Presented By:

Anirudh Krishna Prasad-B42 Devina Misra-B48 Kamal Syal-B54 Pragyan Agarwal-B60 Sachin Shanbhag-B67 Vishwesh Samant-B70

Discussion Topics
History and Timeline
Build up and Causes of Greece Crises Why can't ( Greece ) abandon Euro as its currency What makes it so difficult to come out Of Debt Crises How will it Effect in World and Europe as Whole ? Will the measures to bail out from present crisis be successful ? Pros & Cons .

Background Information
Faced economic hardships and defaulted on its loans in 1826, 1843, 1860 and 1893. Post-World War II development has been due to the Greek economic miracle. During that period, Greece saw growth rates second only to those of Japan, while ranking first in Europe in terms of GDP growth. During the 1980s,Greece suffered from poor macroeconomic performance due to expansionary fiscal policies that led to a tripling of the debt-to-GDP ratio, high inflation, rise in budget deficit. During the 1990s, situation improved with both inflation and budget deficit falling below 3% by 1999. In January 2001 Greece adopted the Euro as its currency, replacing the Greek drachma at an exchange rate of 340.75 drachma to the Euro.

Introduction of Greece Economy

Currently 32nd largest in the world, 15th largest in the EU. In terms of per capita income, Greece is ranked 33rd in the world at $26,600 for nominal GDP. The economy of Greece mainly revolves around the service sector(78.3%) and industry(18.1%), while agriculture makes up 3.8% of the national economic output.

Introduction of Greece Economy

Growth rate of 6.8% in 2011. Inflation rate of 2.3% as of January 2012. Current public debt-to-GDP ratio stands at 159.1% of nominal gross domestic product.

TIMELINE(PRE CRISIS)
1999 - On 1 January, the currency officially comes into existence. 2001 - Greece joins the euro. 2002 - On 1 January, notes and coins are introduced. 2008 - Malta and Cyprus join the euro, following Slovenia the previous year. In December, EU leaders agree on a 200bn-euro stimulus plan to help boost European growth following the global financial crisis.

TIMELINE(DEBT CRISIS)
2009 December- Greece's credit rating is downgraded, fears that government could default on its ballooning debt. 2010 January/March - Government announces tough austerity measures, including public sector pay cuts, fuel increases, and a crackdown on tax evasion. 2010 April/May/October - Fears of a possible default on Greece's debts prompt Eurozone countries to approve a $145bn (110bn euros; 91bn) rescue package for the country. Tougher austerity measures in 2011 draft budget. New taxes and higher rate of VAT. 2011 February - International lenders say austerity measures not enough, Greece must speed up reforms to get its finances back on track.

TIMELINE(CRISIS DEEPENS)
2011 July/September - European Union leaders agree a major bailout for Greece over its debt crisis by channelling 109bn euros through the European Financial Stability Facility. Greece's credit rating is downgraded further. 2011 October/November - Eurozone leaders agree a 50% debt write-off for Greece in return for further austerity measures. PM Papandreou casts the deal into doubt by announcing a referendum on the rescue package which is later criticised. PM withdraws it and resigns. New interim PM Papademos. 2012 January - Debt rescheduling talks with Greece's private creditors falter, endangering the 130bn euro EU/IMF rescue package that Greece needs to meet its next debt repayment deadline in March. 2012 February - Against a background of violent protests on the streets of Athens, the Greek parliament approves a new package of tough austerity measures agreed with the EU as the price of a 130bn euro bailout.

Impact on Banks

Impact on Greece

Effect on Greece stocks

Impact on Europe

Impact on US

Impact on India

Situation solved or not

Austerity and bail out plan

Measures taken

FACTORS that leads country enter into Debt Crisis

4. Public Sector 5. Devaluation 2. Lower Bond Deficit Cause & Effect of currency Yield high , low prices of bond DEBT / GDP > 100% 3. Structural Deficit Deficit : Pension, : 2008 onwards public sector jobs and D/G Dange. other benefits. D/G Good. 2008 onwards

2000 - 2007 1. Foreign Capital Infusion

Feature of Greek economy underlying the crisis

As recent as 2008, state controlled 50% of all business operations. Private sector suffered 2000-Rising government expenditure was allocated to rising public sector wages and benefits Pervasive state control Large and inefficient public administration Political clientelism pervasive tax evasion Influx of capital at low rate during the 2000s Global financial crisis of 2008-09

Build up of Greece debt crisis

Abundant access to cheap capital Flush capital markets and increased investor confidence after adapting the Euro in 2001 Government spending focused on consumption expenditure Strained public finances and falsified statistical data drove up Greeces borrowing costs

Policy response with limited success

May 2010- major financial assistance package by EU, European Central bank and the IMF July 2011- second set of crisis response measures. The new package calls for holders of Greek bonds to accept losses as well as for more austerity and financial and structural assistance 2011-Medium term fiscal strategy-28 billion thru 2015 Privatization and public real estate development Greece cannot depreciate its currency to spur export-led growth. Unemployment is 16%

Causes for Financial Crisis-Endogenous

Widening public deficits Increased public expenditure led to borrowing and high level of debt Debt to GDP ratio will tend to increase because of the 110 billion rescue package by the IMF Deterministic fiscal policy regime (1979) Lower Greece government credibility-it misrepresented that data about its public finance in order to stay within the monetary guidelines of the Euro zone Lack of structural reform-labor market, social security and market competition. This obliged Greece to issue short term bonds at high interest rates. Not a business friendly country- hinder entrepreneurship and capital investment. Ease of doing business rank-109/183 in 2010 in Doing Business by World Bank.

Greece Inflation rate

Evolution of Greek public debt

Public Debt: Maturity Profile

Greek Bonds Spreads

Causes for Financial Crisis-Exogenous

Increased access to capital at low interest Legal skepticism- are bailouts legal?-Germany Disagreement among EU committee members Lack of solidarity funds at the EU level 2007 global subprime crisis Vulnerability of the European banks, which are major holders of Greek and other sovereign debt instruments. Greece owed to France, Germany, Ireland and Portugal Euro depreciated

FACTORS that leads country enter into Debt Crisis

Germany in return for Greece Bonds Currency SWAP ( Goldman Sachs).

Greece showing false monetary transaction with help of Goldman Sachs to borrow money from EU.
Greece Practices
Continued Expenditure. Hiding Actual deficit to EU. Shown : 6% (2009) , While actual was 13.7%(2010) , 216 Billion 70% of bonds were held by FCI i.e. Externally. Huge expenditure on military due to Enmity with Turkey.

Currency Deevaluation

Borrowing from Eur0 Zone.

Borrowing @ Lower interest rate)

Shipping & Tourism Expected revenue fall of 15%

Public sector deficit increased , expenditure. Outwent taxes collection.

False Entry into the EU zone by showing false debt records.

Govt. Bond Commanded lower interest rate

DEBT CRISIS

Step 1 to Enter Debt Crisis

What Cant Greece Abandon Euro?

Speculators will worry that Ireland , Portugal , Spain all Debted Countries will follow same course of Action . Hence ,money will start pouring into German Bank from Irish, polish banks resulting into Banking Crisis. This Banking crisis would lead to Financial Euro Crisis.

EURO CRISIS DUE DEVALAUATION, EUROPE CRIPPLES

Example :

Suppose Euro is Abandoned.

Creating Single Currency without Single Bank , Single Emergency Lender and Credible Set of Fiscal Rules gave Europe a common monetary house without foundation

What makes Greece so difficult to come out of Debt Crisis ?

(Public + Private Debt) Total Gross External DEBT (Public + Private Debt) Gross External Debt as % of GDP

GDP

(Public + Private Debt) Total Gross External DEBT as % of GDP

Gen. Gov.Deficit ( % of GDP)

What makes Greece so difficult to come out of Debt Crisis ?

Big Spaceship: Ready to Go Big?

EUROPE DE STABLIZING OF EURO AS CURRENCY .
EU COULD BREAK DOWN WITH SPAIN , PORTUGAL AND IRELAND IN QUEUE. EURO TRADE COULD CRUSH DOWN. MANY DOMINENT MEMBERS OF EUROPE LIKE GEMANY WOULD LOSE THEIR DOMINANCY WITH JUNK BONDS TAKEN FROM DEBTED COUNTRIES. UNEMPLOYMENT WOULD RISE , INFLATION WOULD RISE , GROWTH MAY BE POSITIVE IN LONG TERM , UNREST WOULD LEAD TO VIOLENCE.

IMPACT ON EUROPE?

Big Spaceship: Ready to Go Big?

U.S. exports to the EU could be impacted if the crisis slows growth in the EU and causes the euro to depreciate against the dollar.

IMPACT ON USA?

As the crisis continues, increased perceptions of risk are impacting U.S financial markets.
CDT DOW dropped more than 992 points. The panic in Greece caused one of the most turbulent days ever on Wall Street. In a matter of minutes, stocks plunged 900 points. The Dow managed to recover but still ended in negative territory, The Dow closed down 347 points.

Big Spaceship: Ready to Go Big?

Greek imports from India include cotton, synthetic fibres, fabrics, vehicles, iron, steel and fruit.

IMPACT ON INDIA?

while Greek exports to India include fibres, fertilizers, organic chemicals, pharmaceutical products, leather goods, metal processing machinery, etc.
Only 0.05% of India's exports go to Greece and Indian banks have virtually no direct exposure to Greece. There will be some additional capital flows coming in in search of a safe heaven and a small drop in exports. Euro which was quoting at around Rs.67 before crisis is way below at Rs.55.9 currently.

Will the measures to bail out from present crisis be successful ?

Crisis response measures focused on financial assistance from the Euro zone IMF, paired with austerity measures and reforms implemented by the Greek government

Measures to bail out from present crisis be successful ?

IMF announced a three-year package of 110 billion(about $158 billion) in loans to Greece at market-based interest rates Three-year lending facilities that could make loans totalling 500 billion (about $718 billion) to Euro zone members facing debt crises.

EU Leaders agreed to create a permanent lending facility, the European Stability Mechanism (ESM),

Measures to bail out

Crisis response measures focused on financial assistance from the Euro zone IMF, paired with austerity measures and reforms implemented by the Greek government IMF announced a three-year package of 110 billion(about $158 billion) in loans to Greece at market-based interest rates Three-year lending facilities that could make loans totalling 500 billion (about $718 billion) to Euro zone members facing debt crises. EU Leaders agreed to create a permanent lending facility, the European Stability Mechanism (ESM),

Reforms by government
Public sector limit of 1,000 introduced to bi-annual bonus, abolished entirely for those earning over 3,000 a month. An 8% cut on public sector allowances and a 3% pay cut for DEKO (public sector utilities) employees. Limit of 800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over 2,500 a month. Return of a special tax on high pensions.

Changes were planned to the laws governing lay-offs and overtime pay.
Extraordinary taxes imposed on company profits. Increases in VAT to 23%, 11% and 5.5%. 10% rise in luxury taxes and taxes on alcohol, cigarettes, and fuel. Equalization of men's and women's pension age limits. General pension age has not changed, but a mechanism has been introduced to scale them to life expectancy changes. A financial stability fund has been created. Average retirement age for public sector workers has increased from 61 to 65. Public-owned companies to be reduced from 6,000 to 2,000

Central bank intervention

ECB:Buying European government bonds in secondary markets to increase confidence and lower bond spreads for Euro zone bonds under market pressure. Between May 2010 and June 2011, the ECB purchased government bonds totalling 78 billion (about $112 billion), with the bulk purchased in the summer of 2010. FED: Swap lines to increase dollar liquidity in the global economy. Privatization and public real estate development program designed to raise 50 billion (about $72 billion) by 2015, including 15 billion (about $22 billion) by 2013

Second rescue package will provide loans to Greece on more favourable terms than the first package (lower interest rate and longer maturities), as well as extend the maturities on existing Euro zone loans to Greece

ABSENCE OF BAILOUT AGREEMENT

Without a bailout agreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. It has been claimed that this could destabilize the EURO INTERBANK OFFERED RATE, which is backed by government securities. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. The crisis has reduced confidence in other European economies. Ireland, with a government deficit in 2010 of 32.4% of GDP, Spain with 9.2%, and Portugal at 9.1% are most at risk.

PRIVATIZATION
2012

The government plans to sell stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATE bank. Government also plan to sell ports, airports, motorway concessions, state land and mining rights. It plans further sales to raise 7bn Euros in 2013, 13bn Euros in 2014 and 15bn Euros in 2015.

Current Trends in Greece

Fitch downgrades Greece to C:23-FEB-12,Fitch cut Greeces longterm ratings today to its lowest rating above a default, becoming the first ratings agency to make the widely expected downgrade after the country announced a bond exchange plan to ease its massive debt burden. Greece launches long awaited debt offer:26-FEB-12,Greece formally launched a bond swap offer to private holders of its bonds on Friday, setting in motion the largest-ever sovereign debt restructuring in the hope of getting its messy finances back on track.

S&P downgrades Greece to selective default:29-FEB-12,Standard & Poors yesterday cut Greeces long-term ratings to selective default, the second ratings agency to proceed with a widely expected downgrade after the country announced a bond swap plan to lighten its debt burden.

Current Trends
EU approves second bailout package for Greece :03-MAR-12,European Union leaders have cleared the release of long-awaited second bailout package for debt- ridden Greece by the end of the week. Moody's downgrades Greece after debt swap:04-MAR-12,Moody's Investors Service on Friday cut Greece's sovereign debt rating to the lowest possible level after a debt-restructuring deal that imposes hefty economic losses for private creditors.

REFERENCES!
http://www.guardian.co.uk/world/2010/may/06/Greece-debt-crisis-economy. http://en.wikipedia.org/wiki/European_sovereign_debt_crisis#Downgrading_of_debt. Google Images. http://en.wikipedia.org/wiki/Economy_of_Greece. http://money.howstuffworks.com/personal-finance/debt-management/debt4.htm. http://economictimes.com http://news.xinhuanet.com/english2010/world/2011-07/26/c_131008820.htm http://www.forexyard.com/blog/en/2011/05/10/greek-debt-crisis-and-ecb-interest-ratesdriving-the-euro/. www.ft.com/indepth/greece-debt-crisis. http://www.hindustantimes.com/G20-tells-euro-zone-to-fix-debt-crisis-withinweeks/Article1-757713.aspx www.france24.com/Greece