The European Crisis

A project in Economics
Hiral Patel Sirjan Gupta Swati Prabhu Rupal Dixit Sumit Jaiswal 111 113 115 117 119

... ............. .............................................. 9 1......................................................... . 11 Degradation of euro.............................. ...... ..... . ...................... ........ ........ 7 Large public deficits and large debts ............... ......... ............... 8 Danger of default .......................... ......... 4 Eurozone before the crisis hit ................. ...................... .................................. 10 Polarized Community.................................. .......... ............................. ......................................................... 12 Monetary Deflation ........... ................................................. ........................... ............................... .......................................................... 9 Stock and Debt market reactions ............................... ....................... ......................................................... .... .................................. ........................................ ......................... ................... .. ........................... .................................................. ................................................................. ............................................................. ........................................... ............. ......... 4 Economic and Monetary Union (EMU)............................................................................................................................................................................................. ......... ...... 10 Inflation... ............................................ .................. ................................ .............................................. ............................................................. ................ ................... ...... ........................ 10 Credit Shortage........................................................................... ........ ... ............................. ................... .. 4 Fiscal policies ......................................................... ................................Monetary policy was too loose ..................... .. 11 Impact on Euro ........................... ................................... ....................... ................... 5 The crisis initiated ........................ ................................................ ........................... 7 Greek Crisis................... . .......................Currency Devaluation.............. ........ .......................................................... ................................ .....Tourism Affected .......................... 9 2. .............................................................. ............. ................................. .... ......................... .............................. ........ 8 Objections to proposed policies ......................................... ........................................... ............ ... 12 ................................. 9 Fiscal Austerity................. ............................... 11 Contagion effect .................................. .... 7 Lack of transparency .......................... 9 Impact of European Crisis : .. 9 Moral Hazard............... .......................................................... ............................................................................................ 11 Criticism of euro-model ....................................... ............. 10 Disruptive Consequences................... ....................................... ... 10 World Trade Disrupted ..................... .........Table of Contents About Eurozone........ ............. ................. 9 3......................................................... ............ 8 Euro as a cause of Economic Crisis ........................................ 7 Effect of global crisis on shipping and tourism.... 7 Austerity and Loan Agreement.................................. 7 Downgrading of debt .. .............................. 6 Spread of Crisis ................................................................................................................................ .......... ................ ... ................................. ........ Hyperinflation and Social Security ............................... ............................................... ...................................... ........ ............................................ ..................................... ................................................ 12 Pressure building on the currency.................................

.. ........................... ............. Currency Channel....................................................Monetary Policy Response by European Central Bank (ECB) .................................... 13 ECB injected liquidity into European banks .................................... ..................................... 13 ECB did not lower interest rates until October 2008 because of its focus on inflation.........Commodity price Channels .................. .................. .... 15 4... 15 .................... ........................ 14 2......................... ........................................ .............................. 13 Assistance provided to crisis struck countries ............................Trade Channels : ......................... ........ 15 3................................................................................. ............................................................... ................................................... ....................................................... 14 Impact of crisis on India .............. .......... ........................................................ ..................... ......................................................................... .............. ... ............................................... 14 Germany........ .............. Banking Channels.......... 14 1.............. ..... ..... ................. .......................................... 14 Japan ............... .... 15 Present Situation ..... . ............... ................ ........... ..................... 13 Federal Reserve used Euro-dollar swaps to make dollars available to ECB to lend to banks............................................................................... ..

. Belgium. which makes political decisions regarding the eurozone and the euro . governance or fiscal policy for the currency union. These guidelines are not binding. Estonia. Fiscal policies The primary means for fiscal coordination within the EU lies in the Broad Economic Policy Guidelines which are written for every member state. When the EU was founded in 1957. Slovenia. who is responsible for what. Malta. Cyprus. but ar e intended to represent policy coordination among the EU member states. but with particular reference to the 17 current members of the eurozone. which can be described as an advanced stage of economic integration based on a single market. It currently consists of Austria. It involves close co-ordination of economic and fiscal policies and. Portugal. with fines for any state which exceeded this a mount. so as to take into account the linked structures of their economies. Monetary policy of the zone is the responsibility of the European Central Bank. For their mutual assurance and stability of the currency. and Spain. which sets agreed limits on deficits and national debt. But the goal of achieving full EMU and a single currency was not enshrined until the 1992 Maastricht Treaty (Treaty on European Union).. though there is no common representation. France. the Member States concentrated on building a 'common market'. Germany. Some cooperation does however take place through the euro group. members of the eurozone have to respect the Stability and Growth Pact. a single monetary policy and a single currency the euro. . the Netherlands. Greece. The Pact originally set a limit of 3% of GDP for the yearly deficit of all eurozone member states. and what conditions Member States must meet in order to adopt the euro . for those countries fulfilling certain conditions. Economic and Monetary Union (EMU) All EU Member States form part of Economic and Monetary Union (EMU). which set out the ground rules for its introduction. Ireland. Italy. Finland. with associated sanctions for deviation. is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the eurocurrency as their sole legal tender. These say what the objectives of EMU are. Luxembourg. Slovakia.About Eurozone The Eurozoneofficially the euro area.

Meanwhile. made their exported goods more affordable. Italy. Lower borrowing costs and the expansion of domestic demand boosted tax revenues. 4. attracting investment into the less productive non -tradable sectors and away from exports and industries competing with imports. Portugal. as well as currency depreciation and rapid labour productivity growth in the export sectors of the United States and Japan. Growth accelerated and the prices of domestic activities (i. the Netherlands. and Ireland) and too tight for Germany. and other historically stable countries in the European core. Blatant fiscal mismanagement added to the problems in Greece. whose domestic demand and wages grew very slowly compared to the European average. This trend was reinforced by especially rigid labour markets in most of the GIIPS that make wage adjustments difficult.Eurozone before the crisis hit 1. Greece. Ireland. added to the competitiveness problems of the GIIPS. 7. Growing demand in the GIIPS enabled these core countries to increase exports. The domestic demand boom in the GIIPS induced rapid wage growth that outpaced productivity.e. GIIPS governments significantly increased spending. 2. increasing unit labour costs and eroding external competitiveness further. those least exposed to international competition. 3. Confidence in the prospects for growth and stability of the economies of Greece. often owed abroad as foreign capital flowed in. The single European monetary policy was too loose for the rapidly growing GIIPS (Spain. such as housing) rose relative to the price of exportable or importable products. causing their interest rates to decline to those of Europe s more stable members. exports rose sharply as a share of GDP in Germany. This reinforced the loss of competitiveness in the GIIPS. The adoption of a common currency whose value was based on broader European competitiveness trends that made it lower than the deutschmark or guilder might have been. Improved confidence and lower interest rates drove up domestic demand in the GIIPS and investors and consumers were emboldened to increase spending and run up debts. 5. and Spain (GIIPS) surged when the euro was introduced. .. Instead of recognizing this as temporary revenue and saving the windfall gains for when growth slowed. 6. The emergence of China.

Defaults and foreclosures increased. mortgage refinancing). which set off a vicious chain reaction. Worse. This had a direct effect on consumer demand as rising house prices had been the cash cow of stretched US consumers (equity withdrawal. the securitisation of the underlying assets swiftly led to the implosion of the US financial sector. as losses emerged and confidence in the solvency of counterparties evaporated. causing consumers to retrench and fir ms to lay off workers.The crisis initiated The crisis was initiated by the deflating of the US housing bubble (and later the equity bubble). The resulting credit crunch then impacted consumers and nonfinancial businesses that could no longer roll over loans. . with a number of negative feedback mechanisms.

Greek government debt was estimated at 216 billion in January 2010. Standard & Poor's estimate s that in the event of default investors would lose 30 50% of their money. Their collapse in value of or the cessation of trading in these assets led to a knock-on implosion of the European banking sector. Lack of transparency To keep within the monetary union guidelines. according to some estimates. and after a lag. already squeezed by past currency appreciation. The massive rate cuts by the US Federal Reserve in response to the crisis (initially unmatched in Europe) led to a sharp further fall in the USD against th e euro. especially homeowners). exacerbating the competitive pressure on European producers.3% following the downgrading. After the introduction of the euro in Jan 2001. Downgrading of debt On 27 April 2010. the government of Greece has been found to have consistently and deliberately misreported the country's official economic statistic s. Finally. Two of the country's largest industries are tourism and shipping. China. which led them to cut their import demand. the crisis also hit emerging economies (not least. where recent reports suggest a major increase in unemployment is likely). In the beginning of 2010. it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. and both were badly affected by the downturn with revenues falling 15% in 2009. Greece was initially able to borrow due to the lower interest rates government bonds could command. the Greek debt rating was decreased to the first levels of ' junk' status by Standard & Poor's amidst fears of default by the Greek government. Some analysts question Greece's ability to refinance its debt. The European financial sector had been a major purchaser of toxic assets from US banks. Large public deficits and large debts Initially currency devaluation helped finance the borrowing. Accumulated government debt is forecast. Stock markets worldwide declined . to hit 120% of GDP in 2010. Yields on Greek government two-year bonds rose to 15. which then hit European companies (and to a lesser extent consumers.There were four main transmissions to the European economy from across the US economy: ‡ ‡ ‡ ‡ US consumer retrenchment (and also stalling business investment) directly affected the sales opportunities of European exporters. Spread of Crisis Greek Crisis Effect of global crisis on shipping and tourism The global financial crisis that began in 2008 h ad a particularly large effect on Greece.

Portugal and Spain Iceland Slovania ‡ ‡ ‡ The UK Latvia. the Greek government requested that the EU/IMF bailout package be activated. Effect on other Eurozone Countries ‡ ‡ ‡ Ireland.8 billion through a number of measures including public sector wage reductions.in response to this announcement. and the International Monetary Fund. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring.Lithuania and Estonia Belgium . Th e negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. essentially printing new money and injecting it into the system by purchasing outstanding debt. It would also destabilise the Euro Interbank Offered Rate. it cannot unilaterally stimulate its economy with monetary policy. the Greek parliament passed the Economy Protection Bill.3 trillion USD since the global financial crisis began.3bn. expected to save 4. there was a possibility that Greece would have been forced to default on some of its debt. 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. and too defe rential to bond rating agencies. the U. lacking the will power to set up sufficient "solidarity and stabilisation framework" to suppor t countries experiencing economic difficulty. On 3 May 2010. A total of 110 billion has been agreed. The IMF had said it was "prepared to move expeditiously on this request". On 23 April 2010. insufficiently supportive of the new government. Federal Reserve expanded its balance sheet by over $1. the European Central Bank suspended its minimum threshold for Greek debt "until further notice". meaning the bonds will remain eligible as collateral even with junk status. Because Greece is a member of the eurozone. For example. Analysts gave a 25% to 90% chance of a default or restructuring. Joseph Stiglitz has also criticised the EU for being too slow to help Greece. perhaps 50 or 25 percent.Italy. a loan agreement was reached between Greece. as it would no longer have collateral with the European Central Bank. The deal consisted of an immediate 45 billion in loans to be provided in 2010. Objections to proposed policies The crisis is seen as a justification for imposing fiscal austerity on Greece in exchange for European funding which would lower borrowing costs for the Greek government.S. the other Eurozone countries. Danger of default Without a bailout agreement. This would effectively remove Greece from the euro.Greece needed money before 19 May. with more funds available later. On 2 May 2010. Austerity and Loan Agreement On 5 March 2010. which is backed by government securities. or it would face a debt roll over of $11 .

Stock and Debt market reactions The immediate consequences were the stock and debt market reactions. The risk of contagion to the financial markets and debt markets of other European continent nations is the major consequence.7% previously forecast). This is why austerity is critical for servicing and reducing that debt. it also renders imports more expensive and exports cheaper. Officially.Currency Devaluation One of the core ideas of the euro is that the member nations will no longer be able to devalue their currencies. Greece took advantage of a strong euro and rock-bottom interest rates to fuel a debt binge by the country s consumers and government. both good for reversing problematic deficits. So.Tourism Affected Because the currency was of the economy was valued at a high rate . Next in stop light is Spain and Italy and the European insurance companies. The EU treaty limits each nation s deficits to about 3% of their gross domestic product.Monetary policy was too loose In essence. Debt markets affect borrowings like mortgages or small business loans. investors were stunned 3. creating at once austerity measures and improved conditions for exports. for a government there is less money to spend. This is exactly what Greece could use these days. They also downgraded Portugal by placing Portugal 'A-1' long-term and 'A-2' short-term ratings on CreditWatch with negative implications.Euro as a cause of Economic Crisis 1. Fiscal Austerity If borrowing costs rise than the cost of doing business rises.7% (not the 3. Impact of European Crisis : On November 30. . 2. If these are controlled or stalled than confidence will rebuild in the non -downgraded countries. Devaluation is a trick that constitutes a semi-default by a country. when Greece recently announced that its government deficit would be 12. 2010 Standard & Poor's announced rating the proposed EU treaty changes regarding the seniority of private-sector creditors following the Ireland bailout. This is very relevant as consumer confidence or sentiment is a key component for economic activity. all loans are paid out in full but in money worth significantly less than when the loans were originally made.tourism had become very expensive for other countries l ike US. no default is set into place. Devaluations not only makes the national debt lose value. for the past decade.

Spain and Portugal downgra des is the common man s reactions. What we are seeing with these downgrades is more money going towards debt financing and therefore more debt.S. and there are plenty of theories why. Further countries that are suspect to contagion like Italy also reverberate with higher costs. currency and interest rate swaps and spreads. Simply I want the Government to bail me out or I don t want the government to interfere anymore and waste my money. not bailed out by taxpayers through a central bank as we have seen by multiple quantitative easing liquidity programs. Political influence in trade can cause exports to be too expensive for importing countries and effect the economy as less money comes in. temporary or more lasting if protectionism kicks in is a disruption to world trade.Moral Hazard Moral Hazard is another consequence of bailouts. How does that the common man you ask. Protectionist policies also make imports more expensive. then it should go bust. Spain and Portugal downgrades is. than imports get more expensive. You could argue politically going forward the Republicans will veto all tax increases and the Democrats will veto all public spending cuts. There are usually two disparate views. In Greece for example we saw the Greek banks downgraded and banks or countries lending are also affected. Credit Shortage When credit is tight any disruption to the credit market can causes more exaggerated tightening. hardly productive parts of the economy. There is always the potential of a currency crisis when you are playing with such massive amounts of money. Hyperinflation and Social Security The danger as the consequences unfold of printing money as recklessly as we have in th e US is we are monetizing our debt which is likely to lead to higher inflation. This is a pattern that the major nations have got into. Downgrades of sovereign debt flow put a further strain to the related debt. Indeed we already have as essentials such as food and energy rise. . where it has become highly polarized this is classic socialist versus free market ideology. Thus the division between the rich and poor becomes an ever widening chasm. With the EU/IMF bailout moral hazard is created by their status as the lender of last resort. World Trade Disrupted Another consequence of the Greek. look at the U. This tends to negatively affect more the poor and middle class than the rich. and the money that has been given to banks an d the car companies. Inflation. If this leads to inflation credit can become unavailable or is prohibitively expensive. Basically if a bank goes broke.S. let them go broke or help them out. If our dollar weakens. We have seen this in the U. Polarized Community Another consequence of the Greek.

So its recent slide from close to $1. Criticism of euro-model Some experts have suggested the euro model itself is flawed and lacks an overarching fiscal policy. and you begin to see the outlines of a disastrous Europewide banking crisis. government. Impact on Euro Even more alarming is the exposure of other EU banks to Greek debt. One thing to note is that many major benefit programs in like social security are linked to inflation. We may see a massive reduction in what are deemed the unproductive areas of our society. The only way out of that will be further compromises by the ECB about the paper it accepts as collateral. It will surely be at least a year before investors wake up to the fact that the fiscal predicament of the United States is actually worse than that of the euro zone. When the euro was launched back in January 1999. Greece is a relatively minor eurozone economy. and finance or debt collection at the expense of local government and the individual.27 last week is far from unprecedented. If it gets to the point where we have high enough inflation social programs may be scaled back by governments. Its problems have hurt the euro partly because of fears over contagion because other eurozone countries such as Spain and Portugal also have large budget deficits and high labour costs. When the underlying facts to the global crisis hit the mainstream you should already be prepared before fear and loathing penetrates the public consciousness. Spain and Portugal downgrades. it was worth less than $1. further declines seem likely. which totals $193 billion. according to the Bank for International Settlements. Focused on the consequences that can be most disruptive you can be prepared for the worst & it should develop this into the Global Financial crisis double dip. Factor in the risk of copycat crises in Portugal and Spain. Disruptive Consequences These are some of the consequences of the Greek. representing about 3 per cent of the region s gross domestic product . There s no mechanism to adjust fundamentals when economies don t grow in . The flip side to this is the police state argument where the government strives to centralize more control following an economic collapse to boost the military and police. Contagion effect Greece s debt crisis and the contagion fears that come along with it are putting the future of the euro currency into question. This would include government.20. experts say. But the way this crisis is unfolding. It is important to be prepared for the next down leg in the world economy if there is one.60 before the global financial crisis to $1. and for most of its first three years it was d own below parity with the dollar. This would see a defactor return of control to local governments. finance and the military.As countries unemployment or other social benefits grow there is an ever growing strain on financés. the answer has been bailouts and monetization.

But even if one or more coun tries walked away from the euro in favor of their own currencies. First. One of the first concerns voiced at the start of the debt crisis a concern that was acted upon by foreign-exchange traders was that if PIIGS governments defaulted on their debts. would have massive loan and capital losses. the possible monetary scenarios is the monetary deflation due to a decrease in the money supply. the euro would decline in value. Degradation of euro The cause of the European debt crisis. 2. or both. in the case of default. . indebted governments might want to be able to print their way out of their trouble. not less. However. a more realistic threat to the euro is that some governmen ts might shed it and return to their own domestic currency. thereby reversing the money multiplier process and causing a decline in the money supply. in the case that no government intervention takes place. valuable. Monetary Deflation 1. The result of these losses would be banks going out of business. Fed up with the (prudent) restraint of money creation imposed upon them by the ECB. and especially after the 2008 financial crisis. The recognition that overspending had occurred was brought about by reduced economic growth and the subsequent reduced tax revenues. was overspending by European governments during the last decade. the single currency has been under relentless selling pressure. the euro could still be protected by the ECB. which were le ss than the amount needed for both expenditures and dept payments. northern European banks. If one or more governments defaulted. The absence of real labour mobility and adherence to sovereign debt rules threaten the currency's survival. Portugal and Ireland has left investors spooked and challenged the euro s robustness. which were large-scale investors in government debt. Italy. The falling money supply deflation would make the euro more.tandem. in its simplest form. it must be understood that. Pressure building on the currency Since concerns began to heighten over the ability of Greece to service its debt at the turn of the year. calling in outstanding lo ans. Just the thought of Greece s problems infecting debtridden countries including Spain.

but without changing the total supply of bank reserves over the entire maintenance period (of.Monetary Policy Response by European Central Bank (ECB) ECB injected liquidity into European banks Since the financial turbulence erupted in summer 2007. the ECB has supplied liquidity in other currencies. with the dominant role played by the banking system in the financing of the economy. ECB did not lower interest rates until October 2008 because of its focus on inflation. the ECB took swift and decisive action to provide liquidity in the interbank money market to alleviate the stresses and ensure. In addition. the ECB has provided unlimited funding in euro at fixed interest rates over periods up to six months against an expanded list of eligible assets for use as collateral in Eurosyst em refinancing operations. and that systemic risk would be effectively contained. in most cases. between the end of June 2007 and the end of September 2008 . 28 days). financial and economic developments as well as central bank policy responses can be usefully examined and assessed over two time periods. But from the onset of the crisis in August 2007. the maturity profile of the refinancing operations was altered. Until October 2008. implies that the transmission of the ECB s policy rates to the euro area bank lending rates is of utmost relevance for economic activity. notably US dollars. on a basis of a swap agreement with the Federal Reserve. Since last October. the ECB took unprecedented steps and increased its intermediation activity. with more central bank liquidity provided to banks for periods up to 3 months (and as of March 2008. On July 2008. it raised its key policy rates by 25 basis points to counter increasing inflationary pressures and medium-term inflation risks. also up to 6 months). to the maximum extent possible. At the same time. that liquidity problems would not turn into solvency problems. The structure of the euro area financial system. The transmission of the policy rates to money market interest rates is an important step but it is also an intermediate one. During this period the Eurosystem engaged in active liquidity management adjusting the intertemporal distribution of liquidity provision within the reserve maintenance period. the balance sheet of the Eurosystem increased only moderately by about 100 billion euro. Federal Reserve used Euro-dollar swaps to make dollars available to ECB to lend to banks. This extraordinary expansion of liquidity provided to euro area banks is reflected in t he growth of the Eurosystem s balance sheet. the borrowing costs of households and firms seemed to have increased compared to the policy rate. so that the overall supply of central money was kept broadly unchanged. As a result. and correspondingly less in the weekly main refinancing operations. banks became ever more reluctant to lend to each other as a result of a sharp increase in the perceived risks of counterparty default and a continued lack of transparency about the health of banks balance sheets. To reduce banks severe funding problems. Following the Lehman Brothers bankruptcy last September. But the substantial reduction in policy rates and the unlimited provision of liquidity to the banking system over . as bank lending standards tightened and bank interest rates followed the path of the Euribor rate.

this is not something that will appeal to decision makers in Germany and the other members of core Europe. the eurozone's sovereign rescue fund. and the IMF. the eurozone member states. Again. Those Channels Are : 1. Noda said Japan would use its foreign -currency reserves to buy more than 20 per cent of the bonds to be issued this mon th by the European Financial Stability Facility. The cost. which aims to help debt -ridden European states Germany This would represent a transfer of resources from Germany and the other members of the EU core to the crisis countries. . particularly as regards short-term credit. It would be the first step toward a fiscal union in which there were ongoing payments from rich to poor European countries. In order to reach these goals the Facility i s devised in the form of a special purpose vehicle (SPV) that will sell bonds and use the money it raises to make loans up to a maximum of 440 billion to eurozone nations in need. The new entity will sell debt only after an aid request is made by a country. a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty.the past seven months have resulted in a decline in bank lending rates. The agreement allows the European Central Bank to start buying government debt which is expected to reduce bond yields.Trade Channels :  Merchandise goods & commercial services. Asian bonds yields also fell with the EU bailout. would be equivalent to the cost of recapitalizing those two countries bank Impact of crisis on India There Are Five Principle Channels Through Which The Developments In Europe Can Percolate too the Indian Economy. Assistance provided to crisis struck countries On 9 May 2010 the 27 member states of the European Union agree to create the European Financial Stability Facility (EFSF). The bonds will be backed by guarantees given by the European Commission representing the whole EU. approximately 3 per cent of the combined GDP of Germany and France.(Greek bond yields fell from over 10% to just over 5%. Japan Japanese Finance Minister Yoshihiko Noda said Tu esday that the government would purchase eurozone bonds to help the region as it struggles with a debt crisis among some of its members. The EFSF will be combined to a 60 billion loan coming from the European financial stabilization mechanism (reliant on guarantees given by the European Commission using the EU budget as collateral) and to a 250 billion loan backed by the IMF in order to obtain a financial safety net up to 750 billions.

France.  India Contributes Around 25% Of Commercial Services To European Countries. 3. EU leaders are right to consider a Greek restructuring. However.  This Channel Did Not Affect Indian Economy Much. Banking Channels  Merchandise goods & commercial services. & UK.  Imports Relatively Cheaper.  Crude Oil Prices Were Raised To US$ 147/Barrel In July 2008  The Demand For Crude Oil & Primary Commodities Was& Was Soaring Higher.  Profit Margin Negatively Impacted for Indian Exporters. Currency Channel  Depreciation Of Euro Against Currencies Including Rupee. Greece needs to find at least 53 billion just to avoid increasing its already massive debt. Present Situation 1. & UK. 4. Benefits Imports of Machinery & equipments. is unlikely to be sufficient an d throws up a number of problems: . which will see Greece buy back its own debt using even more money from the EU/IMF bail-out funds. Major Exports To Germany.  Oil Imports In India Are Relatively Price Inelastic. France. Greece s situation is simply unsustainable.  India Contributes Around 25% Of Commercial Services To European Countries. Even in a best case scenario and with the help of foreign taxpayers. 2. 2. the plan on the table.  Appreciation Of Rupee Could Also Undermine India s Export Competitiveness.Commodity price Channels  Global Commodity PricesDirectly Affects Price Of Imports and Cost Of Products  Oil Is One Of The Major Commodity Imported. Whereas The Price Became The Supply Constraint.  This Channel Did Not Affect Indian Economy Much. The numbers simply do not add up and some sort of restructuring or additional help therefore seems inevitable. This year. Greece is set to fall short of these targets.  Major Exports To Germany.

3. Similarly. as it would be forced to pay an interest rate of around 11%. Greece needs to find at least another Greek Funding gap 2011 53. rely on permanent subsidies from stronger economies. The Greek debt to GDP ratio is forecast to reach 152% in 2011. 4. would be detrimental to the Greek economy due to the high levels of private sector debt and the lack of funding available in the economy.35 Realistically. with inflation in the euro zone at its highest point for many years. Greece is still 6. o Since it hinges on new loans.5 billion.4% and 4.85 billion). The new loans offered at lower interest rates along with the rescheduling of previous bailout funds effectively mean that the EU offers a country that has mismanaged its finances even more cheap money this raises huge moral hazard concerns. which is wholly unaffordable for the country. This shows the massive tensions at work within the euro zone.4% in January. .2%. 5.85 billion short. However. Greece s problems ultimately stem from its lack of economic competitiveness which a restructuring will not in itself solve.35 billion just to remain at its current bn levels of debt. while understandable from a German point of view. the Greek economy is expected to shrink by 4% in 2011. This year. allowing for currency devaluation.a.95 leaders last year is expected to pay out 46. and its total deficit will be running at around 9. Total 53. increasing interest rates is the exact opposite policy to what is needed.9 money. The tax uptake in the country remains small and patchy with tax evasion estimated to cost the government around 20 billion a year. Such a move. hitting 2.The bail-out fund agreed by EU Primary Budget Deficit 4.there is likely to be increasing pressure on the ECB from Germany to increase interest rates. or seek monetary independence. meaning that even with the bail -out Interest payments on debt 15. around 341 billion. debt is not so much removed as transformed. The plan will only reduce Greece s debt by between 2.5 Debt Repayments 32. At a time when Greece needs time to recover. meaning that Greece s debt to GDP will still top around 146 -147% this year b. The money simply has to come from somewhere else. it cannot borrow this money on the markets. At the same time.3% ( 20. Greece effectively has three options: completely reform the economy. To address this problem.

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