Eurozone Debt Crisis

From the point of view of Greece

Group 10
Vasvee Kishore-2017123
Vishnu Naik-2017124
Wahid Khan-2017125
Zishan Shaikh-2017126
Devanshi Thakkar-2017255
Ajay Satish-2016129
 OBJECTIVE

To understand the effect

of austerity measures on
Greek economy.

Generate a Understand the

regression model
with respect to the
austerity measures
and other depending
variables of the
economy.
change in the
economic condition
of Greece with
respect to time and
related macro
economical factors.
 OUTLINE

• Timeline for Greek crisis

• First Bailout – 2010-2012
• Austerity packages in 1st Bailout
• Second Bailout – 2012-2015
• Austerity packages in 2nd Bailout
• Graphs
• Third Bailout – 2015-2018
• Austerity Packages in 3rd Bailout
• Current situation in Greece
• Regression Analysis
• Solutions
 TIMELINE

1999 2009 2011

EURO IS INTRODUCED GREECE’S ACCOUNTING CRISIS DEEPENS
The common currency UNRAVELS A permanent rescue fund
known as the euro is Greece’s budget deficit is planned as European
introduced with 11 is far higher than the leaders look for
founding countries. country held on. resolution.

Timeline
2008 2010 2012
FINANCIAL CRISIS HITS THE CRISIS SPREADS CONTAINING THE CRISIS
US, EUROPE Austerity measures are Countries and banks
The collapse of Lehman adopted; First bail out struggle to get balance
Brothers kicks global for Greece. sheets under control.
crisis into high gear. Second bailout
introduced.
 First Bailout for Greece- 2010 to 2012
• On 2 May 2010, IMF and Euro Group agreed to provide Greece with €110
billion which was to be released over the period from May 2010 to June
2013. Out of 110 billion Germany’s contribution was €22 billion out of EU’s
€80 billion portion. [1]
• This amount was subsequently reduced by €2.7 billion, because Slovakia
decided not to participate in the Greek loan facility agreement while Ireland
and Portugal stepped down from the facility as they requested financial
assistance themselves. [1]

• The financial assistance agreed by EU countries was part of a joint package,

with the IMF committing additional €30 billion under a stand-by
arrangement (SBA). [1]

• In exchange, Prime Minister Papandreou commits to austerity measures,

including 30 billion euros in spending cuts and tax increases. [2]
 Austerity measures
• FIRST AUSTERITY PACKAGE (FEBRUARY 2010)
Limit the deficit. A freeze in the salaries of all government employees, a 10% cut
in bonuses, as well as cuts in overtime workers, public employees and work-
related travels. [1][2]
• SECOND AUSTERITY PACKAGE (MARCH 2010)
30% cuts in Christmas, Easter and leave of absence bonuses, a further 12% cut in
public bonuses, a 7% cut in the salaries of public and private employees, a rise of
VAT, rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported
cars of up to 10%–30%, among others. [2]
• THIRD AUSTERITY PACKAGE AND REFORMS (MAY 2010)
Sale of 4000 government-owned companies, a new rise of VAT and other cuts to
public employee benefits, pension Reform and tax increases.
• FOURTH AUSTERITY PACKAGE AND REFORMS (JUNE 2011)
Rise taxes for those with a yearly income of over €8,000, an extra tax for those
with a yearly income of over €12,000 among others. On 11 August 2011 the
government introduced more taxes, targeting people owning immovable property.
• FIFTH AUSTERITY PACKAGE (OCTOBER 2011)
The new bill hit mostly the civil servants and the retirees. The bill included among
other, major cuts of the wages of civil servants through to the definition of a single
payroll and. cuts for the pensions over 1000 euros. [2]
 Second Bailout for Greece- 2012 to 2015
• On 14 March 2012, euro area finance ministers approved financing of the
second economic adjustment programme for Greece. The euro area
countries and the IMF committed the unreleased amounts of the first
programme plus an additional €130 billion for the years 2012-14. [2]

• The second programme foresaw total financial assistance of €164.5 billion

until the end of 2014. The period was later extended to 30 June 2015. Of
this amount the euro area committed to contribute €144.7 billion and IMF
committed to contribute €19.8 billion. [1]

• Additionally, when launching the second programme it was agreed that

there should be Private Sector Involvement (PSI) to improve the
sustainability of Greece's debt. The high participation to Greece's debt
exchange offer in spring 2012 made a significant contribution to this goal.
• The government's announcement in November 2015 an offer to convert 20
Greek bonds worth €30 billion into five new debt issues with long
maturities. The initial bonds were issued after a 2012 restructuring
of Greek debt that forced private investors to take significant losses. [2]
 Austerity measures
• SIXTH AUSTERITY PACKAGE AND REFORMS (FEBRUARY 2012)
Greece was granted by the EU a €100 bn loan and 50% debt reduction through "private
sector involvement" (PSI) in exchange for future reductions in government spending . The
measures included among other 22% cut in minimum wage that goes to €586 from €750
per month. [1][2]
• SEVENTH AUSTERITY PACKAGE AND REFORMS (OCTOBER–NOVEMBER 2012)
A first part of the multi-bill was concerned the privatisations. The main part of the bill
includes labour market reforms and budgetary changes such as the total abolition of 13th
and 14th month salaries (Christmas, Easter and summer holiday bonuses) among them.
• EIGHTH AUSTERITY PACKAGE AND REFORMS (APRIL–JULY 2013)
The Eighth austerity package included two successive multi-bill with urgent measures so
that Greece to receive the new instalment of the bailout package. It included layoff of
another 15,000 public employees among them school guards and municipal policemen
• NINTH AUSTERITY PACKAGE AND REFORMS (MAY 2014)
Provisions about Greek economic policy during the four next years, under the title
Medium-term Fiscal Strategy plan 2015-2018. The bill provided freeze of wages and
pensions over a period of the next four years, until 2018. [2]
• TENTH AUSTERITY PACKAGE AND REFORMS (JULY 2015)
Transfer of many products in the high rate VAT (23%) and rise of corporation tax from
26% to 29% for small companies among others.
 Revenue and Expenditure for Greece, 1980-2014

Data Source : Eurostat (2014)

 SPENDING & DEBT VS YEARS
Spending & Debt vs Years
200

180

160

140

120

100

80

60

40

20

0
2004
1995
1996
1997
1998
1999
2000
2001
2002
2003

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
General Govt Spending Debt

Data Source : OECD (2016)

 Unemployment Rates of the Population Ages 25-64
Unemployment rate

Data Source : Eurostat (2014)

Minimum wage Minimum Wage, Euro/Month
(Euro/month)

years
Data Source : Eurostat (2016)
 Third Bailout for Greece- 2015 to 2018
• The third bailout program is started in Aug 2015 & will continue till Aug
2018 with financial assistance of 86 billion euro is provided. [2]

• The doubts still remain over whether the country will be able to stand on
its own feet after the bailout.

• The rescue program undermined Greece’s growth, reducing government

spending and salaries by billions of dollars in a country already in deep
recession.

• Private companies closed or fired workers faster than forecast, driving

unemployment beyond what the International Monetary Fund expected. [5]

• Business and consumer spending fell further than anticipated, depriving

the country of tax receipts.

• Sales of state-owned property proceeded slower than expected, and

changes in economic policy also began to lag.
 Austerity measures
• ELEVENTH AUSTERITY PACKAGE (AUGUST 2015)
Provisions for transfer of many products to the high rate VAT (23%). The lower
13% rate covers fresh food, energy, water and hotel stays. 6% rate covers
medicines and press. Abolition of the VAT discount of 30% for the most tourism-
popular Greek islands, after 1 October 2015. [2]
• TWELFTH AUSTERITY PACKAGE (OCTOBER 2015)
The twelfth austerity package voted on October 2015 and includes the required
measures to unlock a portion of loans worth 2 billion euros and changes in the
retirement system like end to early retirement by 2022 and a retirement age
increase to 67. [5]
• THIRTEENTH AUSTERITY PACKAGE (MAY 2016)
The measures included pensions cuts, increase of VAT to 24% and others.
Application of Tourism tax affecting hotels from 2 stars and up and also tax on
TV subscriptions, landlines and internet broadband connections.
• FOURTEENTH AUSTERITY PACKAGE (MAY 2017)
Further pension cuts. Income tax exception lowered from €8,600 down to about
€5,700. Privatization of Greece's Public Power Corporation electricity utility,
railways, Athens' international airport and the Thessaloniki port. [2]
 CURRENT SITUATION

• Nearly a decade since Athens first asked for help from its euro zone partners
and the International Monetary Fund, the Greek economy is still struggling to
recover. Even after a steep restructuring, sovereign debt remains
unsustainable. [8]

• Although the worst is over in terms of fiscal adjustment, few believe Greece
will not be able to escape a fourth bailout even if Athens regains market
access when its current EU-IMF sponsored programme ends in August next
year.

• Greece's re-entry into the markets comes nearly a year before its bailout
programme from the IMF and Eurozone creditors is due to expire in August
2018.

• Greece’s return to the financial markets is merely "a harbinger of the next
terrible phase" of the national crisis, former Greek finance minister (January
to July 2015) Yanis Varoufakis has warned. He claims that the Greek state and
banks remain deeply insolvent. [8]
 Labor force Unemployment
Year Inflation
participation
Dummy
Rate Regression Model:
1995 8.935 60.115 0 10.00
1996 8.195 60.981 0 10.30
1997 5.536 60.838 0 10.30 Y=β0+β1x+β2Z+Є
1998 4.766 62.474 0 11.22
1999 2.637 62.935 0 12.10 Y= Dependent Variable
2000 3.151 63.837 0 11.35 X= Independent Variable
2001 3.374 63.299 0 10.79
2002 3.629 64.146 0 10.36
Z=Dummy Variable
2003 3.531 64.956 0 9.79 E= Residual Error
2004 2.899 66.181 0 10.59
2005 3.545 66.361 0 9.99
2006 3.196 66.667 0 9.01
Dependent Variable:
2007 2.895 66.538 0 8.40 • Unemployment Rate
2008 4.153 66.659 0 7.76 Independent variable:
2009 1.210 67.427 0 9.62
2010 4.713 67.837 1 12.72
• Inflation
2011 3.330 67.257 1 17.87 • Labor rate participation
2012 1.502 67.470 1 24.44 Dummy Variable: Austerity measures
2013 -0.922 67.473 1 27.47
• Z=0 for no austerity measures
2014 -1.311 67.427 1 26.49
2015 -1.736 67.809 1 24.90
(before 2010)
2016 -0.826 68.217 1 23.54 • Z=1 for austerity measures (from
2010 and onwards)
Y = 𝟗𝟓. 𝟐𝟑𝟓 + (−𝟏. 𝟒𝟒𝟐) 𝑰𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏 +
(−𝟏. 𝟐𝟑𝟑)𝑳𝒂𝒃𝒐𝒓 𝒇𝒐𝒓𝒄𝒆 𝒑𝒂𝒓𝒕𝒊𝒄𝒊𝒑𝒂𝒕𝒊𝒐𝒏 + 𝟏𝟏. 𝟔𝟒𝟔(𝑫𝒖𝒎𝒎𝒚) + Є

Regression Statistics
Multiple R 0.970
R Square 0.940
Adjusted R Square 0.930
Standard Error 1.747
Observations 22.000

df SS MS F Significance F
Regression 3.000 862.987 287.662 94.237 3.382E-11
Residual 18.000 54.946 3.053
Total 21.000 917.933

Standard
Coefficients Standard Error t Stat P-value Deviation VIF
Intercept 95.235 16.388 5.811 1.663E-05
Inflation -1.442 0.225 -6.413 4.891E-06 2.707 2.549
Labor force participation -1.233 0.246 -5.015 8.997E-05 2.557 2.720
Dummy 11.646 1.067 10.913 2.291E-09 0.477 1.781
 SOLUTIONS

• Make economic growth more inclusive by urgently adopting

policies to reduce poverty and inequality and boost employment in
the short run. [3]

• Adopt key structural reforms to boost growth and enhance

administrative capacity to improve overall reform implementation.

• Broaden the tax base and strengthen tax administration with more
autonomy. [3]

• Do an expenditure review to rebalance social spending.

 REFERENCES
 [1]European Commission, Economic and fiscal policy coordination, EU financial assistance,
Financial assistance to Greece. Online available at https://ec.europa.eu/info/business-
economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-
countries-have-received-assistance/financial-assistance-greece_en [Retrieved on 5
December 2017]
 [2] OECD Economic Surveys: Greece 2016, OECD Publishing, March 2016. Online available at
http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-
surveys-greece-2016_eco_surveys-grc-2016-en#page1 [Retrieved on 4 December 2017]
 [3] Greece at a Glance Policies for a Sustainable Recovery, OECD 2009, Online available at
https://www.oecd.org/greece/44785912.pdf [Retrieved on 4 December 2017]
 [4] CHRISTIDES Giorgos, "Wealthy Greeks Still Don't Pay Taxes". Spiegel Online. 01 November
2012. online available at http://www.spiegel.de/international/europe/wealthy-greeks-still-
dodging-taxes-despite-crisis-a-864703.html [retrieved on 2 December 2017]
 [5] OECD (2017), Unemployment rate (indicator). Online available at
https://data.oecd.org/unemp/unemployment-rate.htm/ [Retrieved on 5 December 2017]
 [6] OECD (2017), Inflation (CPI) (indicator). Online available at
https://data.oecd.org/price/inflation-cpi.htm [Retrieved on 5 December 2017]
 [7] OECD (2017), Labour force participation rate (indicator). Online available at
https://data.oecd.org/emp/labour-force-participation-rate.htm [Retrieved on 5 December
2017]
 REFERENCES
 [8 ] GIUGLIANO Ferdinando, Europe Needs a Way to Prevent the Next Greek-Style Debt
Crisis, Bloomberg View, 29th November 2017. Online available at
https://www.bloomberg.com/view/articles/2017-11-29/europe-needs-a-way-to-prevent-
the-next-greek-style-debt-crisis [Retrieved on 5 December 2017]
 LITERATURE REVIEW
 DE SANTIS Roberto A. “The Euro Area Sovereign Debt Crisis,” European Central Bank
Working Paper No. 1419, February 2012. Online available at
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1419.pdf [Retrieved on 5 December
2017]
 European Commission, Report on Greek government deficit and debt statistics, 08 January
2010. Online available at
http://ec.europa.eu/eurostat/documents/4187653/6404656/COM_2010_report_greek/c85
23cfa-d3c1-4954-8ea1-64bb11e59b3a [Retrieved on 5 December 2017]

 Eurostat. 2004. “Report on the Revision of the Greek Government Deficit and Debt Figures”
22 November 2004. Online available at
http://ec.europa.eu/eurostat/documents/4187653/5765001/GREECE-EN.PDF/2da4e4f6-
f9f2-4848-b1a9-cb229fcabae3?version=1.0 [Retrieved on 5 December 2017]
 Hellenic Republic Ministry of Economy and Finance. 2006. “Stability and Convergence
Programme, Greece 2006–2007” December 2006. Online available at
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2006-
07/01_programme/2006-12-18_el_sp_en.pdf [Retrieved on 5 December 2017]