Description
It explains the causes of greece debt crisis, How Goldman Sachs Helped Greece to Mask its True Debt, Impact of greece debt crisis on International Equity marke
International Corporate Finance
Greece Debt Crisis and its impact on International Financial Markets
Submitted By
Greece Debt Crisis: Background
? Build Up to the Current Crisis
? Between 2001 to 2008 Greece averaged High budget deficit (5.2%) in comparison
with Eurozone Average(2%) ? High Current Account Deficit(9%) in comparison with Eurozone Average(1%) ? External debt reached 116% of GDP in 2009 as Greece financed these twin deficits with loans in international market ? New Government in 2009 revised the estimation of budgetary deficit to 13%
? Outbreak of Crisis ? Yields of the Greek bonds increased to 400 basis points in Jan 2010 ? State controlled Dubai World default on debt raised possibility of cascade of sovereign default of countries having large debt like Greece ? Allegations on Greek government having falsified statistics
Causes of Greece Debt Crisis
? Domestic Factors
? High Government Spending & Weak Government Revenues ? Budgetary deficits ? Inefficient public administration- High public tax aversion ? Generous pensions and bonuses ? 75% of public expenses non investments type ? Structural Policies & Declining International Competitiveness
? Low productivity
? Import growth double of export with main commercial partners
Contd..
? International Factors
? Increased Access to capital at low interest rates ? Large confidence because of Greece adoption of the Euro as national currency ? Extremely favorable interest rates ? Issues with EU Rules Enforcement ? Non compliance with 1997 Pact of Stability and Growth ? Unreliable data reporting on public financials
Greek Domestic Policy Responses
? Fiscal consolidation and structural reforms: ? Three cut rounds of expenses and increase of taxes announced between Jan
2010 to Mar 2010
? Reduction or freezing of pensions of the public administration
? Increased the taxes on fuel, tobacco, luxury goods ? Measures to impel the competitiveness by promoting private sector and
greater use of technology and innovation
Financial assistance from the Eurozone member states
? ?
On May 2, 2010, the Euro zone and IMF announced a three-year, €110 billion (about $145 billion) stabilization plan for Greece In spite of the promulgation of the measures of aid of the IMF for the Euro-Greece zone, preoccupations of investing on the sustainability of the debt the zone Euro were deepened during the first week of May of 2010. Impelled by these fears, world-wide the stock markets fell with force the 06 of May 2010 EU finance ministers agreed to a broader €500 billion (about $686 billion) “European Financial Stabilization Mechanism” on May 9, 2010
?
European Central Bank President Jean-Claude Trichet speaking with Greek Finance Minister Giorgos Papakonstantinou
How Goldman Sachs Helped Greece to Mask its True Debt
? In 1999, the Maastricht rules threaten to slap hefty fines on euro member
countries
? The Greeks have never managed to stick to the 60 percent debt limit, and they
only adhered to the three percent deficit by manipulating balance sheet
? Aeolos, in 2001: Greece got cash upfront in return for pledging future landing
fees at the country’s airports. Similarly in 2000, Ariadne devoured the revenue that the government collected from its national lottery. It classified those transactions as sales, not loans
? In truth, the deficit each year has been far greater. In 2009, it exploded to over
12 percent
? Huge deal made with Goldman Sachs at the start of 2002. The deal involved
so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period to be exchanged back into the original currencies at a later date.
? Fictional Exchange Rates
? US bankers devised a special kind of swap with fictional exchange rates.
?
?
? ? ?
That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks In 2005, Goldman sold the interest rate swap to the National Bank of Greece In 2008, Goldman helped the bank put the swap into a legal entity called Titlos for use as collateral to borrow more from the European Central Bank. Such deals are not regarded as loans. Hence credit disguised as a swap didn't show up in the Greek debt statistics. In 2002 the Greek showed Govt deficit to be 12%of GDP. But Eurostat reviewed the data in September 2004, the ratio came out to be 3.7 percent. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005. At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years.
Is it just Greece ?
The government surplus or deficit of Portugal, Italy, Ireland, Greece, United Kingdom, and Spain against the European Union and Eurozone 2002–2009
Impact on International financial markets
Impact on International Forex Market
Impact on International Bond markets
Impact on International Equity markets
Impact on international bond markets
? Causes:
? Greece – Member of EU -- role in international trade and
relationship ? Dip in value of Euro
? Impacts
? Increase in yield spreads of the Government
bonds
Investors -- low confidence in the Government securities ? Cascading of sovereign debt crises ? Demand for higher yields ? Downgrading of bonds – S&P ,Moody’s ratings – vicious circle
?
Impacts contd..
? Alternate point of view
?
Instability in the Greece ?other countries more attractive to investors
? Drop in value of Euro – impact on US economy ? Contagion & eurozone debt concerns
? (PIGS -Portugal, Ireland, Greece & Spain)
? ?
?
Increasing bond spreads + downgraded credit ratings Concerns about a spillover of Greece’s crisis – Asian crisis 1998 Size of Spain -- level of impact
Impact in timelines
4/22/10 – Moody’s downgrades Greek bonds one notch and places Greece on a negative outlook. Greek bond spreads widen. Yields on Greek 10-year bonds rise to 8.7%, compared to Germany’s 10-year bonds at 3.04% 4/27/10 – Ratings agency Standard and Poor’s downgrades Greek sovereign debt to “junk” status and downgrades Portuguese sovereign debt by two notches
4/28/10 – Standard and Poor’s downgrades Spanish sovereign bonds one notch
Steps & their impacts
? ECB Intervention
? Buy bonds ? Suspension of minimum threshold for Greek debt
? ? ?
Bonds eligibility as collateral even with junk status Help Greek banks' access to cheap central bank funding, increase Greek bonds' attractiveness to investors Yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier
? EU Governments – Bid to save euro ? IMF -- The European Financial Stabilization
Mechanism ? Government of Greece – Fiscal austerity & Structural reforms
Impacts
Greece 10 year bond
Portugese 10 year bond
6 5 12 10 yield rate 8 6 4 2 0 Dec-08 Series1
yield rate
4 3 2 1 0 Dec-08 Jul-09 time Jan-10 Aug-10 Series1
Jul-09 Jan-10 time
Aug-10
Spain 10 year bond
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Mar-09
Ireland 10 year bond
5.4 5.2 yield rate 5 4.8 4.6 4.4 Jul-09 Oct-09 Jan-10 May-10 Aug-10 time Jul-09 Oct-09 Jan-10 time May-10 Aug-10 Series1
yield rates
Germany 10 year bond
4 3.5 3 yield rate 2.5 2 1.5 1 0.5 0 Mar-09 Series1
Jul-09
Oct-09 Jan-10 time
May-10
Aug-10
US 10 year bond
4.5
4
3.5
3 Axis Title
2.5
2 Series1
1.5
1
0.5
0 Mar-09 Jul-09 Oct-09 Jan-10 Axis Title May-10 Aug-10
Greek 2 year bond yields
Bond yields
20 18 16 14 12 10 8 6 4 2 0 sept oct nov dec jan feb march april may June july
Impact on International Forex markets
? Impact on Indian Forex markets
? Less exposure in Greek financial markets. ? Indian trade exposure with Greece doesn’t stir Indian Forex market
? FII fluctuations may be attributed to Greek crisis to some extent
Impact on Asian Forex markets
? Unlike European nations, which largely borrowed finance from outside the
country sources, Asian countries met their financial needs largely from the domestic market.
? Higher interest rate differential in Asian economies, providing better
investment returns .
? Capital flows into Asia will not be significantly affected unless the European
banking system as a whole gets hit.
Impact on US economy
? Euro depreciation: leading to spread in US trade deficit with Euro zone nations.
? US’s not so significant financial exposure in Greece financial institutions
? Most of Greece’s debt is held by Europeans (more than 80%)
? Instability in the EU may make the United States more attractive to investors
and encourage capital flows to the United States.
? Marginal exposure of US investor in Greek bonds- $14.1 billion of Greece’s
debt obligations are owed to creditors within the United States
Impact on Euro: Massive Euro depreciation
The value of the Euro has worsened, leaving many in the Eurozone concerned that the exchange rate could remain low for some time.
Impact on International Equity market
?
Possible effects of currency depreciation on the stock market ? A depreciating currency causes a decline in stock prices because of expectations of inflation ? Foreign investors will be unwilling to hold assets in currency that depreciates as that would erode the return on their investment ? On a macroeconomic level, a depreciated currency will boost the export industry and depress the import industry. The impact on domestic output will be positive. Increasing output is seen as an indicator of a booming economy by investors and tends to boost share prices Impact of Greece Debt Crisis on global stock markets
?
?
Foreign investors will be unwilling to hold assets in currency that depreciates as that would erode the return on their investment
Impact on different Stock Markets
? Greece Stock Market Index ? Spain Stock Market Index ? Portugal Stock Market Index ? US Stock Market Index
doc_667848764.pptx
It explains the causes of greece debt crisis, How Goldman Sachs Helped Greece to Mask its True Debt, Impact of greece debt crisis on International Equity marke
International Corporate Finance
Greece Debt Crisis and its impact on International Financial Markets
Submitted By
Greece Debt Crisis: Background
? Build Up to the Current Crisis
? Between 2001 to 2008 Greece averaged High budget deficit (5.2%) in comparison
with Eurozone Average(2%) ? High Current Account Deficit(9%) in comparison with Eurozone Average(1%) ? External debt reached 116% of GDP in 2009 as Greece financed these twin deficits with loans in international market ? New Government in 2009 revised the estimation of budgetary deficit to 13%
? Outbreak of Crisis ? Yields of the Greek bonds increased to 400 basis points in Jan 2010 ? State controlled Dubai World default on debt raised possibility of cascade of sovereign default of countries having large debt like Greece ? Allegations on Greek government having falsified statistics
Causes of Greece Debt Crisis
? Domestic Factors
? High Government Spending & Weak Government Revenues ? Budgetary deficits ? Inefficient public administration- High public tax aversion ? Generous pensions and bonuses ? 75% of public expenses non investments type ? Structural Policies & Declining International Competitiveness
? Low productivity
? Import growth double of export with main commercial partners
Contd..
? International Factors
? Increased Access to capital at low interest rates ? Large confidence because of Greece adoption of the Euro as national currency ? Extremely favorable interest rates ? Issues with EU Rules Enforcement ? Non compliance with 1997 Pact of Stability and Growth ? Unreliable data reporting on public financials
Greek Domestic Policy Responses
? Fiscal consolidation and structural reforms: ? Three cut rounds of expenses and increase of taxes announced between Jan
2010 to Mar 2010
? Reduction or freezing of pensions of the public administration
? Increased the taxes on fuel, tobacco, luxury goods ? Measures to impel the competitiveness by promoting private sector and
greater use of technology and innovation
Financial assistance from the Eurozone member states
? ?
On May 2, 2010, the Euro zone and IMF announced a three-year, €110 billion (about $145 billion) stabilization plan for Greece In spite of the promulgation of the measures of aid of the IMF for the Euro-Greece zone, preoccupations of investing on the sustainability of the debt the zone Euro were deepened during the first week of May of 2010. Impelled by these fears, world-wide the stock markets fell with force the 06 of May 2010 EU finance ministers agreed to a broader €500 billion (about $686 billion) “European Financial Stabilization Mechanism” on May 9, 2010
?
European Central Bank President Jean-Claude Trichet speaking with Greek Finance Minister Giorgos Papakonstantinou
How Goldman Sachs Helped Greece to Mask its True Debt
? In 1999, the Maastricht rules threaten to slap hefty fines on euro member
countries
? The Greeks have never managed to stick to the 60 percent debt limit, and they
only adhered to the three percent deficit by manipulating balance sheet
? Aeolos, in 2001: Greece got cash upfront in return for pledging future landing
fees at the country’s airports. Similarly in 2000, Ariadne devoured the revenue that the government collected from its national lottery. It classified those transactions as sales, not loans
? In truth, the deficit each year has been far greater. In 2009, it exploded to over
12 percent
? Huge deal made with Goldman Sachs at the start of 2002. The deal involved
so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period to be exchanged back into the original currencies at a later date.
? Fictional Exchange Rates
? US bankers devised a special kind of swap with fictional exchange rates.
?
?
? ? ?
That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks In 2005, Goldman sold the interest rate swap to the National Bank of Greece In 2008, Goldman helped the bank put the swap into a legal entity called Titlos for use as collateral to borrow more from the European Central Bank. Such deals are not regarded as loans. Hence credit disguised as a swap didn't show up in the Greek debt statistics. In 2002 the Greek showed Govt deficit to be 12%of GDP. But Eurostat reviewed the data in September 2004, the ratio came out to be 3.7 percent. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005. At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years.
Is it just Greece ?
The government surplus or deficit of Portugal, Italy, Ireland, Greece, United Kingdom, and Spain against the European Union and Eurozone 2002–2009
Impact on International financial markets
Impact on International Forex Market
Impact on International Bond markets
Impact on International Equity markets
Impact on international bond markets
? Causes:
? Greece – Member of EU -- role in international trade and
relationship ? Dip in value of Euro
? Impacts
? Increase in yield spreads of the Government
bonds
Investors -- low confidence in the Government securities ? Cascading of sovereign debt crises ? Demand for higher yields ? Downgrading of bonds – S&P ,Moody’s ratings – vicious circle
?
Impacts contd..
? Alternate point of view
?
Instability in the Greece ?other countries more attractive to investors
? Drop in value of Euro – impact on US economy ? Contagion & eurozone debt concerns
? (PIGS -Portugal, Ireland, Greece & Spain)
? ?
?
Increasing bond spreads + downgraded credit ratings Concerns about a spillover of Greece’s crisis – Asian crisis 1998 Size of Spain -- level of impact
Impact in timelines
4/22/10 – Moody’s downgrades Greek bonds one notch and places Greece on a negative outlook. Greek bond spreads widen. Yields on Greek 10-year bonds rise to 8.7%, compared to Germany’s 10-year bonds at 3.04% 4/27/10 – Ratings agency Standard and Poor’s downgrades Greek sovereign debt to “junk” status and downgrades Portuguese sovereign debt by two notches
4/28/10 – Standard and Poor’s downgrades Spanish sovereign bonds one notch
Steps & their impacts
? ECB Intervention
? Buy bonds ? Suspension of minimum threshold for Greek debt
? ? ?
Bonds eligibility as collateral even with junk status Help Greek banks' access to cheap central bank funding, increase Greek bonds' attractiveness to investors Yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier
? EU Governments – Bid to save euro ? IMF -- The European Financial Stabilization
Mechanism ? Government of Greece – Fiscal austerity & Structural reforms
Impacts
Greece 10 year bond
Portugese 10 year bond
6 5 12 10 yield rate 8 6 4 2 0 Dec-08 Series1
yield rate
4 3 2 1 0 Dec-08 Jul-09 time Jan-10 Aug-10 Series1
Jul-09 Jan-10 time
Aug-10
Spain 10 year bond
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Mar-09
Ireland 10 year bond
5.4 5.2 yield rate 5 4.8 4.6 4.4 Jul-09 Oct-09 Jan-10 May-10 Aug-10 time Jul-09 Oct-09 Jan-10 time May-10 Aug-10 Series1
yield rates
Germany 10 year bond
4 3.5 3 yield rate 2.5 2 1.5 1 0.5 0 Mar-09 Series1
Jul-09
Oct-09 Jan-10 time
May-10
Aug-10
US 10 year bond
4.5
4
3.5
3 Axis Title
2.5
2 Series1
1.5
1
0.5
0 Mar-09 Jul-09 Oct-09 Jan-10 Axis Title May-10 Aug-10
Greek 2 year bond yields
Bond yields
20 18 16 14 12 10 8 6 4 2 0 sept oct nov dec jan feb march april may June july
Impact on International Forex markets
? Impact on Indian Forex markets
? Less exposure in Greek financial markets. ? Indian trade exposure with Greece doesn’t stir Indian Forex market
? FII fluctuations may be attributed to Greek crisis to some extent
Impact on Asian Forex markets
? Unlike European nations, which largely borrowed finance from outside the
country sources, Asian countries met their financial needs largely from the domestic market.
? Higher interest rate differential in Asian economies, providing better
investment returns .
? Capital flows into Asia will not be significantly affected unless the European
banking system as a whole gets hit.
Impact on US economy
? Euro depreciation: leading to spread in US trade deficit with Euro zone nations.
? US’s not so significant financial exposure in Greece financial institutions
? Most of Greece’s debt is held by Europeans (more than 80%)
? Instability in the EU may make the United States more attractive to investors
and encourage capital flows to the United States.
? Marginal exposure of US investor in Greek bonds- $14.1 billion of Greece’s
debt obligations are owed to creditors within the United States
Impact on Euro: Massive Euro depreciation
The value of the Euro has worsened, leaving many in the Eurozone concerned that the exchange rate could remain low for some time.
Impact on International Equity market
?
Possible effects of currency depreciation on the stock market ? A depreciating currency causes a decline in stock prices because of expectations of inflation ? Foreign investors will be unwilling to hold assets in currency that depreciates as that would erode the return on their investment ? On a macroeconomic level, a depreciated currency will boost the export industry and depress the import industry. The impact on domestic output will be positive. Increasing output is seen as an indicator of a booming economy by investors and tends to boost share prices Impact of Greece Debt Crisis on global stock markets
?
?
Foreign investors will be unwilling to hold assets in currency that depreciates as that would erode the return on their investment
Impact on different Stock Markets
? Greece Stock Market Index ? Spain Stock Market Index ? Portugal Stock Market Index ? US Stock Market Index
doc_667848764.pptx