Debt sustainability criteria

.5Investment Sustainability

It stipulates that optimal Debt/GDP ratio should be attained, optimality is relative given anyone country’s

fiscal conditions

60%Gross Domestic Product

Developed countries

40% Developing countries

−EU and IMF set debt/GDP ratio−It was simply the median debt/GDP ratio.

−It was proposed to be the optimal ratio.

−It is not binding.−It could be included in EU accession

criteria

Optimal Debt/GDP ratio

Maastricht Treaty - 1992•EU signed Maastricht Treaty, under which EDP was defined in article

104.•According to the treaty, fiscal surveillance concerning public debt is based

on the EDP method.

•The Treaty obliges Member States to comply with budgetary discipline by respecting two criteria:

A deficit to GDP ratio not

exceeding 3%

A debt to GDP ratio not exceeding 60%.

Public debt/GDP figures - EU

Many EU countries have crossed 60%. Public debt in Italy and Greece

exceeds the GDP

Source: EUROSTAT

Public debt/GDP 2010

Public debt/GDP figures - EU

Country %Belgium 96.2Bulgaria 16.3Czech Republic 37.6Denmark 43.7Germany 83.2Estonia 6.7Ireland 92.5Greece 144.9Spain 61France 82.3Italy 118.4Cyprus 61.5Latvia 44.7Lithuania 38Luxembourg 19.1

Country %Hungary 81.3Malta 69Netherlands 62.9Austria 71.8Poland 54.9Portugal 93.3Romania 31Slovenia 38.8Slovakia 41Finland 48.3Sweden 39.7United Kingdom 79.9Iceland 92.9

Economic Indicator Listing in Year 2010

Source: EUROSTAT

<60%60-80%

81-100%101-120%

121%+

SpainNetherland

s

Cyprus

Crossing Debt/GDP

GreeceItaly

MaltaAustria

UKHungaryFrance

GermanyIreland

IcelandPort.

Belgium

Public debt/GDP 2010

Public debt crisis in Greece

Overview:

•Public debt/GDP reached 142% in 2010.

•Increasing tax rates

•Rising unemployment rates

•Greek government now has to pay rates of up to 30% to borrow.

•The government is facing auction sale of the country’s assets so that foreign governments and banks can get their

money back

What triggered the crisis?

•Greece joined EU in 1981.

Since then, Greece enjoyed high economic growth rate brought about by

•No real growth has been achieved since public expenditures were largely used to plug gaps in the Greek budget that was struggling to meet the costs of pensions

and other current expenditures

Trade boom

Tourism boom

Public debt crisis in Greece

•Since EURO ZONE accession in 2001, the local currency had been replaced by a big global currency, the euro .

•This allowed Greece’s borrowing costs to fall sharply, cutting the cost of public sector borrowing and the interest rates paid on business and personal loans

Impact of interest rate decrease 2001-2008

التجارى الرواج التجارى الرواج

Household sectorPrivate sectorPublic sector

Greece’s household savings rate fell from 3.2% in 2000, pre-EMU, to minus 3.2% in 2006, by 2007 the debt-to-income ratio of Greek households had quadrupled to

65% .

Borrowing increased rapidly due to weak bank prudential

regulations

•The increase in consumer spending caused the country’s current account deficit to rise by 14-15% of GDP, with inflation each year being 1-2% above the euro country

average

Public debt crisis in Greece

Borrowing increased rapidly due to weak bank prudential

regulations

Is it the government responsibility?

Total debt to foreign banks at the end of 2010 amounted to $174bn. Yet the breakdown of this huge debt is as follows:

Nevertheless, the government is responsible for:

.1Reducing tax rates and in turn public revenues.

.2Increasing current public expenditures.

.3They took advantage of derivative financial products to make a portion of the government deficit ‘disappear’

from the view of Europe’s accountants.

37% governme

nt debt8% Greek banks 55% non-bank

private sector

Public debt crisis in Greece

العام – الدين أزمة اليونان

Solutions adopted:

Greece faces prolonged austerity and the auction sale of the country’s assets so that foreign governments and banks can get their money back

Since 2009, the government was in a big trouble with foreign banks demanding back their money.

Increasing tax rates

Severe job cutsReducing public expenditures

All these solutions failed since the government was capped

by rising demonstrations.

Thank youDr.Mohamed Zaky