National Law Institute University

Economics project on

GREEK SOVEREIGN DEBT CRISIS
Submitted By:Alok Mishra Roll No:B.A.LL.2011-`36’

TABLE OF CONTENTS

Page No.S. 1 4-5 Topic Introduction 2 6-7 Causes 3 8-9 The “Big” Loan 4 10-11 Long Term Solutions 5 12-13 A uneasy calm 6 14 Meaning for Other Countries 7 15 Bibliography .No.

Rajasekhar for allowing me to pick up such an interesting topic. .ACKNOWLEDGEMNTS I would like to thank my Economics teacher Mr. C. I would also like to thank my seniors as well my friends for providing valuable inputs during the course of this project.

Greece's main problem is that the huge debts must soon be refinanced. the 2010 Euro Crisis developed concerning some European nations. including European Union members Greece. The country's debt is already well over 100 percent of GDP and is still rising. Spain. more than four times the 3 percent limit allowed in the euro zone. fears of a sovereign debt crisis. This led to a crisis of confidence as well as the risk insurance on credit default swaps between these countries and other EU members.Introduction In early 2010. most importantly Germany. The rating agency Moody's calculates that the government will have to take on approximately €40 billion in new . where there is concern about the rising cost of financing government debt. with a bigger national debt than the country's economic output in a year. Concern across the about globe rising government deficits and debt levels together with a wave of downgrading of European Government debt created alarm in financial markets. The country's budget deficit in 2009 was almost 13 percent of GDP. Greece has borrowed its way into an unsustainable position. and Portugal. The debt crisis has been mostly centered on recent events in Greece. The financial crisis has driven up public debt in Europe's common currency zone to such heights that many economists fear the euro could collapse.

6 percent (2008) (Source: European union) According to eurozone rules total government debt should not exceed 60 percent of GDP.6 percent of GDP  Budget deficit: 12. Greece would have to pay heavy fines as per euro zone guidelines for violating the rules of euro zone. The key facts of Greece`s economy are as follows  Debt ratio: 112. A default would most likely have taken the form of a restructuring where Greece would pay creditors only a portion of what they were owed. The country's budget deficit in 2009 was almost 13 percent of GDP.7 percent of GDP (2009)  GDP growth: -1. just to service existing debt obligations and to finance new spending.debt in the first half of 2010.Thus.This would effectively remove Greece from the . more than four times the 3 percent limit allowed in the euro zone . should it no longer be able to find buyers for its bonds. Fears are growing that the state could soon go bankrupt. perhaps 50 or 25 percent. The government itself states that it will need to refinance around 10 percent of its public debt in 2010.1 percent (2009 estimate)  Share of euro zone's GDP: 2. There was a possibility that Greece would have been forced to default on some of its debt. That will be a difficult task for a country whose dire financial situation has been the subject of growing concern in recent weeks. mostly in April and May.

pensions. cheap lending and lack of financial constraints finally took their toll and Some of Greece's financial weaknesses which were hidden were exposed.Also Greece has a huge population of old people and to ensure social benefits for them the government ran into huge debts.euro. Initially currency devaluation helped finance the borrowing. As these debts were not registered there was lack of regulation on the part of the Greek government.. Successive Greek governments have. When the global recession took hold and tourism and trade revenues fell. Years of free spending. the country's fiscal freewheeling was exposed. as it would no longer have collateral with the European Central Bank. To ensure Greece`s entry into the euro zone.2% as foreign capital flooded the country. CAUSES The Greek economy was one of the fastest growing in the eurozone during the 2000s. run large deficits to finance public sector jobs. the Greek government borrowed money at very low interest rates. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. and other social benefits. Estimated tax evasion costs the Greek government over $20 billion per year. Two of the . among other things. from 2000 to 2007 it grew at an annual rate of 4.

cut Greek debt to BBB+ with a negative outlook. and both were badly affected by the downturn with revenues falling 15% in 2009. according to several bankers familiar with the deal.In May 2010. That deal which was hidden from public view because it was treated as a currency trade rather than a loan.Together both these industries accounted for approximately 19% of Greece`s GDP.7%.On 27 April 2010. In 2001. the first time in 10 years a ratings agency has put Greece below the A investment grade. On Dec 8 2009. To keep within the monetary union guidelines. the Greek government deficit was be one of the highest in the world relative to GDP.when the government revealed the higher deficit.country's largest industries are tourism and shipping. Fitch Ratings. In 2009 the government of George estimated Papandreou revised its deficit from to 5% to 12. helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. the Greek debt rating was decreased to the first levels of 'junk' status . just after Greece was admitted to Europe’s monetary union. which had cut Greece to A. Greece was seen as the worst case. Goldman sachs helped the government quietly borrow billions. Greece paid Goldman about $300 million in fees for arranging the 2001 transaction. the government of Greece has been found to have consistently and deliberately misreported the country's official economic statistics. Although similar irregularities and "massaging" of statistics to cope with monetary union guidelines have also been observed in cases of other EU countries.

expected to save €4. On 23 April 2010. the Greek government requested that the EU/IMF bailout package be activated. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. The “Big” Loan Without a bailout agreement. Greece represents only 2% of the eurozone`s economy. This would effectively remove Greece from the Euro.8 billion through a number of measures including public sector wage reductions. Ireland. Spain. Hence. and in some cases Italy. A default would most likely have taken the form of a restructuring where Greece would pay creditors only a portion of what they were owed. The IMF had said it was "prepared . there was a possibility that Greece would have been forced to default on some of its debt. The more severe danger is that a default by Greece will cause investors to lose faith in other European countries This concern is focused on Portugal. on 5 March 2010. The overall effect of Greece being forced off the euro would itself have been small for the other European economies. all of whom have high debt and deficit issues. the Greek parliament passed the Economy Protection Bill. as it would no longer have collateral with the European Central Bank.by Standard & Poor's amidst fears of default by the Greek government.

 General pension age has not changed.5%.  Equalization of men's and women's pension age limits. the other Eurozone countries.  Changes were planned to the laws governing lay-offs and overtime pay. A total of €110 billion has been agreed as rescue package for Greece to prevent a default and stop the worst crisis in the currency’s 11-year history from spreading through the rest of the bloc. and the International Monetary Fund.  Return of a special tax on high pensions. cigarettes. abolished for pensioners receiving over €2.000 a month.000 introduced to bi-annual bonus. 11% and 5.to move expeditiously on this request".  An 8% cut on public sector allowances and a 3% pay cut for DEKO (public sector utilities) employees. The 16-nation bloc will pay 80 billion Euros at a rate of around 5 percent and the International Monetary Fund contributes the rest. with more funds available later. or it would face a debt rollover of $11. Greece needed money before 19 May.  .  10% rise in luxury taxes and taxes on alcohol. but a mechanism has been introduced to scale them to life expectancy changes. and fuel. abolished entirely for those earning over €3.  Extraordinary taxes imposed on company profits. a loan agreement was reached between Greece. On 2 May 2010.500 a month.3bn.  Increases in VAT to 23%. The deal consisted of an immediate €45 billion in loans to be provided in 2010. The government of Greece agreed to impose a fourth and final round of austerity measures.  Limit of €800 per month to 13th and 14th month pension installments.  A financial stability fund has been created. These include: Public sector limit of €1.

the European Council. The European Parliament. 2: The second is a single authority responsible for tax policy oversight and government spending coordination of EU member countries.Average retirement age for public sector workers has increased from 61 to 65. 1: The first proposal is the creation of the European Financial Stability Facility. And following criticism that Europe did too little. European Union leaders have made two major proposals for ensuring fiscal stability in the long term.000 to 2. and especially the European Commission. can all provide some support for the treasury while it is still being built. too late to defend the euro. The stability facility is financially backed by the EU and the IMF. they pledged to react quicker and more efficiently in future. temporarily called the European Treasury. However. The EFSF is set up by the 16 countries whose currency is the euro to provide a funding backstop should a euro area Member State finds itself in financial difficulties.  Public-owned companies to be reduced from 6.000  Long-term solutions EU finance ministers have agreed for the need to be tougher on member states' budgets in the wake of the Greek debt crisis. strong European Commission oversight in the fields of .

" which involves "buying" social peace through public sector jobs. which could jeopardize the establishment of a European Treasury Some senior German policy makers went as far as to say that emergency bailouts should bring harsh penalties to EU aid recipients such as Greece. pensions.taxation and budgetary policy and the enforcement mechanisms that go with it have been described as infringements on the sovereignty of euro zone member state and are opposed by key EU nations such as France and Italy. The Economist has suggested that ultimately the Greek "social contract. will have to be changed to one predicated more on price stability and government restraint if the euro is to survive. and other social benefits. As Greece can no longer devalue its way out of economic difficulties it will have to more tightly control spending .

saying their sacrifices were essential to national survival.65% in its first venture into the markets since a €110 billion rescue package from the European Union and the IMF was secured in May.A Uneasy Calm A whole raft of measures. when the Greek government acknowledged the need to tackle Greece's dire public finances. However The Prime Minister of Greece George Papandreou called on Greeks to brace for more painful spending cuts to deal with an unprecedented financial crisis.6 billion ($2 billion) at a yield of 4.with the goal of cutting Greece's public deficit to less than 3% of GDP by 2014. this week announced that the country’s first-half budget deficit had been cut by 46% .6%. the beleaguered country managed to raise €1. the finance minister. George Papaconstantinou. which include huge cuts to Greece's public sector.These measure are already showing moderate results. Greece has also been getting pats on the back from its EU and IMF lenders for its progress on fiscal consolidation. These Austerity measures planned by the Greek government have been met with violent protests in Athens.The plans hope to achieve budget cuts of 30bn euros over three years . have been announced since December last year. It currently stands at 13.

the euro zone will be forced to further integrate their economies.compared with last year. will radically change the country’s lavish socialsecurity system. Could the Greek crisis be the beginning of the end for the common currency. Trade Unions. beating targets."apart from these problems a larger question is being asked-about the demise of the euro. if properly implemented. coordinate budgets and tax structures as well as cede budgetary and oversight powers to a central body tasked with preventing further collective calamities . have said abolishing the holiday bonus of public servants would be taken as "an act of war. However the two biggest economies of the eurozone frace and germany have pledged to do all that is possible to to see Greece through its deficit crisis and defend the common currency. On July 8th the Greek parliament passed a pension-reform bill which. which have already held a series of strikes. Credit-default-swap spreads on Greek debt have fallen to a one-month low.However such harsh measure have let to serious repercussions. The result is member governments are left very few ways to deal with the current attack on Greek debt and the severe pressure that it's putting on the euro. just eight years after its first notes and coins were issued? The monetary union was never followed up by political union to coordinate budget and taxation practices and create euro-zone institutions and capacities to help member economies adapt to changes and turmoil.

the impact is likely to be direct. but could still be affected. a possibility is that European . there may not be any impact in the long term. However as far as India is concerned it dosent have much to fear. while one of the deputy governors at Reserve Bank of India Subir Gokarn said. compared with how much money their economy generates. The UK does not use the Euro currency. If the debt crisis spreads to other nations in Europe and their banking systems. that depends on Greece getting control of the situation and proving it can make the cuts needed. Finance secretary Ashok Chawla recently stated that he expected the crisis to have a minimal impact on India. If they were to go bankrupt. However. it would mean more problems for Britain's banks. Portugal and Spain are reckoned to be two that could face problems next.Countries that have a big budget deficit. and we could start to appear unattractive to lenders. However In the short run.Meaning for other countries The crisis in Greece is being felt in financial markets around the world. The EU hopes that its bailout will reassure the money markets that their cash is safe. Its budget deficit is also large.

BIBLIOGRAPHY 1: Economic Times 2: Newsweek 3:www. Investors may shift their attention to emerging markets such as India and China.com 4:www. This will negatively impact the Indian stock market and lead to lower reserves as well as depreciation of the Indian rupee denting the growth prospects. if the Eurozone becomes unattractive given debt servicing and currency concerns.wikipedia.bbc. the long run outlook remains positive. India stands to gain. Then again.entities could start withdrawing funds from Indian stock markets. From an investment perspective.co.uk .

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