greece debt crisis final

8/7/2019 GREECE DEBT CRISIS FINAL

1/14

GREECE DEBT CRISIS

Ankur Agarwal

Abhijeet Kendurkar

Nandkishore PippalRajesh Jadhav

Shyamalendu Biswas

Rohan Kshirsagar

Shivendu Singh


2/14

Overviewy Greece was one of the Fastest Growing economy in euro zone from 2000-

2007 having an annual growth rate of 4.2%.

y After restoration of democracy in 1974, the govt wanted to get the separate

population into mainstream, the govt did an unrestrained spending on

infrastructure, social benefits. Since 1993, debt to GDP ratio is 100+.

y Greece was the 12th country to join the EU in 2001.GDP fell by 6.5

percentage points in the decade after 1995. Lower interest rates also

spurred a spending splurge. The economy grew by an average of 4% a year

until 2008.

y Once it was safely inside the euro, indeed, Greece relaxed its fiscal grip.

Greeces inflation rate stayed above the euro-area average, hurting its

competitiveness. The economy relied increasingly on foreign borrowing.

The current-account deficit widened to 14.6% ofGDP in 2008.


3/14

Introduction

y Years of unrestrained spending, cheap lending and

failure to implement financial reforms left Greece badly

exposed when the global economic downturn struck.

The debt levels and deficits that exceeded limits set bythe Euro-zone were revealed & exposed.

y In the first quarter of 2010, the national debt ofGreece

was put at 300 billion ($413.6 billion), which is bigger

than the country's economy. The country's deficit (its

expenditure in comparison to its revenue) is 12.7%.


4/14

The Actual Crisis

y#1: Credibility Problem

y #2: Liquidity Problem

y #3: Insolvency Problem


5/14

Problem #1: Credibility

y Inconsistent budget forecasts and revisions

y Tax system

y

Fiscal irregularitiesOverstatement of social security surpluses

Incorrect reporting of military expenditures

Incorrect reporting of healthcare expenditures

Treatment of certain EU subsidies as revenuey Accounting irregularities

y Derivatives transactions (to maskdebt levels)


6/14

Problem #2: Liquidity

y Total Debt Outstanding: Greece has nearly US$ 400

billion of total outstanding debt

y Near-term Maturities: Greece has US$ 73 billion of

maturities in 2010 alone (~US$27 bn of which is due in

April and May)

y Cost ofFinancing: As of April 22nd, Greek sovereign

debt costs had reached unsustainably high levels ( > 9%

on 10 year)


7/14

Problem #3: Insolvency

An IMFregression analysis of 24 countriesindicates.

y GreecesFiscal Deficit: At 13.6% of 2009 GDP, it is

among the largest in the European Union, and wellabove the 3% limits set by the EUs Maastricht Treaty in

1992

y

Greeces Current Account Deficit: Peaked in Q32008; should be down sharply in 2010 2011 with aid

packages (but still projected to be negative in 2010)


8/14

1010--Yr and 1Yr and 1--Yr Greek Government Bond (GGB) Yields: 1998Yr Greek Government Bond (GGB) Yields: 1998--20102010

Greeces entry into theGreeces entry into the EurozoneEurozone has allowed longhas allowed long--term interest rates to be cut in halfterm interest rates to be cut in half

and shortand short--term rates to be cut 5term rates to be cut 5 --fold which stimulated borrowingfold which stimulated borrowing

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

2

4

6

8

10

12

1-yr GGB 10-yr GGB


9/14

Greece/euro vs UK/Pound Exchange Rates:

March 2008 - March 2010Being part of the Euro Area Greeces exchange rate remains fixed compared to Euro Area

member countries while UK has allowed the Pound to depreciate against Euro Area countries

0.7

0.8

0.9

1

1.1

Greece/Euro UK/Pound


10/14

Impact on Greece Even after the collapse of Lehman Brothers in 2008, Greece was shielded

by euro membership. It could still borrow easily, if not as cheaply, in bondmarkets even as investors aversion to risky assets peaked last March. Theeconomy was on course for a shallow recession at worst. Greek banks werefree of the toxic mortgage securities that felled others.

After Octobers election. The new government said the true deficit waslikely to be 12.7% ofGDP. Worse, the shortfall for 2008 was also revised

up to include unpaid bills to medical suppliers. The mild downturn hurt taxrevenues more than the previous administration had let on. The economyprobably shrank by 1% last year, but consumer spending fell by more.Value-added taxes, a reliable source of revenue, were squeezed. Control ofpublic spending had been relaxed in the run-up to the election, adding tothe deficit.

Global financial crisis had a big impact on Greece, Two of the largest

industries - shipping and tourism were badly impacted. Revenues fell by15%.

The Eurozone has not injected the same degree of monetary liquidity as didthe UK and the USA while the ECB has maintained a more contractionarymonetary stance than the other two central banks

The euro has appreciated by about 65% since 2001 against the US Dollarand by 47% against the Chinese Yuan ;which hurts the exports.


11/14

Steps taken to resolve the

Crisis


12/14

Critical Step #1: Address

LiquidityProblem

Raise debt in capital markets

EU/IMF bailout package : Total aid package reaching a whopping110 billion euro's (145 billion dollars). IMF(30 billion euro's) & EU

(80 billion euro's) over the next three years.

Bilateral arrangements :German domestic support.

EU Debt guarantees

EU Bond issuance


13/14

Critical Step #2: Address Long-

Term Solvencyy #1: Revenue Raising Initiatives

y Increase value added tax from 19% to 21%

y Excise tax on petrol, alcohol, cigarettes and luxury goods

y Sale of selected state assets

y #2: Expenditure Reductions

y Reduce public sector wages and pensions (EUR 1.7 billion)

y Reduce size of public investment programs (EUR 500

million)

y Reduce education expenditures (EUR 200 million)


14/14

Conclusion

y GreecesDebt Crisis has put the EU under the scope, &

it has shifted the attention to the efficiency & the success

of the Euro-zone. Its considered as probably the biggest

test the EU (& the EMU-in particular) has gone through.

How the EU & Greece are handling the crisis with thewhole bail-out plan will reflect to what extent the EU is

able to function on its own as a powerful economic

entity.

greece debt crisis final

Documents