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HISTORY

• Faced economic hardships and defaulted on its loans in 1826, 1843, 1860 and 1893. • Post-World War II development has been due to the Greek economic miracle. During that period, Greece saw growth rates second only to those of Japan, while ranking first in Europe in terms of GDP growth. • During the 1980s,Greece suffered from poor macroeconomic performance due to expansionary fiscal policies that led to a tripling of the debt-to-GDP ratio, high inflation, rise in budget deficit. • During the 1990s, situation improved with both inflation and budget deficit falling below 3% by 1999. • In January 2001 Greece adopted the Euro as its currency, replacing the Greek drachma at an exchange rate of 340.75 drachma to the Euro.

ECONOMY OF GREECE
• Currently 32nd largest in the world, 15th largest in the EU. • In terms of per capita income, Greece is ranked 33rd in the world at $26,600 for nominal GDP. • The economy of Greece mainly revolves around the service sector(78.3%) and industry(18.1%), while agriculture makes up 3.8% of the national economic output. • Growth rate of –6.8% in 2011. • Inflation rate of 2.3% as of January 2012. • Current public debt-to-GDP ratio stands at 159.1% of nominal gross domestic product.

TIMELINE(PRE CRISIS)
• 1999 - On 1 January, the currency officially comes into existence. • 2001 - Greece joins the euro. • 2002 - On 1 January, notes and coins are introduced. • 2008 - Malta and Cyprus join the euro, following Slovenia the previous year. In December, EU leaders agree on a 200bn-euro stimulus plan to help boost European growth following the global financial crisis.

TIMELINE(DEBT CRISIS)
• 2009 December- Greece's credit rating is downgraded, fears that government could default on its ballooning debt. • 2010 January/March - Government announces tough austerity measures, including public sector pay cuts, fuel increases, and a crackdown on tax evasion. • 2010 April/May/October - Fears of a possible default on Greece's debts prompt Eurozone countries to approve a $145bn (110bn euros; £91bn) rescue package for the country. Tougher austerity measures in 2011 draft budget. New taxes and higher rate of VAT. • 2011 February - International lenders say austerity measures not enough, Greece must speed up reforms to get its finances back on track.

TIMELINE(CRISIS DEEPENS)
• 2011 July/September - European Union leaders agree a major bailout for Greece over its debt crisis by channelling 109bn euros through the European Financial Stability Facility. Greece's credit rating is downgraded further. • 2011 October/November - Eurozone leaders agree a 50% debt write-off for Greece in return for further austerity measures. PM Papandreou casts the deal into doubt by announcing a referendum on the rescue package which is later criticised. PM withdraws it and resigns. New interim PM Papademos. • 2012 January - Debt rescheduling talks with Greece's private creditors falter, endangering the 130bn euro EU/IMF rescue package that Greece needs to meet its next debt repayment deadline in March. • 2012 February - Against a background of violent protests on the streets of Athens, the Greek parliament approves a new package of tough austerity measures agreed with the EU as the price of a 130bn euro bailout.

Euro adoption
• 1990s- borrowing costs dropped • Interest rate on 10 year greek bonds were dropped by 18% (from 1993 to 1999) • Common monetary policy was to be anchored by Germany and France • EU members bound by rules to restrict deficit(3% of GDP) • Created new investor confidence in Greece • Government and trade budget ballooned in 2000

Selective feature of Greek economy underlying the crisis
• As recent as 2008, state controlled 50% of all business operations. Private sector suffered • 2000-Rising government expenditure was allocated to rising public sector wages and benefits • Pervasive state control • Large and inefficient public administration • Political clientelism • pervasive tax evasion • Influx of capital at low rate during the 2000s • Global financial crisis of 2008-09

Build up of Greece debt crisis
• Abundant access to cheap capital • Flush capital markets and increased investor confidence after adapting the Euro in 2001 • Low competitiveness • Strained public finances and falsified statistical data drove up Greece’s borrowing costs • Greece’s GDP is $ 330 billion; the debt to GDP ratio is currently 144%.

Policy response with limited success
• May 2010- major financial assistance package by EU, European Central bank and the IMF (3 year package of 110 billion euros) • July 2011- second set of crisis response measures. The new package calls for holders of Greek bonds to accept losses as well as for more austerity and financial and structural assistance. (109 billion euros) • 2011-Medium term fiscal strategy-28 billion euros thru 2015 • Privatization and public real estate development • Greece cannot depreciate its currency to spur exportled growth. Unemployment is 16%

Causes for Financial Crisis-Endogenous
• Widening public deficits along with decreasing competition (since EMU entry) • Increased public expenditure led to borrowing and high level of debt • Process fuelled by incoming capital flows from the EU in the form of subsidies and financing of infrastructure • Debt to GDP ratio will tend to increase because of the 110 billion rescue package by the IMF • Deterministic fiscal policy regime • Lower Greece government credibility-it misrepresented that data about its public finance in order to stay within the monetary guidelines of the Euro zone • Lack of structural reform-labor market, social security and market competition. This obliged Greece to issue short term bonds at high interest rates. • Not a business friendly country- hinder entrepreneurship and capital investment. Ease of doing business rank-109/183 in 2010 in DOING BUSINESS by World Bank.

Greece Inflation rate

Evolution of Greek public debt

Public Debt: Maturity Profile

Credit ratings of Greek bonds

Causes for Financial Crisis-Exogenous
• • • • • • Increased access to capital at low interest Legal skepticism- ‘ are bailouts legal?’ Disagreement among EU committee members Lack of solidarity funds at the EU level 2007 global subprime crisis Vulnerability of the European banks, which are major holders of Greek and other sovereign debt instruments. Greece owed to France, Germany, Ireland and Portugal. • Euro depreciated