GREECE DEBT CRISIS

Introduction
Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. The debt levels and deficits that exceeded limits set by the Euro-zone were revealed & exposed. In the first quarter of 2010, the national debt of Greece was put at 300 billion ($413.6 billion), which is bigger than the country's economy. The country's deficit (its expenditure in comparison to its revenue) is 12.7%.

GREECE
Greece is a member of the European Union, the eurozone, the OECD, the World Trade Organization and the Black Sea Economic Cooperation Organization. The public sector accounts for about 40 percent of GDP. The service sector contributes 78.5 percent of total GDP, industry 17.6 percent, and agriculture 4 percent. Greece is the 31st most globalized country in the world and is classified as a highincome economy.

President: Karolos Papoulias (2005) Prime Minister: George Papandreou (2009) Population (2009 est.): 10,737,428 (growth rate: 0.1%); birth rate: 9.4/1000; Monetary unit: Euro

IMPACT OF EURO INTRODUCTION

Germany had a much stronger currency as compared to Greece, but the introduction of Euro abolished this exchange rate differential. The introduction of the Euro made it much cheaper for the Greek government to borrow. Greece overnight was taken from having a poor credit rating to having a credit rating equal with that of Northern European economies. Greek consumers and the Greek government went on a credit binge of epic proportions German exports to Greece alone increased by 130% in ten years.

TAX EVASION IN GREECE

According to research by the London School of Economics, tax evasion in Greece in the period 2004-5 resulted in the government taking 26.1% less in tax than it was actually due to collect.

The Greek government was responsible for

meeting any shortfall in the budgets of stateowned enterprises. Greece was borrowing increasing amounts of money simply to fill this gap.

GREEK BONDS
On 27 April 2010, the Greek debt rating was decreased to BB+ (a 'junk' status) by Standard & Poor amid fears of default by the Greek government. The yield of the Greek two-year bond reached 15.3% in the secondary market. Standard & Poor's estimated that, in the event of default, investors would lose 3050% of their money. Thus, the government had to pay greater risk premium to borrow money, and hence has entered a vicious cycle of more defaults-higher interest rate-more defaults-higher interest rates

PUBLIC SECTOR ISSUES

Greek public sector has always been used as a system of political patronage. Thus, Workers feel they shouldnt pay the price for governments mistakes. Tax hikes, freezing pension and salary cuts are some austerity measures that are necessary to reduce PSU spending, but will always evoke opposition and unrest among PSU employees. Thus, the Greek government is borrowing more in order to maintain these units.

Public sector issues (cont.)

Greek unions have called for a nationwide strike and there is an overall national disruption of services. PSU employees are not paid adequately. Out of 10 employees, 3 are overworked and underpaid and 7 under worked and overpaid. Greek workers make only half of what other EU country workers make but have similar costs and expenses.

IMPACT OF CRISIS

IMPACT ON EURO
Hard to raise extra tax as high rates of tax evasion. Cost cuts are facing too much opposition. Will most probably have to rely on other EU members help Default would strongly affect the EURO Worries of spill over.

IMPACT ON EURO (cont.)

EURO zone credit ratings could plummet. Weak EURO a problem for several European nations. Spill over problems as other EU nations hold much of Greeces debt. High rates of inflation could be the consequence of bailout action, further depreciating the EURO Any bailout effort would probably result in the ECB to keep rates low for a while (high interest rates are a historical strength of the Euro). As ECB targets inflation not output implementation could be tricky.

IMPACT ON THE WORLD

IMPACT ON INDIVIDUALS
Take-home pay is likely to fall as it is eroded by rising taxes and everyone will have to work longer before they retire - by which time they are likely to find that their pensions have shrunk.

EU/IMF BAILOUT EFFECTIVENESS

A one trillion dollar bailout has been agreed upon. It is a very positive step. EU and IMF are imposing policies on defaulting EU countries which but these end up making the economies worse. It is estimated that Greece will have debt as 149% of GDP in 2013 as compared to the present 115% if it follows these austerity measures.

Austerity measures adopted

Tax hikes. Freezing salaries in PSU. Freezing pension. Late retirements in public sector companies.

Handling Opposition to Austerity

Government must try and convince people that this is a lesser evil. Privatization and liberalization. Unified fiscal policy and strong fiscal coordination and bailout mechanism should be followed by EU. Europe needs strong political integration to handle such unrests and come out of the crisis.

SUMMARY
Greeces debt crisis is reaching a critical period as huge debt repayments are due in the coming weeks. For Greece, this debt crisis is likely to usher in a period of prolonged economic stagnation as government spending is cut dramatically amid a very weak economic climate in Greece and across Europe. For the European Union, the Greek crisis has highlighted the fragility of the euro as a common currency and has foreshadowed potentially larger debt crises in other European Union member states.

RESOLUTION AND CONCLUSION

Bailout plan European governments and the International Monetary Fund (IMF) have stunned global stock markets with a 750bn-euro ($975bn; 650bn) package of standby funds designed to see off financial meltdown. The 27 countries of the European Union (EU) will contribute 500bn Euros towards the financial safety net. They have been joined by the International Monetary Fund (IMF), which is providing other 250bn Euros. The vast bulk of Europe's contribution comes from the 16-nation Euro-zone bloc, which is promising 440bn in loan guarantees. The European Commission is providing 60bn Euros immediately.

Germany and the Euro rescue plan

Germany's parliament has approved the country's contribution to a 750bn euro ($938bn, 651bn) rescue deal for the Euro-zone. The German contribution is key to the plan, and would amount to up to 148bn Euros. Chancellor Angela Merkel warned that the Euro would be "in danger" without strong action.