greek sovereign debt crisis

Greek Sovereign Debt CrisisAditya Lathe

The European Union

Greek Crisis Timeline

Causative Factors

Options

European Union- History• Founded as European Economic Community in

1957 by 6 countries- Belgium, France, (West) Germany, Italy, Luxembourg and Netherlands (in response to greater integration after WWII).

• In 1992, under the “Treaty on European Union” signed at Maastricht, the name ‘European Union’ officially replaces ‘European Community’.

• As of 2011, 27 countries in Europe are part of the European Union.

EU – Member States

Eurozone

• Euro introduced as a common currency in 11 EU countries in January 1999.

• Physical notes and coins introduced in January 2002, replacing all national currencies.

• As of 2011, 17 nations within the EU, use the Euro as a common currency. The nations, implying a monetary union, are together denoted as Eurozone.

Eurozone GDP (Nominal) (Source: ECB)

S.No. Country GDP (2010) %1 Austria 286.2 3.12%2 Belgium 354.4 3.87%3 Cyprus 17.3 0.19%4 Estonia 14.3 0.16%5 Finland 180.3 1.97%6 France 1932.8 21.09%7 Germany 2476.8 27.02%8 Greece 227.3 2.48%9 Ireland 156 1.70%

10 Italy 1548.8 16.90%11 Luxembourg 40.3 0.44%12 Malta 6.2 0.07%13 Netherlands 588.4 6.42%14 Portugal 172.8 1.89%15 Slovakia 65.9 0.72%16 Slovenia 35.4 0.39%17 Spain 1062.6 11.59%

Total €9165.8bn

Austria3%

Belgium4% Fin-

land2%

France21%

Germany27%

Greece2%

Ire-land2%

Italy17%

Nether-land6%

Portu-gal2%

Spain12%

GDP (2010)

The European Union

Greek Crisis Timeline

Causative Factors

Options

Crisis Timeline

Jan 2001: Greece joins the Eurozone, becoming the 12th member to adopt the Euro

Nov 2004: Admits to fudging figures to gain entry to the Euro. Says deficit was not below 3% of GDP, as required by EU rules. Has been consistently above 3% since 1999.

Mar 2005: Adopts austerity measures to reduce deficit and improve finances post the hosting of Olympics. Posts short recovery upto 2006, when GDP grows by 4.1% in 3 months.

Crisis TimelineOct 2009: Recovery short-lived after Global Financial Crisis. Debt fears mount. Economy contracts by 0.3%, national debt up by 56% in 5 years (€242bn), deficit expected to be 6% of GDP. (Later revised to 12.7% of GDP).

Dec 2009: Fitch downgrades rating from A- to BBB+, a first in 10 years. Govt. proposes radical reforms, including crackdown on corruption and reining in public spending. Workers begin strikes.

Feb 2010: Deficit at 12.7%, debt at €300bn. 1st Austerity measure announced, includes freeze on public sector pay & higher taxes. Strikes intensify. Goldman Sachs under Fed enquiry for helping Greece “borrow” billions through Exchange Rate Swaps.

Crisis TimelineApr 2010: 16 Eurozone members announce bailout package. €30bn 3 year loan at 5% interest, to be provided over next 1 year through the ECB. IMF to provide €15bn. S&P downgrades rating to BB+ (Junk status), as loan amount not seen as enough. 2nd Austerity measures announced, include salary cuts, increase in taxes.

May 2010: Size of bailout package increased to avert sovereign default. €110bn 3 year loan at 5% interest to be provided, with Eurozone members share at €80bn and IMF share at €30bn. Deficit at 13.6%. Govt. submits a 3year plan aimed at cutting budget deficit from 13.6% of GDP in 2009 to below 3% of GDP in 2014.

May 2010: With default fears from Portugal and Ireland, EFSF worth €750bn launched. €440bn loan backed guarantee and bilateral loans by Eurozone members, €60bn balance of payment support by EU members and upto €250bn by IMF support to be made available to weak economies.

Crisis Timeline

Jul 11: 2nd Eurozone Bailout package announced. €109bn to be provided through EFSF, at lower interest rates (~3.5%) & with longer timeframe (15-30 yrs). Private sector contribution at €37bn.

Present: Country barely being sustained on drip-feed from the Troika “European Union, European Central Bank & International Monetary Fund”. Fate of the nation still uncertain.

The European Union

Greek Crisis Timeline

Causative Factors

Options

Causative Factors

Structural

rigidities

High fiscal deficit

Reliance on

external debt

Structural Rigidities

Large & Inefficient Public Administration

Costly pension & Healthcare systems

Tax Evasion & absence of the will to maintain financial discipline

Structural Rigidities• According to OECD, spending on public administration as a

percentage of total public expenditure in Greece was higher than in any other OECD member, “with no evidence that the quantity or quality of the services are superior”.

• Public sector plagued by overstaffing and poor productivity.• An aging Greek population—the percentage of Greeks aged over

64 is expected to rise from 19% in 2007 to 32% in 2060—could place additional burdens on public spending and what is widely considered one of Europe’s most generous pension systems.

• Informal economy in Greece valued at between 25%-30% of GDP.• Observers offer a variety of explanations for the prevalence of tax

evasion in Greece, including high levels of taxation and a complex tax code, excessive regulation, and inefficiency in the public sector.

High Fiscal Deficit

High Govt. Spending on public administration

High Govt. Spending on pension and healthcare

Low Revenue collections

High Fiscal Deficit• Greek government expenditures in 2009 accounted for 50% of

GDP, with 75% of (non-interest) public spending going to wages and social benefits.

• Total Greek public pension payments expected to increase from 11.5% of GDP in 2005 to 24% of GDP in 2050.

• Between 2001-2007, while central government expenditures increased by 87%, revenues grew by only 31%.

High Fiscal Deficit

Large External Debt

Adoption of Euro

Lax EU Rules enforcement

External Debt

• With the currency bloc anchored by economic heavyweights (Germany and France), and a common monetary policy conservatively managed by the ECB, perceived stability due to Eurozone membership allowed access to capital at artificially low interest rates• Lax EU Rules enforcement: No financial

penalty for Budget deficit >3% and debt >60% of GDP• Got away with hiding billions of dollars of debt

through currency exchange rate swaps

Central Govt. Debt- Dec 2010

Central Govt. Debt – June 2011

Central Govt. Debt – Maturity Profile

Debt (% of GDP) - Trend

Debt (% of GDP) - Comparative

Country Exposure

Comparative 10 yr Bond yields

German Bonds Greek Bonds

The European Union

Greek Crisis Timeline

Causative Factors

Options

Options

Outright Default

Bailout through EU support & austerity measures

Orderly Default

Exit from Eurozone

Option I: Outright Default• German and French financial institutions are thought to hold

up to 35-40% of Greek debt and would be severely hit.• The credibility of the ECB would suffer, and that could hurt

international investment in the eurozone.• A default could bankrupt Greek banks, which together are

reckoned to hold about a quarter of the Greek sovereign debt.• The fear is of contagion - the weaker eurozone countries

would find it more expensive to borrow in commercial markets. The Irish Republic and Portugal might need a further EU-IMF bail-out.

Option II- EU Support & Austerity Measures• Greece to survive on drip-support from Eurozone . Meanwhile, to

shore up finances by continuing with austerity measures. • Austerity Measures: • Taxes increased by €2.32bn, with additional taxes of € 3.38bn in

2012.• Public sector wage bill to be cut steadily to shrink it by more than

€2bn by 2015. Measures include public sector wage cut of 15%, cap on wages and bonuses.

• Defence spending to be cut by €200mn in 2012, and by €333mn each year from 2013 to 2015.

• Health spending to be cut by €310mn in 2011 and a further €1.81bn in 2012-2015.

• Social security to be cut by €1.09bn in 2011, €1.28bn in 2012 and €1.03bn in 2013.

• €50bn euros to be raised from privatisations by 2015.

Option III- Orderly default• Holders of Greek government bonds would have to accept less

than they were worth, "take a haircut".• According to analysts, the size of that haircut could be

anything between 20% and 50%.• If the settlement were negotiated in an orderly fashion, it

could form part of an acceptable solution - although it would make investors reluctant to buy more Greek bonds in the future.

• Another problem for Greece is that the ratings agencies would probably treat a debt restructuring as a default anyway.

• It would also raise interest rates for bonds issued by other troubled eurozone "periphery" economies - especially the Irish Republic and Portugal - and depress the value of the euro.

Option IV: Exit from Eurozone• Being in the eurozone, Greece is unable to restore its economic

competitiveness by devaluing its currency.• Greece could exit the Euro and return to the drachma at a new

exchange rate: one euro would equal one drachma.• Such a measure would boost exports, tourism. However, would

negatively impact imports.• However, it would increase the size of Greece's debt mountain

and Greece will experience hyperinflation. It may cause a run on the banks.

• Speculation will be fueled regarding other similar orderly exits of other countries (Ireland, Portugal and others).

• There is no legal procedure for leaving the eurozone and some economists said treaty changes would have to take place before an exit could happen.

Thank You

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