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Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
Project on Greece Crisis and Impact for  Economic Environment of Business
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Project on Greece Crisis and Impact for Economic Environment of Business

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: Project on Greece Crisis and Impact for Economic Environment of Business …

: Project on Greece Crisis and Impact for Economic Environment of Business
• financial crisis of 2007–2008
• Greek government-debt crisis
• Causes for deteriorated economic
• Tax evasion and corruption
• Unsustainable and accelerating debt-to-GDP ratios
• Impact of the Greece Economic Crisis on India
India’s Crisis Responses and Challenges

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  • 1. Study on Greece Crisis and Impact For Economic Environment of Business By Renzil D’cruz Web Presence: about.me/renzilde linkedin.com/in/renzilde RenzilDe.com Presented to Dr. P.A.Johnson 1
  • 2. INDEX Sr.no. Topic Page no. 1. Introduction 3 2. financial crisis of 2007–2008 4 3. Greek government-debt crisis 4 4. Causes for deteriorated economic 5 5. Tax evasion and corruption 7 6. Unsustainable and accelerating debtto-GDP ratios 7 7. Impact of the Greece Economic Crisis on India 9 8. India’s Crisis Responses and Challenges 10 9. Summery 10 References 13 10. 2
  • 3. Introduction The economy of Greece is the 34th or 42nd largest in the world at $299 or $304 billion by nominal gross domestic product or purchasing power parity respectively, according to World Bank statistics for the year 2011. Additionally, Greece is the 15th largest economy in the 27-member European Union. In terms of per capita income, Greece is ranked 29th or 33rd in the world at $27,875 and $27,624 for nominal GDP and purchasing power parity respectively. A developed country, the economy of Greece mainly revolves around the service sector (85.0%) and industry (12.0%), while agriculture makes up 3.0% of the national economic output. Important Greek industries include tourism (with 14.9 million international tourists in 2009, it is ranked as the 7th most visited country in the European Union and 16th in the world by the United Nations World Tourism Organization) and merchant shipping (at 16.2% of the world's total capacity, the Greek merchant marine is the largest in the world), while the country is also a considerable agricultural producer (including fisheries) within the union. As the largest economy in the Balkans, Greece is also an important regional investor. The Greek economy is classified as an advanced and high-income one, and Greece was a founding member of the Organisation for Economic Co-operation and Development (OECD) and the Organization of the Black Sea Economic Cooperation (BSEC). In 1979 the accession of the country in the European Communities and the single market was signed, and the process was completed in 1982. 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. Greece is also a member of the International Monetary Fund and the World Trade Organization, and is ranked 31st on the KOF Globalization Index for 2010 and 34th on the Ernst & Young’s Globalization Index 2011. 3
  • 4. Combined charts of Greece's GDP and Debt since 1970; also of Deficit since 2000. Absolute terms time series are in current euros. The country's economy was devastated by the Second World War, and the high levels of economic growth that followed throughout the 1950s to 1970s are dubbed the Greek economic miracle. Since the turn of the millennium, Greece saw high levels of GDP growth above the Eurozone average peaking at 5.9% in 2003 and 5.5% in 2006. Due to the late-2000s financial crisis and the European sovereign debt crisis, the Greek economy saw growth rates of −7.1% in 2011, −4.9% in 2010, −3.1% in 2009 and −0.2% in 2008. In 2011, the country's public debt stood at €355.658 billion (170.6% of nominal GDP). After negotiating the biggest debt restructuring in history with the private sector, Greece reduced its sovereign debt burden to €280 billion (136.9% of GDP) in the first quarter of 2012. Financial crisis of 2007–2008 : The financial crisis of 2007–2008, also known as the global financial crisis and 2008 financial crisis, is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 7, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing "a complete evaporation of liquidity" Greek government-debt crisis: The Greek government-debt crisis is one of a number of current European sovereign-debt crises and is believed to have been caused by a combination of structural weaknesses of the Greek economy coupled with the incomplete economic, tax and banking unification of the European Monetary Union In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany. 4
  • 5. Causes for deteriorated economic In January 2010 the Greek Ministry of Finance highlighted in their Stability and Growth Program 2010 these five main causes for the significantly deteriorated economic results recorded in 2009 (compared to the published budget figures ahead of the year): GDP growth rates: After 2008, GDP growth rates were lower than the Greek national statistical agency had anticipated. In the official report, the Greek ministry of finance reports the need for implementing economic reforms to improve competitiveness, among others by reducing salaries and bureaucracy, and the need to redirect much of its current governmental spending from non-growth sectors (e.g. military) into growth stimulating sectors. Government deficit: Huge fiscal imbalances developed during the past six years from 2004 to 2009, where "the output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues." In the report the Greek Ministry of Finance states the aim to restore the fiscal balance of the public budget, by implementing permanent real expenditure cuts (meaning expenditures are only allowed to grow 3.8% from 2009 to 2013, which is below the expected inflation at 6.9%), and with overall revenues planned to grow 31.5% from 2009 to 2013, secured not only by new/higher taxes but also by a major reform of the ineffective Tax Collection System. Government debt-level: Since it had not been reduced during the good years with strong economic growth, there was no room for the government to continue running large deficits in 2010, neither for the years ahead. Therefore, it was not enough for the government just to implement the needed long term economic reforms, as the debt then rapidly would develop into an unsustainable size, before the results of such reforms were achieved. The report highlights the urgency to implement both permanent and temporary austerity measures that - in combination with an expected return of positive GDP growth rates in 2011 - would result in the baseline deficit decreasing from €30.6 billion in 2009 to only €5.6 billion in 2013, finally making it possible to stabilize the debt-level relative to GDP at 120% in 2010 and 2011, followed by a downward trend in 2012 and 2013. Budget compliance: Budget compliance was acknowledged to be in strong need of future improvement, and for 2009 it was even found to be "A lot worse than normal, due to economic control being more lax in a 5
  • 6. year with political elections". In order to improve the level of budget compliance for upcoming years, the Greek government wanted to implement a new reform to strengthen the monitoring system in 2010, making it possible to keep better track on the future developments of revenues and expenses, both at the governmental and local level. Statistical credibility: Problems with unreliable data had existed ever since Greece applied for membership of the Euro in 1999. In the five years from 2005–2009, Eurostat each year noted a reservation about the fiscal statistical numbers for Greece, and too often previously reported figures got revised to a somewhat worse figure, after a couple of years. In regards of 2009 the flawed statistics made it impossible to predict accurate numbers for GDP growth, budget deficit and the public debt; which by the end of the year all turned out to be far worse than originally anticipated. In 2010, the Greek ministry of finance reported the need to restore the trust among financial investors, and to correct previous statistical methodological issues, "by making the National Statistics Service an independent legal entity and phasing in, during the first quarter of 2010, all the necessary checks and balances that will improve the accuracy and reporting of fiscal statistics". The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets practically were no longer available for Greece as a funding source. On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points:    Implementation of austerity measures, to restore the fiscal balance. Privatisation of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable. Implementation of outlined structural reforms, to improve competitiveness and growth prospect 6
  • 7. Greece's debt percentage since 1999, compared to the average of the Eurozone The payment of the bailout was scheduled to happen in several disbursements from May 2010 until June 2013. Due to a worsened recession and the fact that Greece had worked slower than expected to comply with point 2 and 3 above, there was a need one year later to offer Greece both more time and money in the attempt to restore the economy. In October 2011, Eurozone leaders consequently agreed to offer a second €130 billion bailout loan for Greece, conditional not only the implementation of another austerity package (combined with the continued demands for privatisation and structural reforms outlined in the first programme), but also that all private creditors holding Greek government bonds should sign a deal accepting lower interest rates and a 53.5% face value loss. This proposed restructure of all Greek public debt held by private creditors, which at that point of time constituted a 58% share of the total Greek public debt, would according to the bailout plan reduce the overall public debt burden with roughly €110 billion. A debt relief equal to a lowering of the debt-to-GDP ratio from a forecast 198% in 2012 down to roughly 160% in 2012, with the lower interest payments in subsequent years combined with the agreed fiscal consolidation of the public budget and significant financial funding from a privatization program, expected to give a further debt decline to a more sustainable level at 120.5% of GDP by 2020. Tax evasion and corruption The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007; during this period it grew at an annual rate of 4.2%, as foreign capital flooded the country. Despite of that, the country however each year continued to record high budget deficits. Another consistent problem Greece has suffered from in recent decades, is the government's tax income. Each year it is several times below the expected level. In 2010, the estimated tax evasion costs for the Greek government amounted to well over $20 billion per year. To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing, Most notable is a cross currency swap, where billions worth of Greek debts and loans were converted into Yen and Dollars at a fictitious exchange rate by Goldman Sachs, thus hiding the true extent of Greek loans. The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU. The revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Euros stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and also the debt level clearly exceeding the recommended limit at 60% of GDP. Unsustainable and accelerating debt-to-GDP ratios (1981-2013) 7
  • 8. The table below display all relevant historical and forecasted data for the Greek government budget deficit, inflation, GDP growth and debt-to-GDP ratio. Government budget deficit, inflation, GDP growth and debt-to-GDP ratio (1970–2015) Source: Eurostat and European Commission Greek national account 197 0 198 0 199 0 Public revenue (% of GDP) N/A N/A 31.0 37.0 37.8 39.3 40.9 41.8 Public expenditure4 (% of GDP) N/A N/A 45.2 46.2 44.5 45.3 44.7 Budget deficit4 (% of GDP) N/A N/A 14.2 9.1 6.7 5.9 Structural deficit5 (% of GDP) N/A N/A 14.8 9.1 6.6 HICP inflation (annual % ) N/A N/A N/A 8.9 GDP deflator6 (annual %) 3.8 19.3 20.7 9.8 199 5 1996 1997 1998 1999 2000 2001 2012 2013 2014 2015 2 2 2 3 42.3 43.9 44.1 43.5 N/A 51.3 51.7 50.7 49.6 48.1 N/A 15.6 10.7 9.4 6.8 5.5 4.6 TBA 9.6 14.7 8.7 5.4 1.5 -0.7 -0.4 N/A 3.0 4.2 1.3 4.7 3.1 1.1 -0.8 -0.4 N/A 3.3 4.7 2.3 1.1 1.0 -0.5 -1.2 -0.4 TBA 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 43.4 41.3 40.6 39.4 38.4 39.0 39.2 40.7 40.7 38.3 40.6 44.8 47.1 45.8 45.4 45.1 46.0 44.4 45.0 47.2 50.5 54.0 3.9 3.1 3.7 4.5 4.8 5.7 7.6 5.5 5.7 6.5 9.8 6.1 4.1 3.3 4.0 4.6 4.3 5.6 7.8 5.3 6.8 7.9 7.9 5.4 4.5 2.1 2.9 3.7 3.9 3.4 3.0 3.5 3.3 7.3 6.8 5.2 3.0 3.4 3.1 3.4 3.9 2.9 2.8 2.4 8
  • 9. Real GDP growth7 (%) 8.9 0.7 0.0 Public debt8 (billion €) 0.2 1.5 Nominal GDP8 (billion €) 1.1 17.9 N/A N/A N/A N/A 3.6 3.4 3.4 4.5 4.2 3.4 5.9 4.4 2.3 5.5 3.5 −0.2 −3.1 −4.9 −7.1 −6.0 -4.2 0.6 TBA 31.1 86.9 97.8 105. 2 111. 9 118. 6 141. 0 151. 9 159. 2 168. 0 183. 2 195. 4 224. 2 239. 3 263. 3 299. 7 329. 5 355. 7 344. 6 347. 6 349. 3 TBA 6.8 43.4 88.7 97.5 107. 9 117. 3 125. 0 135. 0 145. 1 155. 2 170. 9 183. 6 193. 0 208. 6 223. 2 233. 2 231. 1 222. 2 208. 5 195. 0 184. 5 185. 0 TBA 22.5 N/A N/A N/A N/A 71.7 11.1 3.8 14.2 6.9 97.5 -9.7 0.9 5.9 -2.8 95.4 -7.8 1.9 3.9 -2.1 94.9 -5.9 2.2 3.1 -0.5 104. 4 -7.0 12.9 3.7 9.5 104. 7 -7.2 3.0 4.5 0.3 102. 6 -6.8 -0.1 4.8 -2.1 98.3 -9.4 -0.5 5.7 -4.3 99.8 -6.8 0.6 7.6 1.5 101. 2 -4.9 0.9 5.5 1.4 107. 5 -7.6 8.1 5.7 6.3 107. 2 -7.0 0.3 6.5 -0.3 112. 9 -4.6 0.5 9.8 5.7 129. 7 1.0 0.1 15.6 16.8 148. 3 5.2 2.7 10.7 18.6 170. 6 9.7 3.1 9.4 22.3 176. 7 11.8 -12.5 6.8 6.1 188. 4 10.1 -3.8 5.5 11.7 188. 9 -0.5 -3.6 4.6 0.5 TBA TBA TBA TBA TBA 2.1 2.4 Debt-to-GDP ratio (%) - Impact of Nominal GDP growth (%) - Stock-flow adjustment (%) - Impact of budget deficit (%) - Overall yearly ratio change (%) 97.9 10.5 2.0 9.1 0.6 100. 3 -8.8 4.5 6.7 2.4 Notes: 1 Year of entry into the Eurozone. 2 Forecasts by EC pr 19 Oct. 2012. 3 Forecasts in the Nov. 2012 bailout plan. 4 Calculated by EDP method. 5 Structural deficit = "Cyclically-adjusted deficit minus impact from one-offs", but figures listed prior 2008 are so far only the "Cyclicallyadjusted deficits". 6 Calculated as yoy %-change of the GDP deflator index in National Currency. 7 Calculated as yoy %-change of 2005 constant GDP in National Currency. 8 Figures prior of 2000 were all converted retrospectively from drachma to euro by the fixed euro exchange rate in 2000. The yearly change in the debt-to-GDP ratio is found by adding the "budget deficit in percentage of GDP" with the "stock-flow adjustment" and the calculated "impact of nominal GDP growth. After implementation of the debt restructure in March 2012, as part of the new Second Economic Adjustment Programme for Greece, this meant that the forecast debt-to-GDP ratio for 2012 fell from 198% to 160%. The signed deal however further stipulates, that in order to make Greece capable in 2020 to fully cover its future financial needs by using the private capital markets, they need to lower the nation’s debt-toGDP ratio further down to maximum 120.5% in 2020. And this significant lowering of the ratio can only be achieved, by a continued compliance with the strict targets set in the bailout plan for the key areas: Fiscal consolidation, economic reforms, labor market reforms and a privatization of public assets worth €50 billion If Greece fail on any of these targets, or if the real GDP growth will not improve to the expected levels, such disappointments will call for the Troika (EU, ECB and IMF) either to assist Greece with a third 9
  • 10. bailout loan, or alternatively to somehow increase the amount of offered debt relief. In that context it is important to note, that the bailout plan from March 2012 is based upon expectations of a real GDP growth of -4.7% in 2012 and 0.0% in 2013. The latest forecast published by the Greek Ministry of Finance on 31 October 2012, showed some worsened figures with a real GDP growth of -6.5% in 2012 and -4.5% in 2013. Despite of this challenge from the worsened recession, the outlook for budget deficits is on the other hand still largely on track compared to the latest bailout plan, as it is now forecast to be 6.6% of GDP in 2012 and declining to 5.2% of GDP in 2013. The debt-to-GDP ratio is however a lot worse than initially expected, as it is now predicted to reach 175.6% in 2012 and 189.1% in 2013 Impact of the Greece Economic Crisis on India India has by-and-large been spared of global financial contagion due to the sub-prime turmoil for a variety of reasons. India’s growth process has been largely domestic demand driven. The credit derivatives market is in nascent stage; the innovations of the financial sector in India is not comparable to the ones prevailing in advanced markets; there are restrictions on investments by residents in such products issued abroad; and regulatory guidelines on securitization do not permit rabid profit making. Financial stability in India has been achieved through perseverance of prudential policies which prevent institutions from excessive risk taking, and financial markets from becoming extremely volatile and turbulent. Despite all these, the global economic slowdown has hit the vital sectors of our economy, posing serious threats to economic growth and livelihood security. The crisis is forcing countries around the world to test the limits of their fiscal and monetary tools. India is no exception. A series of fiscal and monetary measures have been taken by the Government and the RBI to minimize the impact of the slowdown as also to restore the economic buoyancy. India has been consciously pursuing a high growth path in order to achieve the key objectives of rural regeneration, poverty alleviation, inclusiveness and sustainable development. Only growth without inclusiveness, or growth without jobs, will not ensure balanced and all-round development of all sections of the society. That’s why, in the current crisis, the questions that how long it would last and how much it would impinge on the growth rates have assumed critical significance. The present impact ofthe slowdown on India’s growth rate is certainly not alarming. India still is one of the fastest growing economies in the world. There is a just prediction in the Word Bank’s report ‘Global Development Finance 2009’ that India would clock the highest GDP growth rate of 8 per cent in the year 2010. The sheer size of Indian economy would help regain its lost ground. With the right mix of monetary and fiscal policies plus domestic reforms of the productive sectors, as an economy, India has the potential to emerge from this global recession stronger than before. India’s Crisis Responses and Challenges In brief, the impact of the crisis has been deeper than anticipated earlier although less severe than in other emerging market economies. The extent of impact on India should have been far less keeping in view the fact that ourfinancial sector has had no direct exposure to toxic assets outside and its offbalancesheet activities have been limited. Besides, India’s merchandiseexports, at less than 15 per cent of GDP, are relatively modest. Despite thesepositive factors, the crisis hit India has underscored the rising trade in goodsand services and financial integration with the rest of the world.Overall, the Indian economic outlook is mixed. There is evidence ofeconomic activity slowing down. Real GDP growth has moderated in the firsthalf of 2008/09. Industrial activity, particularly in the manufacturing andinfrastructure sectors, is decelerating. The services sector too, which hasbeen our prime growth engine for the last five years, is slowing, mainly inconstruction, transport & communication, trade and hotels & restaurants subsectors.The financial crisis in the advanced economies and the slowdown inthese economies have some adverse 10
  • 11. impact on the IT sector. According tothe latest assessment by the NASSCOM, the software trade association, thedevelopments with respect to the US financial markets are very eventful, andmay have a direct impact on the IT industry. About 15 per cent to 18 per cent of the business coming to Indian outsourcers includes projects from banking,insurance, and the financial services sector which is now uncertain.For the first time in seven years, exports had declined in absolute termsin October. Data indicate that the demand for bank credit is slackening despitecomfortable liquidity. Higher input costs and dampened demand have dentedcorporate margins while the uncertainty surrounding the crisis has affectedbusiness confidence. On the positive side, on a macro basis, with external savings utilisationhaving been low traditionally, between one to two per cent of GDP, and thesustained high domestic savings rate, this impact can be expected to be atthe margin. Moreover, the continued buoyancy of foreign direct investmentsuggests that confidence in Indian growth prospects remains healthy.86Inflation, as measured by the wholesale price index, has fallen sharply, andthe decline has been sustained for the past few months. Clearly, the reductionin prices of petrol and diesel announced in the past months should furtherease inflationary pressures. Summery Why is Greece in debt? Like any state (or person, for that matter), it spent more money than it took in. After the switch to the euro, the traditionally strong Greek public sector saw wages rise to ultimately unsustainable levels. To compound this, the retirement age in the country is low (by Western standards) and benefits are generous. But that alone is not enough to sink an economy. Mass tax evasion, on the other hand, can certainly do the trick. And it did in Greece. When people and businesses don’t pay their taxes, it limits revenue. So when the money inevitably ran out, Athens turned to European banks for loans. Soon, the government was borrowing billions and those debts, like subprime mortgages in the United States, were often repackaged as c0mplex commodites and sold off around the continent. Everyone, especially banks in France and Germany, wanted a piece. Now they have it. Why does Europe — indeed, the world — care so much about Greece’s debts? One of the perceived perks when Europe got together on a single currency (Greeks, for instance, gave up the drachma for the euro) was that a strong Europe could prop up an individual state in a time of need. But what’s happened is that Europe itself has become too weak, in the aftermath of the global financial meltdown, to bite the bullet on a country like Greece. A default would shatter otherwise monetarily strong countries like Germany. The Germans, like the Americans, would be left with a host of “too big to fail” banks ready to do just that. What kind of deal has the EU offered the Greeks? There have been a few already, and certainly a handful more are in the works, but it boils down to this: European banks will take 50 cents for every dollar owed to them by the Greek government. In exchange, Greece must impose what many have described as a crushing austerity. That means no more early retirement, reduced pay for public workers (the ones who manage to keep their jobs), largescale cuts to social programs, and a staggered repayment of the reduced debt. 11
  • 12. Why did Prime Minister Papandreou originally call for a referendum? As you might imagine, “austerity” is a dirty word in large parts of Greece. Many people there believe the country is being unfairly routed by reckless spending, predatory bankers, and subsequent cutbacks by the government. Papandreou, one assumes, didn’t want to be the guy everyone* blamed for taking the EU deal. So he proposed a vote. A referendum. This seriously worried the rest of Europe, as stock markets cratered on fears that Greek voters would spike the bailout. The PM’s decision was scrapped after foreign leaders (and some influential Greek politicians) put pressure on his governing coalition, which might still break any minute now. *There have been riots in Athens and across the country. Anti-austerity protesters were further radicalized when three of their own were killed during a clash with police last year. Why are the Greeks so reluctant to take the bailout? Pete Morici, a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission, explained it rather well in his latest column: “[In exchange for] aid from richer EU governments, Greeks must accept draconian austerity measures,” he wrote. “These would further drive up unemployment, and shrink Greece’s economy and tax base at an alarming pace, placing in jeopardy eventual repayment of Athens’ remaining debt. “As currently constituted, a single currency may serve the One Europe designs of France and Germany, but make Greece and the other Mediterranean states nothing more than the victims of a northern conquest.” Greeks who oppose the deal — and even many who support it only as a means of staying a member of the EU — don’t want to end up like an American post-grad, forever in debt to the banks that provided college loans. What would happen if Greece defaulted on its foreign debt? The first thing you would notice is a massive drop in stock markets from the U.S. to Japan, and all across Europe. It is extremely important to understand that what happens in Greece will be seen as the way forward for a number of other countries — Spain, Portugal and Ireland, to name a few. Some believe Italy could follow suit. Default by the Greeks would likely mean other sovereign states to follow. Strictly within Greece, it wouldn’t be as bad. Relatively speaking. They would drop the euro and return to the drachma, which would, in turn, be severely devalued. Not great news for Greek tourists planning on a trip abroad anytime soon, but very good news for exports, which would become extremely cheap, like those coming out of China or other, smaller developing markets. Outside of Greece, it would be a big mess. German banks, and maybe French too, would need massive bailouts. The prospect of those defaults in other debt-ridden countries (see above) could cause a run on the banks. Even more money would leave the market. And when money leaves the market, demand drops. When demand drops, economies crater. What would happens if Greece accepts the EU deal? 12
  • 13. Now that Greek PM George Papandreou has called off the referendum on the deal — a vote would have been very close as polls indicate the Greeks are very closely split on the EU proposal — this is the most likely outcome. Greece would see its debt cut in half and be made to enforce the tough austerity discussed before. Expect riots. Banks around Europe would take a “haircut” but remain, for the moment at least, solvent. Greece would pay over time, but most of the money right now would come out of a fund sponsored by the stronger state economies from Europe and the IMF. In short, everyone would relax, safe in the knowledge that the global financial system we’ve all come to know and, well — the system we’ve come to know would keep on spinning for at least another day. References 1. Global Economic crisis and Inpact on India,Rajya Sabha Secretariat,June 2009 2. Alan Greenspan, The Age of Turbulence: Adventures in a New World,New York: Penguin, 2007 3. Arjun K. Sengupta, “The financial crisis and the Indian response”, The Hindu, October 24, 2008 1. Ajit Balakrishnan, “Brave new world of derivatives”, Business Standard, November 11, 2008 Web Reference: Wikipedia Article on Greek Goverment Crisis http://en.wikipedia.org/wiki/Greek_government-debt_crisis 13
  • 14. Wikipedia Article on Economy of Greece http://en.wikipedia.org/wiki/Economy_of_Greece BBC News - Q&A: Greek debt crisis http://www.bbc.co.uk/news/business-13798000 BBC News - Euro crisis: How a Greek euro exit could affect you http://www.bbc.co.uk/news/business-18091763 Greece debt crisis and its impact on India - MBA Rendezvous www.mbarendezvous.com/topimage.php?id=407 14

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