9 1.4-1.5-3.3 Slovak Republic 8.3 10.5 5.8-4.9 4.2 3.3 2.4 Slovenia 5.9 6.9 3.6-8.0 1.4-0.2-1.0 Spain 4.1 3.5 0.9-3.7-0.1 0.7-1.8 Advanced economies 3.0 2.8 0.0-3.6 3.2 1.6 1.4 Euro area 3.3 3.0 0.4-4.3 1.9 1.4-0.3 European Union 3.6 3.4 0.5-4.2 2.0 1.6 0.0 Developing Asia 10.3 11.4 7.8 7.1 9.7 7.8 7.3 ASEAN-5 5.7 6.3 4.8 1.7 7.0 4.5 5.4 Latin America and the 5.7 5.8 4.2-1.6 6.2 4.5 3.7 Caribbean Middle East and North Africa 6.1 5.6 4.7 2.7 4.9 3.5 4.2 Brazil 4.0 6.1 5.2-0.3 7.5 2.7 3.0 China 12.7 14.2 9.6 9.2 10.4 9.2 8.2 India 9.5 10.0 6.2 6.6 10.6 7.2 6.9 Indonesia 5.5 6.3 6.0 4.6 6.2 6.5 6.1 Russia 8.2 8.5 5.2-7.8 4.3 4.3 4.0 South Africa 5.6 5.5 3.6-1.5 2.9 3.1 2.7 Turkey 6.9 4.7 0.7-4.8 9.0 8.5 2.3 Source: International Monetary Fund, World Economic Outlook Database, April 2012 Note: 2011 Figures for Cyprus, Greece, Malta, Portugal, Spain are IMF projection Figures from 2012 onwards are IMF projection However, in today s globally integrated world, it is highly uncertain as to whether the developing countries would be able to sustain their growth momentums. This is because as the GDP in the developed nations along with the Euro Zone declines even further, the exports to these countries is bound to get affected adversely. Moreover, the financial economy in the developing countries will also be impacted as Capital Flows (FDI & FII s) might see a slowdown due to the gloomy global conditions. Debt to GDP ratio 5
Growing Debt has been a major reason for the current crises that most of the European nations find themselves in. Although, some amount of debt shall always have to be borne upon to induce growth in the economy however it is the continued overdependence on borrowings that are bound to have dire consequences and dilute the fiscal positions of the government. Specifically talking about the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) nations we see that their debt levels were so high that it became almost impossible for them to repay their loans, and thus most of them approached either the other better placed European partners or the International Monetary Fund for loans in order to sustain themselves. Furthermore, as seen in the previous section the slowing down of the economic growth in these countries is going to further have repercussions on the financial stability of the region. As slowdown in growth would invariably lead to lower tax revenue being generated thereby hampering the governments repaying capacity. As seen from the data the general government debt as percentage of GDP in case of Greece, Ireland, Italy, and Portugal has been more than 100 per cent in the year 2011. In fact in case of both Greece and Italy this has been the case ever since 2008. The high interest on government debt of these countries almost triggered off a virtual bankruptcy. Such huge and unsustainable sovereign debts resulted in a sovereign debt crisis in Euro zone. Refer table 2 for data on debt to GDP ratio. Table 2 General government gross debt as % of GDP Country 2008 2009 2010 2011 2012 2013 Japan 191.8 210.2 215.3 229.8 235.8 241.1 United Kingdom 52.5 68.4 75.1 82.5 88.4 91.4 United States 76.1 89.9 98.5 102.9 106.6 110.2 Austria 63.8 69.5 71.8 72.2 73.9 74.3 Belgium 89.3 95.9 96.2 98.5 99.1 98.5 Cyprus 48.6 58.3 61.3 71.8 74.3 75.2 Estonia 4.5 7.2 6.7 6.0 5.7 5.4 Finland 33.9 43.5 48.4 48.6 51.6 52.8 France 68.3 79.0 82.4 86.3 89.0 90.8 Germany 66.7 74.4 83.2 81.5 78.9 77.4 Greece 110.7 127.1 142.8 160.8 153.2 160.9 Ireland 44.2 65.2 92.5 105.0 113.1 117.7 Italy 105.8 116.1 118.7 120.1 123.4 123.8 Luxembourg 13.7 14.8 19.1 20.8 23.8 26.8 Malta 62.3 68.0 69.4 70.9 71.4 70.7 Netherlands 58.5 60.8 62.9 66.2 70.1 73.7 Portugal 71.6 83.1 93.4 106.8 112.4 115.3 6
projection Slovak Republic 27.9 35.6 41.1 44.6 47.1 48.8 Slovenia 21.9 35.3 38.8 47.3 52.5 55.9 Spain 40.2 53.9 61.2 68.5 79.0 84.0 Source: International Monetary Fund, World Economic Outlook Database, April 2012 Note: 2011 Figures for Cyprus, Greece, Malta, Portugal, Spain are IMF projection Figures from 2012 onwards are IMF Current Account Balance (CAB) Countries engage in international trade for a variety of reasons. Exports are a means of generating foreign exchange which can be used in financing the imports, obtain economies of specialization, exports also act as an important means to measure the competitiveness of a country s industries. Most of the major economies within the European Union have had a rather weak current account balance position. The data reflects the decline in the competitiveness of most of the European nation s exports. The weak current account position would invariably mean dependence on capital flows to maintain the balance of payments position. This however under the prevailing conditions could further aggravate the external debt situations of various economies. Specifically looking at the Euro Zone situation we see that amongst the PIIGS nations barring Ireland all the remaining four nations have a negative CAB as a percentage of GDP. In fact that has been the case for them ever since 2008. Greece s current account deficit as percentage of its GDP stood at 9.7 per cent in 2011. Refer table 3 for figures on current account balance. Table 3 Current account balance as % of GDP Country 2008 2009 2010 2011 2012 2013 Japan 3.2 2.8 3.6 2.0 2.2 2.7 United Kingdom -1.4-1.5-3.3-1.9-1.7-1.1 United States -4.7-2.7-3.2-3.1-3.3-3.1 Austria 4.9 2.7 3.0 1.2 1.4 1.4 Belgium -1.6-1.7 1.5-0.1-0.3 0.4 Cyprus -15.6-10.7-9.9-8.5-6.2-6.3 Estonia -9.7 3.7 3.6 3.2 0.9-0.3 Finland 2.6 1.8 1.4-0.7-1.0-0.3 France -1.7-1.5-1.7-2.2-1.9-1.5 Germany 6.2 5.9 6.1 5.7 5.2 4.9 Greece -14.7-11.0-10.0-9.7-7.4-6.6 Ireland -5.7-2.9 0.5 0.1 1.0 1.7 Italy -2.9-2.1-3.5-3.2-2.2-1.5 7
Luxembourg 5.1 6.5 7.7 6.9 5.7 5.6 Malta -5.3-8.3-6.4-3.2-3.0-2.9 Netherlands 4.3 4.2 6.6 7.5 8.2 7.8 Portugal -12.6-10.9-10.0-6.4-4.2-3.5 Slovak Republic -6.6-3.2-3.5 0.1-0.4-0.4 Slovenia -6.9-1.3-0.8-1.1 0.0-0.3 Spain -9.6-5.2-4.6-3.7-2.1-1.7 Source: International Monetary Fund, World Economic Outlook Database, April 2012 Note: 2011 Figures for Cyprus, Greece, Malta, Portugal, Spain are IMF projection Figures from 2012 onwards are IMF projection Section 2 Global uncertainty and its impact on India Impact on exports India s exports are fairly well diversified across countries and India s exports are positively linked to the global economic growth. The current global economic slowdown has its emergence in the Euroregion but the contagion is being witnessed in all major economies of the world. Several countries are seeing a slowdown in their economic growth. For instance, we take two developed economies, EU countries and emerging market economies to analyze the impact of euro crisis on India s exports. Graph 1 Growth rate of developed economies (Percent) 8
2012 projection IMF projection Source: International Monetary Fund, World Economic Outlook Database, April Note: 2011 Figures for Cyprus, Greece, Malta, Portugal, Spain are IMF Figures from 2012 onwards are From the graph given above it is amply clear that growth in these developed countries has not been consistent with the more recent years seeing a deceleration in growth. India s exports are driven by growth in the global markets. And if we look at the share in India s global exports of some of these countries and other nations facing economic uncertainty, then we see this figure trending down indicating that the erstwhile growth markets for our exports are somewhat loosing their importance. See table 4 for details on this last point. Graph 2 indicates that the euro area s economic growth rate was in negative in 2012 and declining at a very fast rate. Since 2008 the European economies have been seeing a weakening of the growth momentum and now again some of these countries are on the brink of a recession. Graph 2 Growth rate of PIIGS economies (Percent) 9
April 2012 projection are IMF projection Source: International Monetary Fund, World Economic Outlook Database, Note: 2011 Figures for Cyprus, Greece, Malta, Portugal, Spain are IMF Figures from 2012 onwards The 27 EU countries have a share of 18.6 percent in India s exports and it is the second largest destination for our exports. The euro area s instability had been negatively reflected in India s exports to the euro region. The share of EU countries in India s total exports has declined from 20.2 percent in 2009-10 to 18.6 percent in 2010-11 on account of the sovereign debt crisis in major economies of this region. If we look at our exports to the PIIGS countries, then we see that the share of these countries in India s overall exports has declined with time. See table 4 for details. Now look at the growth performance of the BRICS partner countries over the last few years. Here we see that growth in these countries too has decelerated but the extent of slowdown is much less than what is seen in case of some of the developed countries including those in the EU region. 10
Graph 3 Growth rate of BRICS partners economies (Percent) 2012 projection IMF projection USA UK Japan Source: International Monetary Fund, World Economic Outlook Database, April Note: 2011 Figures for Cyprus, Greece, Malta, Portugal, Spain are IMF Table 4 Composition of India s exports: Share of major trading partners 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 11 Figures from 2012 onwards are 2011-2012(Apr- Sep) Developed Economies 16.48 16.83 14.92 12.71 11.41 10.93 10.17 11.18 4.41 4.91 4.45 4.11 3.59 3.48 2.84 2.82 2.55 2.41 2.27 2.37 1.63 2.03 2.07 1.81 European Countries Germany 3.38 3.48 3.15 3.14 3.45 3.03 2.69 2.69 Portugal 0.27 0.25 0.29 0.30 0.24 0.21 0.21 0.19 Spain 1.66 1.56 1.49 1.41 1.37 1.14 1.02 0.98 Italy 2.74 2.44 2.84 2.40 2.06 1.90 1.81 1.72 France 2.01 2.02 1.66 1.59 1.63 2.14 2.02 1.34 Netherland 1.92 2.40 2.12 3.22 3.43 3.58 3.09 2.83 Ireland 0.25 0.27 0.18 0.19 0.24 0.15 0.11 0.11 Greece 0.37 0.55 0.53 0.33 0.47 0.25 0.14 0.25 EU Countries (27) Brazil Russia China 21.85 22.53 21.23 21.17 21.24 20.16 18.64 17.13 BRICS Partners 0.81 1.06 1.15 1.55 1.43 1.35 1.58 1.87 0.76 0.71 0.71 0.58 0.59 0.55 0.63 0.55 6.72 6.56 6.58 6.66 5.05 6.50 7.81 5.15
South Africa Commerce, Govt. of India 1.18 1.48 1.77 1.63 1.07 1.15 1.59 1.45 Relationship between FIIs, Sensex and Exchange Rate Source: Ministry of In this section we analyze the trends in the foreign institutional investment flows, the movement in Sensex and the movement in the exchange rate. We do this looking at data for the period 2008 to 2012. We start with 2008 to understand if the global liquidity crisis (that had its origins in the US) had any impact on the Indian markets or not. As the graphs below show, in 2008-09 FIIs had pulled out money from India for most part of the year. This is understandable because the many of these investors were facing difficulties in their home markets and to partly compensate for the losses being faced at home, they moved money out from many emerging markets including India. This outflow or rather the withdrawal of money from India had two effects. One, it took a toll on the sensex and two, it put pressure on the Rupee that saw it value plummet from Rs. 40 to a $ in April 2008 to over Rs. 50 to a $ in March 2009. Beginning fiscal 2009-10, market sentiments started improving and FIIs were seen to return back to the Indian markets. In the months following March 2010, India emerged as one of the better performing markets globally and this was support by our own good economic performance as well as improvement seen in some parts of the developed world. FII flows into India were robust through the period April to September 2010. And this trend was accompanied by an improvement in the market performance. On one hand the sensex rose and on the other hand we saw the value of the Indian Rupee gaining strength against the $. 12
The year 2010-11 saw a similar trend developing. FIIs pumped in sizable amounts in the Indian market barring the months of May and February when there was a net outflow of funds. This was a sign of confidence amongst foreign investors with regard to the growth prospects for the Indian market. This was also a period when the sensex saw some improvement in its level. While 2009-10 and 2010-11 proved to be good from the point of view of foreign investment inflows, things changed quiet a bit in 2011-12. As the crisis in the Euro zone intensified, FIIs once again came under pressure and started withdrawing from emerging markets including India. This movement 13
(which paralleled trends we saw in 2008-09) led to a decline in the Sensex as well as loss in value of the INR against the $. FII has been taken from SEBI data taken from BSE website trading day s average Source: Sensex Monthly Exchange Rate is Months The data given in the table below and the graphs based on this set of numbers show that there is a clear link or rather a strong relation between FII flows and movement in the BSE Sensex. Both in 2008-09 and in 2011-12, which were periods of widespread uncertainty and pessimism in most of the developed countries across the world, we witnessed a slowdown (and on most occasions a withdrawal) of FII flows into the country. And this had a direct bearing on the movement in the Sensex, which went down every time FIIs pulled money out of India. Likewise there exists a relation between FII flows and movement in the exchange rate. Whenever FIIs have pulled money out of the Indian market, the INR has lost its value and depreciated against the $. Table 5 FII flows, Sensex and Exchange Rate 2008-09 FII Direct Impact Sensex Impact of FII and Sensex Exchange Rate April -627 15,772 40.0 May -5,174 17,560 42.1 Jun -11,095 16,591 42.8 July 1,782 13,480 42.8 Aug 46 14,064 42.9 14
2009-10 2010-11 2011-12 Sep -5,074 14,413 45.6 Oct -17,205 13,007 48.7 Nov 1,617 10,209 49.0 Dec 2,377 9,163 48.6 Jan -3,443 9,721 48.8 Feb -3,124 9,340 49.3 Mar -5,890 8,763 51.2 April 8,999 9,746 50.1 May 17,406 11,635 48.5 Jun 4,898 14,747 47.8 July 13,182 14,506 48.5 Aug 4,523 15,695 48.3 Sep 20,573 15,691 48.4 Oct 15,973 17,186 46.7 Nov 6,181 15,839 46.6 Dec 8,711 16,947 46.6 Jan 8,413 17,473 46.0 Feb 4,363 16,339 46.3 Mar 29,438 16,438 45.5 April 12,393 17,555 44.5 May -6,986 17,537 45.8 Jun 11,249 16,943 46.6 July 24,724 17,679 46.8 Aug 14,686 17,911 46.6 Sep 32,668 18,027 46.1 Oct 24,303 20,094 44.4 Nov 21,211 20,272 45.0 Dec 3,214 19,530 45.2 Jan 5,364 20,622 45.4 Feb -3,270 18,425 45.4 Mar 6,883 17,982 45.0 April 7,196 19,463 44.4 May -4,276 19,224 44.9 Jun 4,883 18,527 44.8 July 10,653 18,975 44.4 Aug -7,903 18,352 45.4 Sep -1,866 16,964 47.7 Oct 3,079 16,256 49.3 Nov -3,263 17,541 50.8 Dec 21,873 16,556 52.5 Jan 26,329 15,535 51.2 Feb 35,228 17,180 49.2 15
2012-13 Mar 1,793 17,715 50.4 April -4,897 17,430 51.8 May 17,371 53.4 Jun 16,217 55.5 Recently we have seen that the RBI in consultation with the government has announced a series of measures to open up the capital account further. These measures which include steps like increasing the investment limit in the government bond market, making terms for availing and use of ECBs by corporates a little more flexible, expanding the list of potential investors in the G-SEC market are encouraging and have been taken with the view to encourage more capital flows into the country and to prop up the sliding Rupee. However, reactions from an array of stakeholders show that these measures would be of limited use unless they are backed by key structural reforms that have a bearing on the overall investment environment. These policy changes have not resulted in any fresh and sizable flows and this is a sign of lack of confidence in the investor community with regard to India s economic environment and its growth prospects in the near term. Our large and growing fiscal deficit as well as current account deficit is having a bearing on the exchange rate. This is also affecting our credit rating with many large sovereign rating agencies issuing a warning to that affect. This has led to an increase in the interest rates that are being charged to or asked from Indian borrowers in the international market and hence any move to encourage ECBs would see its impact getting diluted due to this factor. It may be noted that FDI or direct investment is of a more durable variety. FDI inflows into the country do not get too influenced by volatility in the global financial markets. We have seen this as during periods of stress in the recent past, FDI flows have remained robust with only occasional dips. The policy makers must therefore make an effort to promote such inflows to stem the continuing weakness of the Indian Rupee. Alternatively they can consider bringing the current account and the trade deficit under control by extending price decontrol measures to products like diesel, further discouraging imports of gold and promoting the domestic capital goods sector. 16
Annexure Time lines: Euro zone crisis 2008 EU leaders agree on a 200bn-euro stimulus plan 2009 In April, the EU orders France, Spain, the Irish Republic and Greece to reduce their budget deficits In December, Greece admits that its debts have reached 300bn euros Greece is burdened with debt amounting to 113% of GDP - nearly double the Euro zone limit of 60%. Ratings agencies start to downgrade Greek bank and government debt. 2010 In February, Greece unveils a series of austerity measures aimed at curbing the deficit. On 11 February, the EU promises to act over Greek debts and tells Greece to make further spending cuts. The Euro zone and IMF agree a safety net of 22bn euros to help Greece The EU announces that the Greek deficit is even worse than thought after reviewing its accounts - 13.6% of GDP, not 12.7%. 2 May, the Euro zone members and the IMF agree a 110bn-euro bailout package to rescue Greece. In November, the EU and IMF agree to a bailout package to the Irish Republic totaling 85bn euros. 2011 In February, Euro zone finance ministers set up a permanent bailout fund, called the European Stability Mechanism, worth about 500bn euros. In April, Portugal admits it cannot deal with its finances itself and asks the EU for help. In May, the Euro zone and the IMF approve a 78bn-euro bailout for Portugal. In July, the Greek parliament votes in favour of a fresh round of drastic austerity measures, the EU approves the latest tranche of the Greek loan, worth 12bn euros. In August, European Commission President Jose Manuel Barroso warns that the sovereign debt crisis is spreading beyond the periphery of the Euro zone. On 7 August, the European Central Bank says it will buy Italian and Spanish government bonds to try to bring down their borrowing costs, as concern grows that the debt crisis may spread to the larger economies of Italy and Spain. Italy passes a 50bn-euro austerity budget to balance the budget by 2013 after weeks of haggling in parliament. On 4 October, Euro zone finance ministers delay a decision on giving Greece its next installment of bailout cash, sending European shares down sharply. 17
On 6 October the Bank of England injects a further 75bn into the UK economy through quantitative easing, while the European Central Bank unveils emergency loans measures to help banks. On 14 October G20 finance ministers meet in Paris to continue efforts to find a solution to the debt crisis in the Euro zone. On 21 October Euro zone finance ministers approve the next, 8bn euro ($11bn; 7bn), tranche of Greek bailout loans, potentially saving the country from default. On 26 October European leaders reach a "three-pronged" agreement described as vital to solve the region's huge debt crisis. 2012 On 13 January, credit rating agency Standard & Poor's downgrades France and eight other Euro zone countries, blaming the failure of Euro zone leaders to deal with the debt crisis. On 12 February, Greece passes the unpopular austerity bill in parliament - two months before a general election. On February 22, a Markit survey reports that the Euro zone service sector has shrunk unexpectedly, raising fears of a recession. March begins with the news that the Euro zone jobless rate has hit a new high. On 13 March, the Euro zone finally backs a second Greek bailout of 130bn euros. On 12 April, Italian borrowing costs increase in a sign of fresh concerns among investors about the country's ability to reduce its high levels of debt. On 25 May, Spain's fourth largest bank, Bankia, says it has asked the government for a bailout worth 19bn euros ($24bn; 15bn). On 9 June, after emergency talks Spain's Economy Minister Luis de Guindos says that the country will shortly make a formal request for up to 100bn euros ($125bn; 80bn) in loans from Euro zone funds to try to help shore up its banks. On 12 June, optimism over the bank bailout evaporates as Spain's borrowing costs rise to the highest rate since the launch of the euro in 1999. On 15 June, former UK Chancellor of the Exchequer Gordon Brown underlined fears of contagion with a warning that France and Italy may need a bailout. On 17 June, Greeks went to the polls, with the pro-austerity party New Democracy getting most votes., allaying fears the country was about to leave the Euro zone. 18