GREEK DEBT CRISIS

Unfolding of the crisis

 May 2010
 Greek govt’s budget deficit estimated to be more than 13.6% ,
one of the highest in the world relative to GDP. Government
debt expected to exceed 120% of GDP, in 2010.
 The news sends shockwaves across the investor community.
  May 2, 2010:
 Euro zone and International Monetary fund agree on a £110
billion rescue package for Greece, conditional on
implementation of harsh Greek austerity measures.

 Proposed spending cuts of 11% of GDP in 2010, 4.3% in

2011, 2% in 2012 and 2013.

 According to Daniel Gros, eminent economist on Eurozone

issues, 1% of GDP decline in Greek govt’ spending lowers
demand by 2.5%, hence proposed high spending cuts, would
lead to recession.
Loss of investor confidence, in Greece as well as other EURO
zone economies, with high budget deficits, as they appear
risky to lenders like:
 IRELAND
 SPAIN
 PORTUGAL

Loss of confidence due to:

i. widening of bond yield spreads
ii. credit default swaps
Difficult to implement spending cuts and raise taxes due to:
a) Civil unrest
b) Hostility in northern European policy circles.

Bailout package implies loss of credibility for GREECE, and

may cause Euro to fall against major currencies
 CAUSES

 POLITICAL

 ECONOMIC
 POLITICAL

 Post restoration of democracy in 1974, and removal of right

leaning military junta, Govt in an effort to bring
disenfranchised left leaning population into the economic
mainstream, began running large deficits to finance public
sector jobs, pensions, and other social benefits.
 ECONOMIC CAUSES
 Initially, currency devaluation helped finance borrowings.

 With the introduction of EURO, lower interest rates, allowed

Greece to borrow.

 The Global financial crisis which began in 2008, affected 2 of

Greece's largest industries:
A) TOURISM
B) SHIPPING

 Consequently, revenues in 2009 fell by 15%.

 MISREPORTING
 To comply with Monetary Union guidelines,
GOVERNMENT OF GREECE, consistently, and
deliberately misreported the country’s official
economic statistics, hiding actual level of borrowing.

In 2009, govt’ raised deficit estimates, alarmingly, from

6% to 12.7%.

In 2001, Greek govt’ paid hefty fees to Goldman Sachs

for arranging transactions that hid borrowings.
 EFFECTS ON INDIAN AND OTHER
ECONOMIES
 Greek debt market is reliant on foreign investors to the extent
of 70%, hence posing the risk of a sovereign risk contagion,
especially to banking system, including that of Italy, and UK.

 80% of budget savings of Greece go to Germany, France and

other foreign debt holders (banks)

 April 2010, Greek debt rating downgraded to ‘junk’ status, by

S&P.
 Bond yields increase in absolute and relative terms to German
government bonds.

 Downgrading of rating of Spain, Ireland, and Portugal.

 Higher yields on government debt would cause concern of

potential bank runs in many European nations.
 EFFECTS ON INDIAN ECONOMY
According to experts, analysts, including Montek Singh
Ahluwalia,

SHORT TERM IMPACT:

Mainly sentimental, causing domestic financial markets to be
volatile, in the near to medium term, owing to concerns
regarding:
the viability of £110 billion bailout package
Implementation of Greek austerity measures.
 Long term

No significant long term effects, since Indian economy :

A) Reliant on domestic factors for growth.

B) Possesses comfortable foreign exchange reserves.

 SOURCES

www.wikipedia.com
www.investopedia.com
www.timesonline.co.uk
www.moneycontrol.com
www.economictimes.com
www.news.bbc.co.k
www.newyorktimes.com