GREECE DEBT CRISIS Vishal Sarin

Introduction  27 th largest economy in the world by nominal GDP and the 33 rd by PPP (IMF, 2008)  Greece is a member of OECD, WTO, Black sea Economic corporation, EU, & Eurozone  The Greek economy is a developed economy with the 22nd highest standard of living in the world.  Public sector accounting for about 40% of GDP.  Service sector contributes 75.7% of the total GDP,  Industry 20.6% & Agriculture 3.7%.

2010 DEBT CRISES Greece’s debt crisis is reaching a critical period as huge debt repayments are due in the coming weeks. For Greece, this debt crisis is likely to be in a period of prolonged economic stagnation as government spending is cut dramatically. Sovereign Debt A debt instrument guaranteed by a government.

The Greek Crises The Greek government has a very large fiscal deficit adding to an already huge level of debt The problem is huge current account deficit – Which means the Greek economy needs to attract very large inflows of capital if the economy isn’t going to face a sharp contraction of domestic demand Greek has no independent monetary policy or ability to devalue its exchange rate as having membership of the euro zone

First let us know the basics.

What is budget deficit?  When the expenditures of a government (its purchases of goods and services, plus its transfers (grants) to individuals and corporations) are greater than its tax revenues, it creates a deficit in the government budget; such a deficit is known as deficit spending.  This causes the government to borrow capital from the 'world market', increasing further debt, debt service (interest) and interest rates

GOVERNMENT DEBT Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government. By contrast, annual government deficit refers to the difference between government receipts and spending in a single year. As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities, government bonds and bills. Less creditworthy countries sometimes borrow directly from supranational institutions.

A broader definition of government debt considers all government liabilities, including future pension payments and payments for goods and services the government has contracted but not yet paid. Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be one year or less, long term is more than ten years. Medium term debt falls between these two boundaries.

Government Bond A government bond is a bond issued by a national government, and often denominated in the country's domestic currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Government bonds are theoretically risk-free bonds, because governments can, up to a point, raise taxes, reduce spending, or simply print more money to redeem the bond at maturity. Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.

Reasons for current economic situation World economic crisis Speculators Country’s structural problems

World Economic Crisis Reduced revenues as a result of pressures on income and growth Shaky Stock Market Slower investment flows Drop of tourist arrivals Negative impact on exports Negative impact on international sea transport

Speculators Hedge funds betting against Greece / Euro Numerous negative media reports Unclear messages by foreign officials / executives The 3 biggest rating agencies downgraded Greece The borrowing rates for Greece skyrocketed Euro was hit / Fears for crisis expansion in other European countries

Structural Problems Excessive expenditures Mismanagement Unregulated labor market Obsolete pension system Tax evasion Oversized public sector

Greek Weakness 1.Greek government had been lying about the size of its budget deficit last year. 2.The scale of the true budget deficit, caught investors off-guard and led to fears that the Greek government would default on its debt. 3.These fears led to a sharp depreciation of the euro and highlighted many of the weaknesses of the European common currency. 4.Moreover, the euro has proven to be a major problem for Greece, as it cannot devalue its currency in order to lessen its debt burden and to boost exports, and as it has exposed the weakness of the Greek economy in relation to other Eurozone members, most notably Germany.

Germany Holds the Key Most EU leaders, as well as the governments of most EU member states, support a bailout package for Greece to help it survive this debt crisis. However, Germany has proven to be highly reluctant to fund such a bailout, as a majority of German voters oppose such a move and as the center-right German government faces a key state election in Germany’s largest state in the near future. If Germany blocks an EU bailout for Greece, there will be little choice for the Greek government but to turn to the IMF

The Greek Crises – implications for the EUR and UK The EUR has underperformed other currencies in recent weeks as the crises has raged This underperformance is greater than would have been suggested by moves in other financial prices And appears to reflect a significant increase in the perceived riskiness of Euro Zone The problems are severe and speak to a wider issue facing the Euro Zone The UK’s fiscal issues now look less serious in relative, but not in absolute, terms

Possible spread beyond Greece One of the central concerns prior to the bailout was that the crisis could spread beyond Greece. The crisis has reduced confidence in other Eurozone economies. Ireland, with a government deficit of 14.3 percent of GDP, Spain with 11.2 percent, and Portugal at 9.4 percent are most at risk. According to the Financial Times: "So far, investors have concentrated their ire on peripheral eurozone economies because of the zone's inability to resolve cleanly the Greek crisis. That is understandable, say many economists, but they add that the focus on continental Europe is unfair."

Niall Ferguson writes that "the sovereign debt crisis that is unfolding... is a fiscal crisis of the western world". Financing needs for the Eurozone in 2010 come to a total of €1.6 trillion, while the US is expected to issue US$1.7 trillion more Treasury securities in this period, and Japan has ¥213 trillion of government bonds to roll over. The countries most at risk are those that rely on foreign investors to fund their government sector. According to Ferguson similarities between the U.S. and Greece should not be dismissed.

This year the OECD forecasts $16,000bn will be raised in government bonds among its 30 member countries. Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels. Even countries such as the US, Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy.

According to the Niall Ferguson in the Financial Times "Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries by the Federal Reserve and reserve accumulation by the Chinese monetary authorities. But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year."

The government surplus/deficit of Portugal, Italy, Ireland, Greece, United Kingdom, and Spain against the European Union and Eurozone

What to Watch For In the past, Germany would have given in to pressure from France and other European Union member states, but a more confident and assertive Germany is beginning to stand up for its own interests within the European Union. Ferocious and pro-cyclical conditionality imposed by Germany and IMF like cutting Greece’s budget deficit by 11% over 3 years in return of a Euro 120 billion loan, this would mean abandoning the euro, introducing “new drachama” and devaluing by 50% or more.

Lesson Unless protective action is taken early, a country can rapidly be overpowered by the financial markets. Once traders start betting against a country’s bond or its currency, the herd instinct takes over. Greece’s budget deficit is not high by world standard- 13.6% v/s 12.3% in the US. But traders perceived its sovereign debt structure is too risky.

REFERENCES Irvin, Geroge, “Greece still has a choice”, Business Line, Tuesday, May 4,2010 Page: 8 Economy of Greece, ISA Global, 2010, world.com/reports_forecasts/global_updatewww.isa- world.com/reports_forecasts/global_update Economics21, arithmetic-greek-debt-defaultwww.economics21.org/.../painful- arithmetic-greek-debt-default