The Euro Situation1992 Members of the EU (European Union) signed theMaastricht Treaty where they promised to limit deficitspending and debt levelsEarly 2000s, many of the members of the EU were notable to stay within the restrictions, so many began toutilize different methods to hide their debt levelsGreece was guilty of this. In 2009 George Papandreoubecame prime minister and discovered that the gov’thad understated its public debt for years.
The Euro Situation(cont’d)The debt continued to grow to €290 billion. This is a ratioquadruple the allowable ratio based on the Growth Pactof the Euro Zone.In April 2010 the Greek government debt wasdowngraded to “junk bond” status. Because of this theGreek government could no longer borrow money fromthe private capital markets.The Eurozone countries and International Money Fund(IMF) created 2 bail out packages. One in May 2010 of€110 billion and one in October 2011 of €130 billion.
Why Greece?Government Spending:Greece has always had high budget deficits b/c ofheavy spending on public sector jobs, pensions, andother social benefits.Global Economic CrisisGreece’s two biggest earners were tourism andshipping and both were hit particularly hard duringthe downturn. Revenue fell 15% in 2009.
Why Greece? (Cont’d)Tax evasion and CorruptionEvery year the gov’t’s tax income is well below theexpected level. In 2010 the estimated tax ecasioncosts were over €20 billion.From 2000-2010, Greece has been beyond theEurozone stability criteria but was able to hide this formany years with a variety of financial tricks aided bybanks including Goldman Sachs.
Long term interest ratesInterest rates above 6% inSeptember of 2011 show thatfinancial markets doubt whether ornot Greece is reliable
Greek debt compared toEurozoneCountries like Greece arebringing down the entireEurozone because they arenow connected.The debt ridden countriesneed help from thestronger economies likeGermany. If one goesdown, they all go down.The U.S. is also heavilydependent on trade withEurope.
Implications for U.S.If investors lost confidence in the Eurozone, the eurowould weaken. A weakened euro would mean andecrease in U.S. exports to the Eurozone and anincrease in imports from the Eurozone. This wouldwiden the U.S. trade deficit.The U.S. also has a large financial stake in the EU. TheEU is the the United States biggest trading partner.The entire global economy would be affected b/cbasically every country is directly or indirectly affectedby the U.S. and the Eurozone.
“System Reboot - Recapitalisationapproaches the finishing line”- The Economist - May 25th 2013- The Economist - May 25th 2013This article talks about the status of the recapitalisation of thebanking system of Greece.In 2011 a second bailout package was created for Greece thatincludes $65 billion (€50 billion) for the “Hellenic FinancialStability Fund” (HFSF).Within the HFSF €27.5 billion is supposed to go to Greece’sfour biggest banks - Alpha, National Bank of Greece (NBG),Piraeus, and EurobankIf any of these banks can raise at least 10% of the capitalrequirement it can remain privately owned. Otherwise it will beowned by the Greek state. The banks have until June 14thwhich means everything must be approved by the end of May.
Pros for investorsThe banking system will be much more concentrated.Before the 4 banks held 70% of the assets in Greeceb/c of foreign owned firms. After they will own 95%.With each share investors buy, they have a warrant tobuy more at the price of the rights issue (adjusted byinterest rates) for the next 4 1/2 years.
Cons for investorsHigh political risks. Greek politicians may meddle in thebanks’ affairs. These investments depend on HFSFkeeping its promise of privatising holdings based on astrict schedule.Losses have turned out heavier than expected.According to IMF recapitalisation is able to cope w/“non performing loans” reaching 40% of total lending.The ratio is already at 29.5%.
Status of the banksAlpha: Consortium of banks led by J. P. Morgan hascommitted €457 million. In total they have raised €550million which is 12% of its capital requirement.National Bank of Greece (NBG): May succeedPiraeus: Will reach the 10% neededEurobank: Will be state owned/fully capitalised by theHFSF