Description
greece crisis and the factors/causes that led to it. It also explains measure taken by Greece to avert the crisis.
Greece Crisis
1
Greece-Macro Economic Indicators
• Greece is the 27th largest economy in the world • Greek economy is a developed economy • Public debt, inflation, and unemployment in Greece are above the euro-zone average • Unemployment rate – 11.9% in 2010, Inflation - 1.7% in 2010 • Greece’s share of annual GDP in the Euro zone: 3%
2
Adoption of Euro Currency by Greece
• Prior to the adoption of the euro, Greece was among the worst economic performers of Euro area members
• Annual inflation was one of the highest in the region; the Greek government paid the highest borrowing premium; and GDP growth was the slowest in Europe • On January 1, 2001, Greece became the 12th member of the European Union to adopt the euro, after working to meet the EU's economic “convergence criteria”. The criteria include i. ii. iii. Long-term interest rates could not be more than 2% points higher than those of the three, best-performing member states Inflation had to be below a reference value Government debt had to be below 60% of GDP and budget deficits below 3%
3
Background- Greece Debt
• Greece’s government borrowed heavily from abroad to fund substantial
government budget and current account deficits
• Greece’s reported budget deficits averaged 5% per year, compared to a Euro zone average of 2%,and current account deficits averaged 9% per year, compared to a Euro zone average of 1% • Both Greece’s budget deficit and external debt level are well above those permitted by the rules governing the EU’s Economic and Monetary Union (EMU)
4
Built Up- Crisis
• Greece funded twin deficits, budget deficit & current account deficit, by borrowing in international capital markets, leaving it with a chronically high external debt (115% of GDP in 2009) • Greece’s reliance on external financing for funding budget and current account deficits
• The global recession resulting from the financial crisis put strain on many governments’ budgets, including Greece’s, as spending increased and tax revenues weakened
5
Outbreak of the Crisis
• In October 2009,the new socialist government, led by Prime Minister George Papandreou, revised the estimate of the government budget deficit for 2009, nearly doubling the existing estimate of 6.7% of GDP to 12.7% of GDP
• This was followed by rating downgrades of Greek bonds by the three major credit rating agencies
• Crisis arise due to the fear that Greece may not be able to refinance bonds maturing in 2010
6
The Debt Trap
• The Greek government was able to successfully sell €8 billion ($10.6
billion) in bonds at the end of January 2010, €5 billion ($6.7 billion) at the end of March 2010, and €1.56 billion ($2.07 billion) in mid-April 2010, but at high interest rates
• However, Greece must borrow an additional €54 billion ($71.8 billion) to
cover maturing debt and interest payments in 2010
7
Causes for the Crisis
DOMESTIC FACTORS
• Greece borrowed heavily in international capital markets to fund government budget and current account deficits • High Government Spending and Weak Government Revenues • Declining International Competitiveness
8
INTERNATIONAL FACTORS
• Increased Access to Capital at Low Interest Rates • Issues with EU Rules Enforcement
Problems
Credibility Problems
•
• •
Liquidity Problems
• Near term maturities: Greece has 54 billion Euro of maturities in 2010 alone
Inconsistent budget forecast and revision
Tax system Fiscal irregularities
•
Cost of Financing: As of April 22nd Greek sovereign debt costs had reached unsustainably high levels (>9% on 10 year)
•
• •
Greece is highly dependent on the capital markets to solve its liquidity problem
High Deficit-to-GDP ratio On April 22,2010 Greece’s 2009 budget deficit was revised higher for the 4th time, to 13.6%, up from prior estimate of 12.9%
9
The Contagion Effect
10
11
Fall of “The EURO”
• Greece’s bankruptcy has led to a drop in value for the euro • Currency depreciation coupled with declining bond prices (and higher interest rates) • The currency might lose its identity as the second reserve currency globally
12
Financial Assistance - EU & IMF
110 billion euro EU-IMF bailout programme Conditions for the bailout :
• Greece has to slash its budget deficit to the EU limit of 3% of GDP by 2014 from 13.6 % in 2009 • Severe austerity measures for the next 3 years
13
Financial Assistance – EU & IMF
€110 Billion
€80
Billion
(Euro Zone)
€30 Billion
(IMF)
14
Financial Assistance - EU & IMF
First Tranche May, 2010
• €14.5 billion - euro area member states • € 5.5 - IMF
Second Tranche • €9.0 billion Due in September
15
Austerity Measures
• • • Increases in VAT to 21% 10% rise in taxes on alcohol, cigarettes, and fuels 10% increase in luxury taxes
•
General pension age does not change but a mechanism is introduced to scale them to life expectations changes
Creation of a financial stability fund
•
•
•
Average retirement age for public sector workers increased from 61 to 65
Public-owned companies to diminish from 6,000 to 2,000
16
Austerity Measures
• Public Sector limit introduced of €1,000 to bi-annual bonus, abolished entirely for those earning over €3,000 a month Cuts of 8% on public sector allowances and 3% pay cut for DEKO (public sector utilities) pay cheques •
•
•
Freeze on increases in public sector wages for three years
Limit of €800 to 13th and 14th month pension instalment. Abolished for those pensioners receiving over €2,500 a month Extraordinary taxes on company profits
•
17
Repercussions of Proposal on Greece economy
• A unit decrease in fiscal expenditure means a more than one unit decline in the total GDP and increase in unemployment rate • If the government seeks to increase the revenue through increasing indirect taxes (VAT), it would increase the prices of essential commodities • Narrowing of the fiscal deficit in fact also decreases the GDP
18
Conclusion
• The sovereign debt crisis has highlighted the need for members of the European monetary union to significantly strengthen their institutional and operational architecture to dissipate doubts about the long term viability of monetary union itself If Portugal, Spain face further downgrades from the rating agencies, the yields to rise on their bonds and it would become expensive to roll over their debt Any Political fallout of the Euro zone could lead to further depreciation of Euro The bigger problem in long term would be if the need for a bailout arises for the other troubled nations, which would force them to accept loans from IMF and if they fail to carry on the austerity drive and miss the IMF targets, the future funds will be stopped causing a greater problem ------------19
•
• •
doc_566869369.pptx
greece crisis and the factors/causes that led to it. It also explains measure taken by Greece to avert the crisis.
Greece Crisis
1
Greece-Macro Economic Indicators
• Greece is the 27th largest economy in the world • Greek economy is a developed economy • Public debt, inflation, and unemployment in Greece are above the euro-zone average • Unemployment rate – 11.9% in 2010, Inflation - 1.7% in 2010 • Greece’s share of annual GDP in the Euro zone: 3%
2
Adoption of Euro Currency by Greece
• Prior to the adoption of the euro, Greece was among the worst economic performers of Euro area members
• Annual inflation was one of the highest in the region; the Greek government paid the highest borrowing premium; and GDP growth was the slowest in Europe • On January 1, 2001, Greece became the 12th member of the European Union to adopt the euro, after working to meet the EU's economic “convergence criteria”. The criteria include i. ii. iii. Long-term interest rates could not be more than 2% points higher than those of the three, best-performing member states Inflation had to be below a reference value Government debt had to be below 60% of GDP and budget deficits below 3%
3
Background- Greece Debt
• Greece’s government borrowed heavily from abroad to fund substantial
government budget and current account deficits
• Greece’s reported budget deficits averaged 5% per year, compared to a Euro zone average of 2%,and current account deficits averaged 9% per year, compared to a Euro zone average of 1% • Both Greece’s budget deficit and external debt level are well above those permitted by the rules governing the EU’s Economic and Monetary Union (EMU)
4
Built Up- Crisis
• Greece funded twin deficits, budget deficit & current account deficit, by borrowing in international capital markets, leaving it with a chronically high external debt (115% of GDP in 2009) • Greece’s reliance on external financing for funding budget and current account deficits
• The global recession resulting from the financial crisis put strain on many governments’ budgets, including Greece’s, as spending increased and tax revenues weakened
5
Outbreak of the Crisis
• In October 2009,the new socialist government, led by Prime Minister George Papandreou, revised the estimate of the government budget deficit for 2009, nearly doubling the existing estimate of 6.7% of GDP to 12.7% of GDP
• This was followed by rating downgrades of Greek bonds by the three major credit rating agencies
• Crisis arise due to the fear that Greece may not be able to refinance bonds maturing in 2010
6
The Debt Trap
• The Greek government was able to successfully sell €8 billion ($10.6
billion) in bonds at the end of January 2010, €5 billion ($6.7 billion) at the end of March 2010, and €1.56 billion ($2.07 billion) in mid-April 2010, but at high interest rates
• However, Greece must borrow an additional €54 billion ($71.8 billion) to
cover maturing debt and interest payments in 2010
7
Causes for the Crisis
DOMESTIC FACTORS
• Greece borrowed heavily in international capital markets to fund government budget and current account deficits • High Government Spending and Weak Government Revenues • Declining International Competitiveness
8
INTERNATIONAL FACTORS
• Increased Access to Capital at Low Interest Rates • Issues with EU Rules Enforcement
Problems
Credibility Problems
•
• •
Liquidity Problems
• Near term maturities: Greece has 54 billion Euro of maturities in 2010 alone
Inconsistent budget forecast and revision
Tax system Fiscal irregularities
•
Cost of Financing: As of April 22nd Greek sovereign debt costs had reached unsustainably high levels (>9% on 10 year)
•
• •
Greece is highly dependent on the capital markets to solve its liquidity problem
High Deficit-to-GDP ratio On April 22,2010 Greece’s 2009 budget deficit was revised higher for the 4th time, to 13.6%, up from prior estimate of 12.9%
9
The Contagion Effect
10
11
Fall of “The EURO”
• Greece’s bankruptcy has led to a drop in value for the euro • Currency depreciation coupled with declining bond prices (and higher interest rates) • The currency might lose its identity as the second reserve currency globally
12
Financial Assistance - EU & IMF
110 billion euro EU-IMF bailout programme Conditions for the bailout :
• Greece has to slash its budget deficit to the EU limit of 3% of GDP by 2014 from 13.6 % in 2009 • Severe austerity measures for the next 3 years
13
Financial Assistance – EU & IMF
€110 Billion
€80
Billion
(Euro Zone)
€30 Billion
(IMF)
14
Financial Assistance - EU & IMF
First Tranche May, 2010
• €14.5 billion - euro area member states • € 5.5 - IMF
Second Tranche • €9.0 billion Due in September
15
Austerity Measures
• • • Increases in VAT to 21% 10% rise in taxes on alcohol, cigarettes, and fuels 10% increase in luxury taxes
•
General pension age does not change but a mechanism is introduced to scale them to life expectations changes
Creation of a financial stability fund
•
•
•
Average retirement age for public sector workers increased from 61 to 65
Public-owned companies to diminish from 6,000 to 2,000
16
Austerity Measures
• Public Sector limit introduced of €1,000 to bi-annual bonus, abolished entirely for those earning over €3,000 a month Cuts of 8% on public sector allowances and 3% pay cut for DEKO (public sector utilities) pay cheques •
•
•
Freeze on increases in public sector wages for three years
Limit of €800 to 13th and 14th month pension instalment. Abolished for those pensioners receiving over €2,500 a month Extraordinary taxes on company profits
•
17
Repercussions of Proposal on Greece economy
• A unit decrease in fiscal expenditure means a more than one unit decline in the total GDP and increase in unemployment rate • If the government seeks to increase the revenue through increasing indirect taxes (VAT), it would increase the prices of essential commodities • Narrowing of the fiscal deficit in fact also decreases the GDP
18
Conclusion
• The sovereign debt crisis has highlighted the need for members of the European monetary union to significantly strengthen their institutional and operational architecture to dissipate doubts about the long term viability of monetary union itself If Portugal, Spain face further downgrades from the rating agencies, the yields to rise on their bonds and it would become expensive to roll over their debt Any Political fallout of the Euro zone could lead to further depreciation of Euro The bigger problem in long term would be if the need for a bailout arises for the other troubled nations, which would force them to accept loans from IMF and if they fail to carry on the austerity drive and miss the IMF targets, the future funds will be stopped causing a greater problem ------------19
•
• •
doc_566869369.pptx