Group -9 Presents to You

Members: Ektaa Neeti SaiNidhish Seweeka Soumi

The Greek Crisis : Tragedy or Opportunity

Greek History
A prospering post-world war II economy

Europes forbear

The new Greek polity

The 1980s: populist years

The 1990s: European union

Banking on Europe
Trouble in the public sector
Structural challenges

Problem with taxes

Structural challenges
Agriculture declined from 6.6% in 2000 to 4% in 2009 Industry declined from 21% of output to 16.9% Research and development spending was less Greek hourly productivity was 44% below the average euro countries Greece ran a large surplus in services

Gathering troubles
we knew of the longstanding issue of the public sectors poor productivity and we knew that the actual deficit had been underestimated by the previous government Finance minister- George
Papaconstantinou

The actual crisis

Most countries have seen estimates for their budget deficit swell over the course of 2009, but the magnitude of the Greek revisions over both 2008 and 2009 and the implications for excessive external debt financing has been shocking. The estimated 2009 deficit rose from 5.1 % for 2009 as reported to the European Commission during the spring to 12.7%

Twin Deficits
Since y=C+I+G+N-X and Y= S+I+T then (S-I) (T-G) = (X-M)

The Troika
Three financial institutions might help prevent a Greek fiscal collapse The european council The european central bank The international monetary fund
The european council, comprised of heads of european union member states To sustain the euro and the european ideal Euro- area banks

The European Union

The European central bank

A politically independeant arm of the european union The european central banks role was to maintain price stability and act as a lender for euro-area banks Main refinancing operations Long term refinancing operations Marginal lending facility european central bank first conducted an expansionary monetary policy

The International Monetary Fund

The global financial rescue team It disbursed loans over time in tranches In dealing with debt crisis such as in Asia in 1998-1999 the international monetary fund earned a reputation for imposing excessive fiscal austerity and being politically insensitive However over time under the leadership of dominique strauss-kahn it had become a kinder and gentler international monetary fund

Causes of the Greek fiscal crisis

widening public deficits in conjunction with declining external competitiveness Greek government failed to satisfy its intertemporal budget constrain and thus public debt turned out to be unsustainable in the long-run Increased twin deficits together with the lack of structural reforms in home regarding labour market flexibility, social security and market competition, obliged Greece to issue new bonds at short maturity periods and at higher interest rates compared to the anchor of the EMU, that is Germany.

Endogenous Causes of the Greek Fiscal Crisis

Exogenous Causes of the Greek Fiscal Crisis

The Eurozone governments failed to give a clear signal indicating their readiness to support Greece, while the Greek fiscal crisis was escalating.

the lack of solidarity funds at an EU level

Greece and Greeces major trading partners in the Balkan peninsula were also hit by the 2007 global crisis - originating from the US sub-prime loan market crisis - but with a time lag

An Overview of the Fiscal Consolidation Programmes of Greece

Greeces Government Response to the Crisis
Greek government designed and adopted a fiscal consolidation programme in order to reduce the public debt and provide the framework to improve stability and growth to the economy. Its main elements on the revenues side were focused on (i) measures to reduce tax evasion and improve tax collection (ii) reduction of social contribution evasion (iii) a special levy on profitable companies (iv) acceleration of EU receipts for the public investment Programme and (v) increase on several types of indirect taxes

The EU-IMF Fiscal Consolidation Package

European financial stability facility

European financial stabilisation mechanism European governments and the International Monetary Fund (IMF) have stunned global stock markets with a 750bn-euro ($975bn; 650bn) package of standby funds designed to see off financial meltdown. The 27 countries of the European Union (EU) will contribute 500bn Euros towards the financial safety net. They have been joined by the International Monetary Fund (IMF), which is providing other 250bn Euros.
The vast bulk of Europe's contribution comes from the 16-nation Euro-zone bloc, which is promising 440bn in loan guarantees. The European Commission is providing 60bn Euros immediately

Impact of crisis
Southeastern Europe
Greeces foreign policy focus on the region and growing trade volumes between the countries, neighboring Serbia, Albania, Macedonia, Romania, Bulgaria and Turkey cannot remain indifferent to the magnitude of the crisis next door.

Spill-over effect:
Some spillover effects have already started to manifest themselves. As Greek 10-year bonds fall and yields continue to remain above 6%, sovereign debt issuance and the risk premium investors demand to hold securities emitted by Romania, Serbia, Bulgaria and Turkey have been adversely affected.

Impact on private individuals:

The most obvious way would be through tax bills, as Europe agrees to ride to the rescue and help Greece deal with its mounting public and foreign debts. Any assistance to Greece will come at a cost that will ultimately have to be borne by taxpayers in the nations that contribute.

Contagion Effect
Greek crisis has made investors nervous about lending money to governments through buying government bonds. Everybody's interest rates are heading higher as governments are having to pay a greater risk premium to borrow money.

Reduced wealth:
Take-home pay is likely to fall as it is eroded by rising taxes and everyone will have to work longer before they retire - by which time they are likely to find that their pensions have shrunk.

Latest Developments
May 2010 Global policymakers install emergency financial safety net worth about $1 trillion to bolster financial markets and prevent Greek crisis from destroying the euro 440 billion guarantees from euro zone states (Germany: 123 billion) 60 billion European debt instrument 250 billion from IMF Greece taps emergency loans to repay 8.5 billion of 10-year bonds Germany announces ban on short selling of shares in top 10 German financial institutions, Euro government bonds and CDS Speculations that Germanys banks are more threatened by the Greek debt crisis than first thought

What is the impact on Asia?

Less impact due to generally
strong trend in domestic and external demand

Potential stress may come from: 1. Exposure to European sovereign debt 2. General weakening of sentiment and risk of generalised sell-off in sovereign debt 3. Drop in import demand from Europe

Conclusion
Greece should declare an "emergency," along with a bank holiday, and leave the eurozone and return to the drachma Fix future growth of government spending to some percentage of GDP growth Right now tourism is 15% of GDP , make it 25% Encourage all the foreign direct investment Drop tax rates to the lowest in Europe and then enforce them

Quote: Sigmund Freud

"Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

THANK YOU.