A6 EcoPjt TheGreekCrisis&TheEuro

8/6/2019 A6 EcoPjt TheGreekCrisis&TheEuro

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The 2010 Greece Debt CrisisAnd the European Sovereign Debt Crisis

Group 6, Section AAbhishek Arora 10P003

Harsh Maru 10P018Krishna Chaitanya T 10P024

Nikhil Jain 10P034Anup Rao 10P044

Sneha Vaidyanathan 10P054


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Agenda

Greece: An OverviewCurrent State

Macroeconomic OutlookHow it Happened

Aftermath

On the Euro-zone

On Currencies

Europes Web of Debt

Portugal Ireland

Italy Iceland Spain


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Greece: An Overview

Sources: [1]World Bank Report (2009), [2] Eurostat Report(2004)

24th

Largest Economy by nominal GDP[1]

Rated as a developed economy on the basis of:

Its per capita income

Industrialization

Human Development Index (HDI) 22nd in the world

Underwent impressive economic and social development post WW 2 Greekeconomic miracle

Average growth rate of 7% from early 1950s to mid 1970s

Due to:

Marshall Plans stimulation

Devaluation of the Drachma

High foreign investments Massive construction activities due to rebuilding of cities

Entered the Euro in 2001

Even then, there were doubts over massive under-reporting of its debts

Eg. Found to have not recorded a lot of military spending

Excuse: Different accounting principles followed

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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Greeces Current State

Sources: [1]World Bank Report (2009), [2]TradingEconomics

In Crisis!

GDP: SD 330 Billion [1]

GDP Growth in 2010: (1.28%)

Fiscal Deficit: 15.6% of GDP (Nov2010) [2]

Even higher than Irelands 14.4% in 2010

High Current Account Deficit: 11%of GDP

High imports

Net Foreign Debt: 70% of GDP

Government Bond Yields Shootingp

As fears of defaults rise

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


5/22


Sources:TradingEconomics

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


6/22


Sources:TradingEconomics

Public debt: A huge114.1% of GDP(550 Bn)

2010, Greecesgovernment bonds

had one of thehighest yields in theEurozone

Investors worriedthat the government

would default ontheir debt and wereloath to invest

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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Manipulations

Sources: Michael Lewis on Greece, Vanity Fair

To join the European nionin 2001, Greece needed to:

Reduce budget deficit to3% of GDP

Reduce inflation toroughly German levels In the 1980s and 90s,

Greeks were regardedmuch less likely thanGermans to repayloans

Interest rates in Greece

were 18%: ~10%higher than in Germanyto compensate for therisk

What Greece did:

Moved pensions, defenceexpenses off the booksthrough accountingshenanigans

Froze prices forgovernment-suppliedgoods like electricity andwater, cut taxes onalcohol, gas and tobacco

Substituted higher-price

items from the CPI withcheaper ones the dayinflation was measured

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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What Happened?

Sources: [1]World Bank Report (2009), [2]TradingEconomics, [3] Michael Lewis on Greece, Vanity Fair, [4]The Viewspaper

2000-08

Had high domestic demand and was heavily dependent on (mainlyGerman) imports

Currency devaluation and lower Euro zone interest rates helpedfinance borrowing

Subsequent governments were lax and indulged in unrestrained publicspending and manipulated budgets

Tourism and shipping exports helped sustain economy Wages and prices of goods went up steadily

Crisis: a result of fiscal intemperance, not euro competitiveness

or financial recklessness

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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What Happened?

Sources: [1]World Bank Report (2009), [2] Market Melange, [3] Michael Lewis on Greece, Vanity Fair, [4]The Viewspaper

2008-09

Global Financial crisis hit! Exports of shipping and tourism

sectors hit very badly down by

15% in 2009 Wages declined But prices of imported goods

remained high

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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What Happened?

Sources: Bloomberg, BBC

2009

New socialist government elected (Nov) massively revised 2009s forecast budgetdeficit from 6 to 8% to 12.7% (later revised to 15.4%)

April 2010 45 Billion E

/IMF bailout package activated to help service 8.5 Billion bonds duein May 2010 S&P downgraded Greeces debt rating to BB+ (junk status) yields hit 15.3%

May 2010

4.8 Bn savings targeted (through public wages reduction and increased taxes) in

austerity bill passed by Greece Germany agreed to 110 Bn for E

/IMF bail out of Greece out over the next 3years at 5% interest

Protests and riots in Greece over spending cuts and tax increases Best case scenario: assuming GDP turns positive in 2012, fiscal deficit will decline to a

still huge 8% of GDP, but gross national debt may reach 140% of GDP by 2014

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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Policy Response

Sources:US Congressional Research Service, April 2010

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt

Fiscal Austerity

3 packages unveiled by Government, worth 16 Bn (6.4% of GDP) since Oct 2009 Target sharp spending cuts, tax increases, improved collection

Tax Raises

Rise in VAT from 19% to 21%

Tax raises on fuel, tobacco, alcohol, luxury products

One-off 1% tax raise on incomes over 100,000

Spending cuts

Civil servant hiring freeze (5:1 retirement/recruitment ratio for new hires from 2010)

10% cut on civil servant bonuses

30% cut in public sector supplementary pay (~ 1 months salary)

Freeze on state pensions

Longer term budget deficit targets established:

8.7% of GDP in 2010

5.6% of GDP in 2011

2.8% of GDP in 2012

2% of GDP in 2013

Structural reforms to pension, healthcare, public administration systems


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Aftermath: Post bailout

Sources: IMF Dec 2010 Review

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


16/22

Aftermath: Revised Projections


Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt


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Alternatives for Greece

Sources: Market Melange

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt

Default on Debt?

With interest rates of 5% and debt above100% of GDP, servicing debt costs 6%of GDP now

GDP growth has not touched a nominal6% for a long while

216 Bn (70%) of debt held byforeigners, in addition to E

/IMF loans,unlike Japanese case (5%)

Greece is paying 6% of GDP to servicedebt where default will hurt 3 timesmore abroad than in Greece: justified?

For debt-deflation spiral to start, debtneeds to be internal

Atleast 30% haircut on Greek bonds Rating would go down, but likely to

bounce back after 5-8 years when lendersreturn to Greece for higher returns

Leave Euro, devalue currency?

Return to Drachma, renegotiate to paydebts in Drachmas

Devalue drachma, make exports morecompetitive, increase revenues and paydebts off faster?

Cons: Will lose eligibility for low interestEuro loans

Healthy banking system

Rich, underlevered savers

Low household debt / GDP ratio

Low corporate debt/ GDP ratioLow bank debt/ GDP ratio

Manageable total debt / GDP ratio (Half that of the K or the S!)

Scores poorly only on sovereign debt / GDP ratio

Have bailouts only delayed chances of a default?


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Effect of the Crisis on Europe

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt

Sources: Niall Ferguson in Newsweek

Contagion effect

Italy and Belgium have bloated debts like Greece Portugal and Spain have Greek-style overreliance on foreign

lending

Greek banks balance sheets stuffed with dodgy Greek bonds:

Neighbouring Bulgaria and Romania rely on Greek banks forfunding

Could face a credit crunch

Other E Banks are exposed to Greek debt ($200Bn)

If copycat crises happen in Portugal and Spain, could lead to adisastrous European banking crisis => Euro further down

Euro slid from $1.6 to $1.27 in one week in May 2010


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Europe: Fragility in the Region

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt

Sources: Eurostat

Europe: GDP Growth from 2002-09

Europe: Balance Sheet for 2009


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Europe: Sovereign Debt Crisis

Greece:

Overview

CurrentState

How itHappened

Aftermath

EuropesWeb ofDebt

Sources: Business Week, Fortune

Iceland

Collapse of all 3 major commercial banks

Couldnt refinance short-term debt Run on deposits in the

K

Consequences

Krona declined in value

Stock market capitalisation declined by 90% in 2009

Real GDP decreased by 5.5% in the first half of 2009

State

#1 in 2008

N HDI Now: De-facto bankruptcy

Debt = 850% of GDP

Causes

Deregulated banks: Most rapid expansion of a banking system in the history ofmankind

2003: 3 biggest banks had assets ~$10 Bn, 100% of GDP

2007: 3 biggest banks had assets ~$140 Bn, 1400% growth in 3.5 years

Banks financed their expansion through loans on interbank lending market, foreigndeposits, households (took on a debt of 213% of disposable income)

Huge household debt led to huge inflation

2003-07: Banks lent Icelanders money to buy stocks and real estate:

Stock market multiplied 9 times (

S: doubled)

Real estate priced tripled

Central bank held interest rates high (~15%) to control inflation encouraged moreforeign deposits bubble, which burst


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Questions?

Than You

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A6 EcoPjt TheGreekCrisis&TheEuro