greek sovereign debt crisis
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DESCRIPTIONA description of the Greek financial crisis (pre cursor to the current Euro Zone Crisis)
- 1.Greek Sovereign Debt Crisis Aditya Lathe
2. The European UnionGreek Crisis TimelineCausative FactorsOptions 3. European Union- History Founded as European Economic Community in 1957by 6 countries- Belgium, France, (West)Germany, Italy, Luxembourg and Netherlands (inresponse to greater integration after WWII). In 1992, under the Treaty on European Unionsigned at Maastricht, the name European Unionofficially replaces European Community. As of 2011, 27 countries in Europe are part of theEuropean Union. 4. EU Member States 5. Eurozone Euro introduced as a common currency in 11 EUcountries in January 1999. Physical notes and coins introduced in January2002, replacing all national currencies. As of 2011, 17 nations within the EU, use the Euroas a common currency. The nations, implying amonetary union, are together denoted asEurozone. 6. Eurozone GDP (Nominal) (Source: ECB)GDP (2010)S.No. CountryGDP (2010)%1Austria 286.23.12% Portugal 2Belgium 354.43.87% 2%Belgium 3Cyprus 17.30.19%NetherlandAustria 4%Finland 6%3%2%4Estonia14.30.16%Spain 5Finland 180.31.97%12% 6France 1932.8 21.09% France 7Germany2476.8 27.02%21%8Greece227.32.48% Italy 17%9Ireland 1561.70% 10Italy1548.8 16.90%Germany27%11Luxembourg 40.30.44% 12Malta 6.20.07% Ireland 13Netherlands 588.46.42% 2%14Portugal172.81.89% Greece15Slovakia 65.90.72%2% 16Slovenia 35.40.39% 17Spain1062.6 11.59%Total 9165.8bn 7. The European UnionGreek Crisis TimelineCausative FactorsOptions 8. Crisis TimelineJan 2001: Greece joins the Eurozone, becomingthe 12th member to adopt the EuroNov 2004: Admits to fudging figures to gain entryto the Euro. Says deficit was not below 3% ofGDP, as required by EU rules. Has beenconsistently above 3% since 1999.Mar 2005: Adopts austerity measures to reducedeficit and improve finances post the hosting ofOlympics. Posts short recovery upto 2006, whenGDP grows by 4.1% in 3 months. 9. Crisis Timeline Oct 2009: Recovery short-lived after Global Financial Crisis. Debt fears mount. Economy contracts by 0.3%, national debt up by 56% in 5 years (242bn), deficit expected to be 6% of GDP. (Later revised to 12.7% of GDP). Dec 2009: Fitch downgrades rating from A- to BBB+, a first in 10 years. Govt. proposes radical reforms, including crackdown on corruption and reining in public spending. Workers begin strikes. Feb 2010: Deficit at 12.7%, debt at 300bn. 1st Austerity measure announced, includes freeze on public sector pay & higher taxes. Strikes intensify. Goldman Sachs under Fed enquiry for helping Greece borrow billions through Exchange Rate Swaps. 10. Crisis TimelineApr 2010: 16 Eurozone members announce bailout package. 30bn3 year loan at 5% interest, to be provided over next 1 year throughthe ECB. IMF to provide 15bn. S&P downgrades rating to BB+(Junk status), as loan amount not seen as enough. 2nd Austeritymeasures announced, include salary cuts, increase in taxes.May 2010: Size of bailout package increased to avert sovereigndefault. 110bn 3 year loan at 5% interest to be provided, withEurozone members share at 80bn and IMF share at 30bn. Deficitat 13.6%. Govt. submits a 3year plan aimed at cutting budgetdeficit from 13.6% of GDP in 2009 to below 3% of GDP in 2014.May 2010: With default fears from Portugal and Ireland, EFSFworth 750bn launched. 440bn loan backed guarantee and bilateralloans by Eurozone members, 60bn balance of payment support byEU members and upto 250bn by IMF support to be made availableto weak economies. 11. Crisis TimelineJul 11: 2nd Eurozone Bailout package announced.109bn to be provided through EFSF, at lower interestrates (~3.5%) & with longer timeframe (15-30 yrs).Private sector contribution at 37bn. Present: Country barely being sustained on drip-feed from the Troika European Union, European Central Bank & International Monetary Fund. Fate of the nation still uncertain. 12. The European UnionGreek Crisis TimelineCausative FactorsOptions 13. Causative Factors StructuralrigiditiesRelianceHigh on fiscalexternal deficitdebt 14. Structural Rigidities Large & Inefficient Public Administration Costly pension & Healthcare systems Tax Evasion & absence of the will to maintain financial discipline 15. Structural Rigidities According to OECD, spending on public administration as apercentage of total public expenditure in Greece was higher than inany other OECD member, with no evidence that the quantity orquality of the services are superior. Public sector plagued by overstaffing and poor productivity. An aging Greek populationthe percentage of Greeks aged over 64is expected to rise from 19% in 2007 to 32% in 2060could placeadditional burdens on public spending and what is widelyconsidered one of Europes most generous pension systems. Informal economy in Greece valued at between 25%-30% of GDP. Observers offer a variety of explanations for the prevalence of taxevasion in Greece, including high levels of taxation and a complextax code, excessive regulation, and inefficiency in the public sector. 16. High Fiscal Deficit High Govt. Spending on public administration High Govt. Spending on pension and healthcare Low Revenue collections 17. High Fiscal Deficit Greek government expenditures in 2009 accounted for 50% ofGDP, with 75% of (non-interest) public spending going towages and social benefits. Total Greek public pension payments expected to increasefrom 11.5% of GDP in 2005 to 24% of GDP in 2050. Between 2001-2007, while central government expendituresincreased by 87%, revenues grew by only 31%. 18. High Fiscal Deficit 19. Large External Debt Adoption of Euro Lax EU Rules enforcement 20. External Debt With the currency bloc anchored by economicheavyweights (Germany and France), and acommon monetary policy conservatively managedby the ECB, perceived stability due to Eurozonemembership allowed access to capital atartificially low interest rates Lax EU Rules enforcement: No financial penalty forBudget deficit >3% and debt >60% of GDP Got away with hiding billions of dollars of debtthrough currency exchange rate swaps 21. Central Govt. Debt- Dec 2010 22. Central Govt. Debt June 2011 23. Central Govt. Debt Maturity Profile 24. Debt (% of GDP) - Trend 25. Debt (% of GDP) - Comparative 26. Country Exposure 27. Comparative 10 yr Bond yields German BondsGreek Bonds 28. The European UnionGreek Crisis TimelineCausative FactorsOptions 29. Options Outright DefaultBailout through EU support & austerity measuresOrderly Default Exit from Eurozone 30. Option I: Outright Default German and French financial institutions are thought to holdup to 35-40% of Greek debt and would be severely hit. The credibility of the ECB would suffer, and that could hurtinternational investment in the eurozone. A default could bankrupt Greek banks, which together arereckoned to hold about a quarter of the Greek sovereign debt. The fear is of contagion - the weaker eurozone countrieswould find it more expensive to borrow in commercialmarkets. The Irish Republic and Portugal might need a furtherEU-IMF bail-out. 31. Option II- EU Support & AusterityMeasures Greece to survive on drip-support from Eurozone . Meanwhile, toshore up finances by continuing with austerity measures. Austerity Measures: Taxes increased by 2.32bn, with additional taxes of 3.38bn in2012. Public sector wage bill to be cut steadily to shrink it by more than2bn by 2015. Measures include public sector wage cut of 15%, capon wages and bonuses. Defence spending to be cut by 200mn in 2012, and by 333mneach year from 2013 to 2015. Health spending to be cut by 310mn in 2011 and a further 1.81bnin 2012-2015. Social security to be cut by 1.09bn in 2011, 1.28bn in 2012 and1.03bn in 2013. 50bn euros to be raised from privatisations by 2015. 32. Option III- Orderly default Holders of Greek government bonds would have to accept lessthan they were worth, "take a haircut". According to analysts, the size of that haircut could beanything between 20% and 50%. If the settlement were negotiated in an orderly fashion, itcould form part of an acceptable solution - although it wouldmake investors reluctant to buy more Greek bonds in thefuture. Another problem for Greece is that the ratings agencies wouldprobably treat a debt restructuring as a default anyway. It would also raise interest rates for bonds issued by othertroubled eurozone "periphery" economies - especially theIrish Republic and Portugal - and depress the value of theeuro. 33. Option IV: Exit from Eurozone Being in the eurozone, Greece is unable to restore itseconomic competitiveness by devaluing its currency. Greece could exit the Euro and return to the drachma at a newexchange rate: one euro would equal one drachma. Such a measure would boost exports, tourism.However, would negatively impact imports. However, it would increase the size of Greeces debt mountainand Greece will experience hyperinflation. It may cause a runon the banks. Speculation will be fueled regarding other similar orderly exitsof other countries (Ireland, Portugal and others). There is no legal procedure for leaving the eurozone and someeconomists said treaty changes would have to take placebefore an exit could happen. 34. Thank You 35. Coming soon to a country nearyou: Irish Debt Crisis Portuguese Debt Crisis Italian Debt Crisis? Spanish Debt Crisis?