ECONOMIC CRISIS IN GREECE

DISCUSS THE ECONOMIC CRISIS IN GREECE. EXPLAIN WHY AND HOW THE CRISIS HAPPENED. CITE A REAL LIFE EXAMPLE, THE IMPACT OF THE ECONOMIC CRISIS ON ONE INTERNATIONAL BANK IN GREECE. IN YOU OWN OPINION; EXPLAIN HOW THIS ECONOMIC CRISIS MIGHT BE RESOLVED. 1.0 INTRODUCTION According to online business dictionary economic crisis can be defined as a situation in which the economy of a country experiences a sudden downturn brought on by financial crisis. An economy which facing an economic crisis will most likely experience a falling GDP, a drying up of liquidity and rising or falling prices to inflation or deflation. An economic crisis can take the form of a recession or a depression also called as real economic crisis.. As example a country which was facing economic crisis normally when the country if facing a falling GDP, a drying up of liquidity and rising or falling prices due to inflation or deflation. An economic crisis also can take the form of a recession or a depression. Greece is one of the developed countries that became as a member of European Union since 1981 and one of the highest ranking in terms of its tourism and social cohesion. In addition, Greece also is a member of the euro zone, the OECD, the World Trade Organization and the Black Sea Economic Cooperation Organization. The economy of Greece had a rapid development during the World War II and until the 1980 and then again the two-year period 1995 and 1996. Today, Greece is a developed country Greece with high standard of living ranked 22nd on the Economists Quality of Life Index. Between 1832 and 2002 the currency of Greece was Drachma. Upon signing the Maastricht Treaty, Greece vowed to join the euro zone which occurred on 1 January 2002. Then in 2002, Greece adopt euro as its common currency and the exchange rate was 340.75 to 1. According to World Bank data for the year 2010, shows that the economy of Greece is the 32nd largest in the world by nominal gross domestic product (GDP) and the 37th largest of purchasing power parity (PPP). Furthermore, per capita is ranked at 33 rd by nominal GDP and 31st at PPP according to 2010 data. Nevertheless, by the end of 2009, Greece had to face significant problems of the severe economic crisis like the high rate of unemployment, tax invasion and corruption of the political parties. As a result in the April 2010 the country received a large loan from the world Monetary Fund and the European Union. In switch over for this bailout, the government announced combined spending cuts and tax increases on top of the tough GB30503 INTERNATIONAL OFFSHORE BANKING Page 1

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austerity measures already taken. Furthermore, Greece is presently in debt that threatens the euro zone, yet the country revealed an ambitious plan to fight tax evasion and raise revenues in the next couple of the years in an attempt to further cut its budget deficit and win back market confidence. With a more and more rising in unemployment rate about 12 percent, in order to stand up Greece needs to invest in exports, business creations and agriculture. 2.0 HISTORY OF ECONOMIC CRISIS IN GREECE Economic crisis is a natural phase of the economic cycle that is passed from one stage of growth and recovery from recession and depression. The economic crisis is an isolated phenomenon but is a necessary element in the capitalist economic system. Thus economic crisis is somehow an inevitable consequence of the social system as well. In 2009-2010, financial crisis Greece is occur in the country and it is basically a unique matter. The financial crises in Greece occur and have been increasing since 2006 until 2007 and the probability of a banking crisis was 15% at the end of 2009. Greece experienced major recession in its economy during 2009 and faced the highest budget deficit which stood at amount of 15.4% and government debt to GDP ratios. Greece is badly exposed when the global economic downturn struck because of the unrestrained spending, cheap lending and failure to implement financial reforms. In October, 2009, the new government discloses the 2009 budget deficit which will be 12.7% more than double the previously figure. Next in November 2009, the new government pledges in its 2010 draft budget to save Greece from bankruptcy by cutting the deficit while keeping electoral promises to help the poor amid the economic crisis. The final budget draft shows Greece aims to cut its budget deficit to 9.1% of GDP in 2010 to assure EU partners and markets as well. It also sees public debt rising to 121 % of GDP in 2010 from 113.4% in 2009. EU forecasts on Greece for 2010 are worse, with the deficit seen at 12.2 % of GDP and national debt rising to 124.9% of GDP, the highest ratio in the EU during that period of time. On December 2009, the government revealed the higher deficit which it cut Greek debt with a negative outlook. According to Prime Minister George, Papandreou the socialist of PASOK party, he determined to win back the countrys lost credibility. On December 14, Papandreou outlines policies to cut the countrys ballooning budget deficit and try to regain the trust of investors and EU partners. Papandreou announces a 10% cut in social security GB30503 INTERNATIONAL OFFSHORE BANKING Page 2

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spending in 2010.He also announces a drastic overhaul of the pension system in six months and a new tax system that will make the wealthier carry more of the burden. Thus in February 2010, Papandreou says the government will extend public sector wage freezes to those making below 2000 euros a month for 2010, excluding seniority pay hikes. Greece must refinance 54 billion Euros in debt in 2010, with a crunch in Q2 as 20 billion Euros becomes due. A 5-year bond issue in January was five times oversubscribed but the government had to pay a hefty premium. 3.0 FACTORS OF ECONOMIC CRISIS IN GREECE 3.1 DEBT CRISIS The debt crisis basically came about because the country has lost control of their finances since the global recession. On the other way, clearly to say that the borrowing and spending happen more that they could realistically afford. As a result, Greece has to bail them out to the tune of billions of Euros. Greece was the first country to accept a bailout in May 2010. When government debt spiral out of the control, which means government, could not pay the debts, a financial collapse might happen. Higher debt level create affluence through borrowing, real economic growth has virtually ground to a halt in developed countries and recent improvements in employment, income and wealth. 3.2 IMBALANCES OF INCOME As we know when Greece was hit by the financial crisis of 2008, it went into recession in 2009. Due to that, a lot of stark realities were exposed. The Greek government had been on a binge of unrestrained spending and excessive borrowing and with the sudden fall in income. In 2009 the countrys national debt or borrowing was bigger than the countrys economy. The crisis was caused by a gross imbalance in income and expenditure which temporarily managed by borrowings. Basically, in terms of expenditure, Greece also enjoyed a high standard of living which makes a result of government spending in areas of human development. A comparative measure of life expectancy, literacy, education and standards of living for countries worldwide, Greece consistently ranked in the list of very high human development countries (Human Development Index, 2001). Next when see into the income, Greece had an average economic growth of 7% and this was result of several measures including a drastic devaluation, attraction of foreign investment , significant development of the chemical industry, development of tourism and

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the services sector in general and a massive construction activity which connected with huge infrastructure projects and others as well. 3.3 THE FAILURE OF WELFARE STATE The crisis happens because of the fault of greedy speculators and corrupt politicians. The notion that the welfare state and a market economy are deeply incompatible affects Greece by the current financial crisis pension expenditure which was set to increase a bit more rapidly. The pension expenditure projected to rise as steeply as in Greece to 21.45 of GDP in 2040 and 24.1% in 2060 (EC 2009). The failure to reform Greek pensions can be formulated in terms of political economy, or even as a result of a failure of representation. Besides, as important stakeholders were under-represented such as the young, women, nonstandard workers, while others were not represented at all like proverbial future generations, the political system seemed incapable of producing a solution. In Greece, for instance billions were poured into programs that allowed public services workers to retire at age 62, younger than anywhere else on the continent. No wealth that will be created from those pension dollars or funded by borrowing. The assumption in Greece was that the public could service the cash demands on these debts through new public borrowing as well. The Greek crisis and the public protests and resistance to proposed government measures, are being presented on the world stage as further evidence of wild and crazy Greeks. 3.4 THE HUGE IMBALANCES BETWEEN TRADE AND CAPITAL FLOES AMONG NOTIONS The imbalances between trade and capital flows among notions in Greece makes them faced the difficulty as well. Capitalisms global crisis is a burden for the working classes of the world, but it is also an opportunity. When the global capitalist crisis hit in 2007, Greece like most other countries boosted in deficit finance. It had already been running high government deficits largely based on very rosy predictions of Greeces economic prospects which given to a low wages and rising productivity. Due to this, Greece has borrowed a lot although other countries who borrow more are not being treated like Greece. The explosion of speculation and excess risk taking by banks and other financial or non-financial corporations also create the problem in Greece and as they have to faced the economic problem. GB30503 INTERNATIONAL OFFSHORE BANKING Page 4

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3.5 THE FAILURE OF SUPERVISION AND REGULATION BY GOVERNMENTS INCREASINGLY DEPENDENT ON COOPERATION AND THE RICH The economies of Greece are too diverse from those of Northern Europe. Lack of discipline, accountability is the main problem through economic crisis in Greece. This problem will affect the abandonment of financial independence as well. For example, Greek resistance stimulate and inspire parallel movements in other countries whose people are likewise boiling because they bear the costs of a crisis that doesnt bring any recovery. 3.6 THE COUNTRYS STRUCTURAL PROBLEMS Greece facing the structural problems in term of excessive expenditures over the past 6 years while the government expenditures increase by 87%, revenues grew only by 31%. Next in management terms, in 2009, Greek government expenditure accounted for 50% of GDP. A continuous over-staffing and poor productivity in the public sector was encountered, while in terms of unregulated labour market, Greek industry is suffering from declining international competitiveness. Wages in Greece have increase at a 5% annual rate since the country adopted euro and while exports to its major trading partners during the same period which has grew only 3.8%. 4.0 REAL LIFE EXAMPLE Society assume debt crisis as short term problem that easily solved by authorities. However its totally different from world leader economics. They opinion debt crisis as a serious problem that will scaring the world and threatening global financial stability. According eHow, 2011 debt crisis define as deals with countries and their ability to repay borrowed funds. Therefore, it deals with national economies, international loans and national budgeting. The definitions of "debt crisis" have varied over time, with major institutions such as Standard and Poor's or the International Monetary Fund (IMF) offering their own views on the matter. The most basic definition that all agree on is that a debt crisis is when a national government cannot pay the debt it owes and seeks, as a result, some form of assistance. Greece went on a debt binge that came crashing to an end in late 2009, provoking an economic crisis that threatened both Europes recovery and the future of the euro. Since then, Greece has relied on a package of 110 billion, or $152.6 billion, agreed to by its richer European neighbours in May 2010. The price was a series of austerity measures meant to cut its bloated deficit and restore investor confidence. It cut the pay of its public GB30503 INTERNATIONAL OFFSHORE BANKING Page 5

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workers a quarter of the work force by 10 percent but continued to miss deficit targets as its economy sank deeper into recession, shrinking by an estimated 5.5 percent in 2011. At early century of 20th, Greece economic was strong and grow smoothly because of tourism and shipping industries. Contribution of both industries makes GDP of Greece in increased and stabile. However its not constrained once happened changes business cycle in Greece. As a result, Greece identify as debt countries. Several reason cause debt crisis take place in Greece. Adoption of Euros as national currency in 2001 recognize as one of the most important contribution factor. The Alliance between the European countries where monetary policy was managed by the European Central Bank (ECB) was viewed with high degree of confidence. ECB established on 1999 which responsibility for conducting monetary policy and Greece joined ECB on 2011 and since from that use Euro as national currency. Joint of Greece on ECB is a starting point of debt crisis on particular country. This allowed Greece to borrow at a rate more favourable than the countries outside European Union. Secondly, Greece borrowed many and heavily from abroad to control government budget and decline on current account deficit. This situation occurs because of high government spending, weak government revenue, high wage rate and low productivity and also decline on international competitiveness. For example, lower export rate, tax evasion and corruption contributed to debt crisis hit Greece. Since 1993, debt-to-GDP has remained above 100%, which is way above the 60% limit decided by the Stability and Growth Pact of European Union. On October 2009 Greece debt crisis become worst when the new socialist government, led by Prime Minister George Papandreou, revised the estimate of the government budget deficit for 2009. The government budget deficit assumes nearly doubling the existing estimate of 6.7% of GDP to 12.7% of GDP. This situation created the questioned the ability of Greece to repay the debt and control again the Greece with better economic level. There are several real life example occurs related to debt crisis in Greece. According to star online, Greece peoples strike with Greece government as step to against Greece Budget 2012 due to approved by parliament next week. This strike was held in front of parliament in Athens on 1 December 2011 with representing of 4 million strong workers with purpose to protest new austerity measures that are expected to heap more misery on Greeks already reeling from waves of salary cuts, layoffs and tax hikes. Tagaris, T.F.(2011) GB30503 INTERNATIONAL OFFSHORE BANKING Page 6

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reporters of star online state that European leaders approved an 8 billion euro ($10.8 billion) tranche of aid this week to prevent Greece, now led by technocrat Prime Minister Lucas Papandreou, from going bankrupt. Christos Kiosis, a union chief at Athens water utility EYDAP assume that this budget is an austerity budget and starvation budget which must not be passed. The authors report that Greece government want to tight 2012 Budget due to debt crisis that recently occurs in Greece. Beside that, the reporter of iHaveNet.com state that bank will be head to coalition government. Authors also mention that after four days of political wrangling that threatened to jeopardize international rescue loans and the country's future in the Euro zone and the EU, rival Greek leaders have agreed that former European Central Bank (ECB) Vice-President Lucas Papandreou will head a coalition government and deal with keeping the aid coming, and the harsh austerity measures that come with them. The combine of Europe Union, International Monetary Fund and Europe Central Bank Troika will help Greece by lent Greece 109 billion Euros in a first bailout, and is now sitting on a second deal of 130 billion Euros. Author define the rise in prices when Greece adopted the euro as a currency and easy credit were major causes of the current debt crisis, along with generations of packing political hires onto the public payroll, corruption, tax evasion, an uncompetitive economy and lack of foreign investment. Reporter state the announcement caused a bump in the Athens stock exchange and helped Greece's struggling banks for short term period

5.0 IMPACTS OF DEBT CRISIS IN ONE INTERNATIONAL BANK IN GREEC E As an economics knowledgeable human, can realize that when a country hit by economic crisis the country will faced many problem. There are economic level not stabile, unemployment will high, social problem will occurs and many. The debt crises also make Greece country to face those particular problems. Moreover debt crisis not only effect the

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country but it also will affect international bank that around in Greece. There are several international banks in Greece such as Citibank, HSBC, Commercial bank, and more. Citibank was first established in Greece in 1964 as the First National City Bank of New York. According to Rahman, S. (2011 November 28) assume that Citibank going to celebrate its 200th anniversary on 2012. The authors also state that Citibank is an experienced bank in project financing. Citibank can play a role with its advisory services, expertise and financing, in the case of these large projects. Citigroup is the third largest bank holding company in the United States by total assets, after Bank of America and JP Morgan Chase. Citibank as an international bank in Greece affect by debt crisis period. There are Citibank have shutdowns their network in Greece. It closed 31 branches out of 71 branches in its network in the country. Theophanides, I (2010, November 21) report on Greek Reporter the decision was part of a general strategy for the restructuring of its presence in Greece amid a current economic crisis. By closing their branches in Greece, bank can focus on operations with comparative advantages such as asset management and credit cards where Citibank has a leading share in the market. Citibank assume closing of branches as strategy to control the debt crisis but this action give impact to Greece. Closing their network make involvement of international bank in Greece becomes less. Beside that the high perception of Citibank among Greece peoples will contaminated. This situation occurs due to closed branches in Greece. This will constitute to high unemployment rate in Greece. The closing of branches make the bankers which identify as Greece citizen those work in Citibank lose their career. It does prove by Greece unemployment statistics indicate that closing of 31 branches of Citibank cause employees lost their professional in country. Since 1964 Citibank have employee more than 1,700 employees (Citi, 2011). However the amount was decreased once Greece hit by debt crisis. Directly the unemployment rate will rise from year to year with debt crisis. The enlargement in unemployment rate will cause appear social problems in Greece such as suicide, robber, terrorist and more. By this conclude that, the rising of unemployment rate and social problems due to shutdown Citibank network in Greece make a low perception among Greece people as well among worldwide economic leaders. As mention earlier, Citibank is most famous and important international bank in Greece. The involvement of Citibank in Greece on banking sectors cause to give hand for GB30503 INTERNATIONAL OFFSHORE BANKING Page 8

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contribute control debt crisis in country. According The Economic Times, Citibank net funded exposure to the sovereign entities of Greece, Ireland, Italy, Portugal, and Spain based on Citibank internal risk management measure. Citibank which fought the financial meltdown with American taxpayers money, has revealed that exposure to these five countries include Greece. In December 2010, Citibank exposure to Greece more generally including Greek government and the Greek private sector was $7.3 billion. 6.0 RECOMMENDATION TO RESOLVED ECONOMIC CRISIS. In my opinion the economic crisis in Greece can be resolved by reduce its structural imbalances and improve competitiveness with reforms that raise productivity. The large difference in per capita income with the most advanced economies is mostly due to a productivity gap, although participation rates of the young and women in the labour force are also low. Low productivity is predisposed by inflexible product and labour market regulations. Thus enhancing labour market flexibility would also can help to prevent the expected rise in unemployment, which is already high among the young and women, from being structural. In order to reforms in labour and product markets we have to face some challenges. One of this challenge is we need to consider about minimum wages setting mostly to youth and female unemployment. Furthermore, the government also can encourage decentralised wage bargaining by avoiding administrative extensions of collective agreements to firms not directly represented in the negotiation. Major productivity gains can be repeated from further moves towards a pro-competition regulatory stance. Moreover specific areas where there is most scope for the improvement such as by reducing the number of procedures for business registration and meeting legal obligations, easing regulation of professional services and making the regulatory framework in retailing more conducive to competition. On the other hand establishing effective competition in network industries can be achieved by further progress towards privatising public enterprises and introducing more modern regulation in the energy, communications and transport sectors. Strong and effective regulators are critical for promoting competition in all newly liberalised sectors. The economic crisis also can be resolved by stabilize the financial system. As we all know in the meltdown of the financial system can affect the modern economy. So that by recapitalize the financial sector by transfers of wealth from the taxpayers to banks and brokers. This is most likely one of the key element of the Paulson Plan, done by the GB30503 INTERNATIONAL OFFSHORE BANKING Page 9

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government buying assets at above market prices. Furthermore by close defunct or weakening financial institutions under new bankruptcy legislation, under which the courts could act extraordinary speed and authority. This must engage swap managements. Where, the new managements could be selected by a bi-partisan committee of business leaders that should have only a minority of members from the financial industry. Besides that, outright nationalization is also one of the ways to solve financial crisis. One of the examples is as done in the defunct Savings and Loans during the early 1990s and today with the GSEs and AIG. In this case large scale nationalizations might be required. If so, our political regimes survival might depend on how this is done. Where, this is not their acquisition, but also their operation and eventual privatization. One of the example that show the creation of an agency like depression era is Home Owners Loan Corporation as recommended by Nouriel Roubini can play a role in any of these policy choices. On the other hand, the economic crisis also can be determined by stabilize the economy. Whereby set up the job training and education programs now, rather than throw them together in haste when they are needed yesterday. In this case, there will be many unemployed, and this is an opportunity to upgrade their skills for the next cycle. Furthermore, many local governments will go bankrupt as so many vulnerable like NYC. So when work with the states now can prepare the necessary legal and financial apparatus to handle these. Hence, stabilize the economy through implement a massive monetary stimulus, such as taken by Japan after the 1989 crash. That means near-zero interest rates and rapid increase in the balance sheet of the Federal Reserve.

7.0 CONCLUSION. In a nutshell the economic crisis is one of the major effects to slowdown the economy expansion. Furthermore the economic crisis will lead to hard financial crisis. Where, in this case the instability of currency occurs and country might borrow money from other country in order to stabilize their economic. In this case country might face high debt. So from this entire situation finally country will enter to recession, where the unemployment rate and price of services and goods also increase. Hence, to avoid the economic crisis several recommendations are suggested such as reduce structural imbalances and improve competitiveness, stabilize financial system and stabilize the economy must be adopted. This GB30503 INTERNATIONAL OFFSHORE BANKING Page 10

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is because the economic crisis will affect the countries trade and the standard living of people also will reduce because of instability of currency. Furthermore when the unemployment rates increase finally it will lead to increase in the illegal activities such as drug supplied robbery and so on in order to gain some income to survive. Consequently, this economic crisis must resolve in the root because it will affect the countrys economic sectors and also will affect the countries prestige.

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8.0 REFERENCES Dabilis, A. (n.d.). Greece: Banker to Head Coalition Government . Retrieved December 2, 2011, from iHaveNet.com: http://www.ihavenet.com/World-Greece-Banker-to-HeadCoalition-Government-SET.html eHow. (2011). What Is the Meaning of Debt Crisis? Retrieved November 29, 2011, from eHow money: http://www.ehow.com/info_7832927_meaning-debt-crisis.html. Lyrintzis, C. (March,2011). Greek politics in the era of economic crisis-Reassessing Causes and Effects. The london school of economics and political science . Matsaganis, M. (2003). the welfare state and the crisis. the case of greece . Mises, l. v. (2006). the causes of the economic crisis. Park, C. A. (2009). Causes and Consequences of Global Imbalances. Asian Development

Review, vol.26, no.1 , pp.19-47.

Rahman, S. (2011, November 28). Let's not exaggerate the impacts. Tagaris, T. F. (2011, December 1). Greeks strike over government's "starvation" budget. Retrieved December 2, 2011, from thestar online: http://thestar.com.my/news/story.asp?file=/2011/12/1/worldupdates/2011-1201T153911Z_3_TRE7B00U5_RTROPTT_0_UK-GREECE-STRIKE&sec=Worldupdates Tiberg, A. l. (2010). Characteristicts of the 2009/2010 Financial crisis in Greece and the Probability of a bank Run. University of guthenburg school of bussiness, economics

and laws.
Theophanides, I. (2010, November 27). Greek Reporter. Citibank closes 31 Branches in

Greece .

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