sohail greece final

8/6/2019 Sohail Greece Final

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INSTITUTE FOR TECHNOLOGY & MANAGEMENT

Prepared By:Sohil Jivani, Amit Shah & Ashutosh Dhoot

(Batch XMBA-11)


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World Map - Europe


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L ocation Of Greece


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What is EU Zone? (Euro Zone)


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What is EU Zone? (Euro Zone)

Euro is the official currency of the EuropeanUnion. However, some countries inside the EU,

decided to keep their traditional money (UKstill use the Pound).

The Euro zone is the group of countries thathad adopted the Euro () as thier currency.

On the 27 countries in the EU, 17 countriesbelong to the zone Euro.

The other countries have either refused (UK,sweden, Denmark....) adopting the Euro or are waiting for their Economies to be fit withthe legal economics demanding defined bythe EU.

The Euro zone currentlyconsists of:

Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy

L uxembourg Malta the Netherlands Portugal Slovakia Slovenia Spain.


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Introductiono Greece is the twenty-seventh largest economy in the world by

nominal gross domestic product (GDP) and the thirty-thirdlargest by purchasing power parity.

o The Greek economy is a developed economy with the 22nd higheststandard of living in the world.

o The public sector accounts for about 40% of GDP.o The service sector accounts for about 75.8% of the total GDP

o Industry sector accounts for about 20.8% of the total GDP.o Agriculture sector accounts for about 3.4% of the total GDP.

o Greece is the twenty-fourth most globalized country in the world andis classified as a high income economy.


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Beginning stage of Greeks economy:

Greece's main industries are:TourismShippingIndustrial productsFood and tobacco processingTextiles, chemicals, metal products, mining and petroleum

The gradual development of industry and further developmentof shipping in a predominantly agricultural economy,calculating an average rate of per capita GDP growthbetween 1833 and 1911 that was only slightly lower than thatof Western European nations.


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Greeces Entry into EuroZone Greece was accepted into

the EuroZone by theEuropean Council on 19June 2000, based on anumber of criteria using1999 as the reference year.

Greece currency waschanged from Drachma toEuro


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Change in Economy The economic growth

turned negative in 2009 for the first time since 1993.

By the end of 2009, as aresult of a combination of international (financialcrisis) and local

(uncontrolled spending prior to the October 2009national elections) factors ,the Greek economy facedits most severe crisis after 1993.


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Greeces Debt Crisis: Background

During the decade preceding the global financial crisis that started infall 2008, Greeces government borrowed heavily from abroad tofund substantial government budget and current account deficits.

Greece funded these twin deficits by borrowing in internationalcapital markets, leaving it with a chronically high external debt(115% of GDP in 2009).

The reliance on financing from international capital markets leftGreece highly vulnerable to shifts in investor confidence.

Investors became jittery in October 2009, when the newly electedGreek government, led by Prime Minister George Papandreou,revised the estimate of the government budget deficit for 2009 from6.7% of gross domestic product (GDP) to 12.7% of GDP.


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Global financial crisis had a big impact on Greece, Two of the largestindustries - shipping and tourism were badly impacted. Revenues fell by15%.

Years of unrestrained spending, cheap lending and failure to implementfinancial reforms left Greece badly exposed when the global economicdownturn struck. The debt levels and deficits that exceeded limits set by theEuro-zone were revealed & exposed.


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Despite increasing nervousness surrounding Greeces economy, theGreek government was able to successfully sell:

8 billion ($10.6 billion) in bonds at the end of January 2010, 5 billion ($6.7 billion) at the end of March 2010 And 1.56 billion ($2.07 billion) in mid-April 2010

However, Greece must borrow an additional 54 billion ($71.8 billion)to cover maturing debt and interest payments in 2010, and there areconcerns about the governments ability to do so.

Investor jitteriness spiked again in April 2010, when Eurostatreleased its estimate of Greeces budget deficit.

At 13.6% of GDP, Eurostats estimate was almost a full percentagehigher than the previous estimate released by the Greek governmentin October 2009.


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This led to renewed questions about Greeces ability to repay itsdebts, with 8.5 billion ($11.1 billion) falling due in mid-May 2010. On

April 23, 2010, the Greek government formally requested financialassistance from the IMF and other Eurozone countries.


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Possible Causes of the Crisis

D omestic Causes High Government

Spending and WeakGovernment Revenues

Structural Rigidities

Tax Evasion Corruption

International Causes Adoption of the euro

Increased Access toCapital at L ow InterestRates

L ax enforcement of EUrules aimed at limiting theaccumulation of debt


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A broader outlook towards domesticcauses

Between 2001 and 2007,Greeces GDP grew at anaverage annual rate of 4.3%, compared to a

Eurozone average of 3.1%.

Over the past six years,however, while the centralgovernment expendituresincreased by 87%,revenues grew by only31%, leading to budgetdeficits well above the EUsagreed-upon 3% of GDPthreshold.


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Major reasons for High Govt. spending: L arge and inefficient public administration in Greece

Costly pension and healthcare systems And a general absence of the will to maintain fiscal discipline as major

factors behind Greeces deficit. An aging Greek population the percentage of Greeks aged over 64 is

expected to rise from 19% in 2007 to 32% in 2060. (Will result in High

Pension payments.)

Major reasons for Weak Revenue Collection: Tax Evasion Greeces unrecorded economy

Major reasons for structural policies & declining internationalcompetitiveness: High relative wages and low productivity

Low productivity resulted in lower export growth rates.


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A broader outlook towards internationalcauses

Increased Access to Capital at L ow Interest Rates:o Adoption of the euro

Issues with EU Rules Enforcement:o The rules set by EU, calls for budget deficits not to exceed 3% of GDP

and debt not to exceed 60% of GDP.o Following the launch of the euro, Greece failed to comply with the limits

set by the Pact.o National Statistical Service of Greece revealed that Greece had violated

the 3% limit in every year since 2000 with deficit of 7.9% of GDP & debtbeen above 100% of GDP in 2004.

o L ack of enforcement by EU is thought to have limited the role it can playin discouraging countries, like Greece, from running up high levels of

debt. As it never took any actions when Greece defaulted.


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Steps taken to resolve theCrisis


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Critical Step #1: Address L iquidity Problem

EU / IMF bailout package: Total aid package reaching awhopping 110 billion euro's (145 billion dollars).

IMF = (30 billion euro's) & EU = (80 billion euro's) over the next three years.

Bilateral arrangements: German will provide largest bilateralloan followed by France.

Germany = 8.4 billion (approximately $11.2 billion). France = 6.3 billion (approximately $8.4 billion).

EU Bond issuance


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Fiscal Austerity measure provided by PrimeMinister: George Papandreou


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Critical Step #2: Address L ong-TermSolvency

#1: Revenue Raising Initiatives: Increase value added tax (VAT) from 19% to 21% Excise tax on petrol, alcohol, cigarettes and luxury goods. 1% tax increase on personal income of over 100,000.#2: Expenditure Reductions: Civil servant hiring freeze in 2010 with a 5:1

retirement/recruitment ratio. 10% cut in civil service salary allowances (bonuses). Freeze on state pensions 30% cut in public sector supplementary pay (equivalent to

about one month of pay).


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Contd.

#3: Structural Reforms: Raising the average retirement age from 61 to 63 Calculating pensions on the basis of lifetime contributions as

opposed to the last five years of earnings.

#3: Public Administrations: Reducing the levels of local administrative authorities from 5

to 3. Reducing the number of Greek municipalities from 1,034 to370.

Reducing the legal public entities formed by local authoritiesfrom 6,000 to 2,000.


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Contagion Effect You only find out who is swimming naked when the tide

goes out If Greece defaults, there is a risk of contagion to other Southern

European countries, including Portugal, Ireland, Italy, and Spain(which, along with Greece, have been nicknamed the PIIGS or GIIPS).

L ike Greece, these countries borrowed heavily during the creditbubble before the current global financial crisis and haveencountered investors who are increasingly nervous about thesustainability of their debt.

Greek crisis has made investors nervous about lending money togovernments through buying government bonds.

Everybody's interest rates are heading higher as governments arehaving to pay a greater risk premium to borrow money.


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Impact on Private Individuals

Take-home pay is likely to fall as it is eroded by rising taxes.

Mix of tax increases and sharp spending cuts could lead tohigher unemployment

It will further deepen an ongoing recession in the country.

Everyone will have to work longer before they retire - by whichtime they are likely to find that their pensions have shrunk.


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Impact On U.S. Economy If Euro weakens it will widen the U.S. trade deficit.

Given the strong economic ties between the United States and theEU, financial instability in the EU could impact the U.S. economy.

$14.1 billion of Greeces debt is held by U.S. creditors, and a Greekdefault would likely have ramifications for these creditors.

US & Greece have almost similar economic crisis background.However the impact will be less severe in US economy because theUnited States, unlike Greece, has a floating exchange rate and the

dollar is a reserve currency.

The debate about imbalances within the Eurozone is similar to thedebates about U.S.-China imbalances. Hence internationaleconomic cooperation and coordination is required to achieve

international financial stability.


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Economic trade between India & Greece

As we have seen, Greece in reality has little economictrade with India .The bottom line is India's economy is far more connected and dependent on European American& Middle-Eastern Countries than back in 1982.

So another financial crisis in Europe will impact India.


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sohail greece final

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