GREEK DEBT CRISIS

....and its implication in global economy

How it all started

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 by the Eurozone were revealed & exposed. In the first quarter of 2010, the national debt of Greece was put at 300 billion, which is bigger than the country's economy. The country's deficit (its expenditure in comparison to its revenue) is 12.7%.

Dual effect
Greece during Financial Crisis Economy of Greece Greece has spread the risk to other weak and indebted strong Euro-area economies.

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%

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.

Impact on the securities issued

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.

Germany and the Euro rescue plan

Germany's parliament has approved the country's contribution to a 750bn euro rescue deal for the Euro-zone. The German contribution is key to the plan, and would amount to up to 148bn Euros. Chancellor Angela Merkel warned that the Euro would be "in danger" without strong action.

 The big economies like Germany of the Euro zone continue to grow slowly since it bails out the smaller and weaker ones In order to maintain the credibility of the euro.

Why?

The euro zone effect

The euro zone was a moment of triumph for nations used to holding on to the coat tails of a superpower like us.... So they could create a currency that would compete with the US dollar The situation now unfortunately is the ultimate effect of the very same decision When few countries one country gets effected the others will get the beating

 Greece and Portugal is already in major breach of Euro-zone rules on deficit management and with the financial markets betting the country will default on its debts, this reflected badly on the credibility of the euro.

So what happens?

A Vicious Circle
This lack of credibility of Euro 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. Which will in turn increase the difficulty to pay back the debt

The domestic efforts

Greece has outlined plans to cut its budget deficit, or the amount its public spending exceeds taxation, from 8.7% of its GDP in 2010, and to less than 3% by 2012. Just before the massive bail-out package was announced the Greek government pledged to make further spending cuts and tax increases totaling 30bn Euros over three years - on top of austerity measures already taken.

Ultimately its the people

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. 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.

Conclusion
Greeces Debt 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 has gone through. How the EU & Greece are handling the crisis with the whole bail-out plan will reflect to what extent the EU is able to function on its own as a powerful economic entity. Its too early yet to measure the effectiveness of the bail out plan.

What about us?

Companies like Tech Mahindra gets 50% of its income from Europe There over 13 major companies in India like this. Almost 15% of are exports are to the European countries IT exports earn 20 to 30 per cent from European exports

Thank you