greece bad debt and its impact

8/7/2019 GREECE BAD DEBT AND ITS IMPACT

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GREECE BADGREECE BAD

DEBT ANDDEBT ANDITS IMPACTITS IMPACT

PREPARED &PREPARED &PRESENTED BY:PRESENTED BY:

AJUMENAJUMENALAMUALAMUARUL RAJARUL RAJ


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CURTAIN RAISECURTAIN RAISE


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BAD DEBTBAD DEBT

loss to the businessloss to the business expenseexpense


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ECONOMYOF GREECEECONOMYOF GREECEtwentytwenty--seventhseventh

largestlargest economyeconomy ininthethe worldworld byby nominalnominalgrossgross domesticdomestic

productproduct (GDP)(GDP)InternationalInternational

MonetaryMonetary FundFund--20082008

thirtythirty--thirdthird largestlargest byby

purchasingpurchasing powerpowerparityparity

2222ndnd highest higheststandardstandard ofof livingliving inin

thethe worldworld


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GREECE BAD DEBTGREECE BAD DEBT

End of 2009End of 2009

financial crisis &financial crisis &uncontrolled spendinguncontrolled spending

prior to the Octoberprior to the October2009 national2009 nationalelectionselections

second highestsecond highest

budget deficit (afterbudget deficit (afterIreland)Ireland)


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second highest debt (after Italy) tosecond highest debt (after Italy) toGDP ratio in the EUGDP ratio in the EU

2009 budget deficit2009 budget deficit --13.6% of GDP13.6% of GDP


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GREECESGREECES

ECONOMICECONOMICWOESWOES


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2010 DEBT CRISES2010 DEBT CRISES

Angela MerkelAngela Merkel--"institutions bailed"institutions bailed

out with public fundsout with public fundsare exploiting theare exploiting thebudget crisis inbudget crisis inGreece andGreece andelsewhereelsewhere

initial size of the loaninitial size of the loanpackage waspackage was 4545billion ($61 billion)billion ($61 billion)


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first installment coveredfirst installment covered 8.5 billion of Greek8.5 billion of Greek

bonds that became due for repaymentbonds that became due for repayment a national strike was held against tax increasea national strike was held against tax increase Greece, Portugal, Spain have a 'credibilityGreece, Portugal, Spain have a 'credibility

problem', because they lack of adequately repayproblem', because they lack of adequately repaydue to their low growth rate, high deficit, lessdue to their low growth rate, high deficit, lessFDI, etc.FDI, etc.


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GREECE GDP GROWTH RATEGREECE GDP GROWTH RATE Gross Domestic ProductGross Domestic Product

(GDP) in Greece(GDP) in Greececontracted at an annualcontracted at an annualrate of 1.50 percent inrate of 1.50 percent in

the last reported quarter.the last reported quarter. From 2000 until 2010,From 2000 until 2010,

Greece's averageGreece's averagequarterly GDP Growthquarterly GDP Growthwas 0.66 percentwas 0.66 percent

reaching an historicalreaching an historicalhigh of 2.80 percent inhigh of 2.80 percent inMarch of 2003 and aMarch of 2003 and arecord low ofrecord low of --1.501.50

percent in June of 2010percent in June of 2010


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THREE YEARS OF RECESSIONTHREE YEARS OF RECESSION

The European Union andThe European Union andInternational MonetaryInternational MonetaryFund (IMF) announced aFund (IMF) announced a

bailbail--out package on 2out package on 2MayMay -- the biggest inthe biggest inrecent history.recent history.

They are offering 110bnThey are offering 110bneuros (95bn; $146.2bn)euros (95bn; $146.2bn)spread over three yearsspread over three years --

but on condition thatbut on condition thatGreece slashes publicGreece slashes publicspending and boosts taxspending and boosts taxrevenuerevenue


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WHY GREECE IS SO MUCHWHY GREECE IS SO MUCH

TROUBLE?TROUBLE? Public spending risePublic spending rise

and public sectorand public sector

wages practicallywages practicallydoubled during thatdoubled during thattime. However, as thetime. However, as themoney flowed out ofmoney flowed out of

the government'sthe government'streasury, tax incometreasury, tax incomewas hit because ofwas hit because ofwidespread taxwidespread tax

avoidance.avoidance.


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last year was 13.6% of its gross domesticlast year was 13.6% of its gross domesticproduct (GDP).GDP is the value of all itsproduct (GDP).GDP is the value of all itsgoods and services. This is one of thegoods and services. This is one of thehighest in Europe and more than fourhighest in Europe and more than four

times the limit under euro zone rules.times the limit under euro zone rules.


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HOW BAD IS THE GREECES DEBTHOW BAD IS THE GREECES DEBT

PROBLEMPROBLEM The GreekThe Greek

government hasgovernment has

confirmed that theyconfirmed that theyhave misled marketshave misled marketsand distorted theand distorted thebudget accounts forbudget accounts for

many years,many years,highlighting ahighlighting asubstantialsubstantialinformationinformation

asymmetry.asymmetry.


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In Greece's case, the information gapIn Greece's case, the information gap

between it and potential buyers of Greekbetween it and potential buyers of Greekdebt is more a chasm than a gap.debt is more a chasm than a gap.

a shortage of national savings and musta shortage of national savings and must

sell debt to foreign investors to financesell debt to foreign investors to financethe budget deficit.the budget deficit.

Given the inability of the Commission toGiven the inability of the Commission tomanage and enforce its own budgetmanage and enforce its own budgetcontrolscontrols


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WHY IS THIS A WORRYOUTSIDEWHY IS THIS A WORRYOUTSIDE

GREECE?GREECE? affected becauseaffected because

of the impact onof the impact on

the commonthe commonEuropean currencyEuropean currency

taxpayers of thesetaxpayers of these

countries willcountries willeffectively share aeffectively share apart of Greece'spart of Greece'sburdenburden


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Many major banks have invested in GreekMany major banks have invested in Greekdebt.debt.

So the economic crisis could affect theirSo the economic crisis could affect theirshareholders, many of whom are ordinaryshareholders, many of whom are ordinary

investors or people who own their sharesinvestors or people who own their sharesthrough pension fundsthrough pension funds


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COMPARING GREECE SITUATIONCOMPARING GREECE SITUATION

WITH OTHER COUNTRIESWITH OTHER COUNTRIES India, China, Brazil orIndia, China, Brazil orso called emergingso called emergingnations.nations.

If the investors fromIf the investors fromEU region see aEU region see aproblem in theirproblem in theirhomeland, they willhomeland, they will

start pulling out theirstart pulling out theirinvested funds frominvested funds fromthese emergingthese emergingeconomies for theireconomies for theirown use in theirown use in their

countries.countries.


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selling pressure, so more collapse in theseselling pressure, so more collapse in these

emerging markets.emerging markets. Then, not to be forget that all the economicThen, not to be forget that all the economic

conditions impact the consumer behavior. If aconditions impact the consumer behavior. If aperson in Greece or UK is not feeling financiallyperson in Greece or UK is not feeling financially

secure, he will not spend lavishly.secure, he will not spend lavishly.

This will lead to reduction in demand, whichThis will lead to reduction in demand, whichmight have a severe impact on the exportsmight have a severe impact on the exports

made to the EU region countries from marketsmade to the EU region countries from marketslike India and China. So, overall, everything willlike India and China. So, overall, everything willget impacted across the globeget impacted across the globe


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COULD GREECE LEAVE THE EUROCOULD GREECE LEAVE THE EURO

Currency traders haveCurrency traders havefeared that somefeared that somecountries with largecountries with large

budget deficitsbudget deficits -- suchsuchas Greece, Spain andas Greece, Spain andPortugalPortugal -- tempted totempted toleave the euro.leave the euro.

A country which leftA country which leftthe euro could allowthe euro could allowits currency to fall inits currency to fall invalue, and thusvalue, and thusimprove itsimprove its

competitiveness.competitiveness.


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But it would cause huge break in the financialBut it would cause huge break in the financial

markets as investors would fear other nationsmarkets as investors would fear other nationswould follow, potentially leading to the breakwould follow, potentially leading to the break--upupof the monetary union itself.of the monetary union itself.


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CURTAIN FALLCURTAIN FALL


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ASSET SEIZUREASSET SEIZURE

Greece declared itselfGreece declared itselfunable to make itsunable to make itsdebt repayments ondebt repayments on

schedule, some hedgeschedule, some hedgefunds or otherfunds or othercreditors could go tocreditors could go tocourt to try to seizecourt to try to seizeGreek assetsGreek assets

many courts wouldmany courts wouldsupport a Greek assetsupport a Greek assetseizure.seizure.


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Military equipment, embassy buildings andMilitary equipment, embassy buildings andother property essential to the functioningother property essential to the functioningof government is excused from claimsof government is excused from claims


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WHAT GREECE DOING?WHAT GREECE DOING? hike VAT (sales tax) and fuelhike VAT (sales tax) and fuel

duty, rise the retirement age andduty, rise the retirement age andreduce pensionsreduce pensions

Carl B. Weinberg, chiefCarl B. Weinberg, chief

economist of High Frequencyeconomist of High FrequencyEconomics in ValhallaEconomics in Valhalla -- Only aOnly amultiyear restructuring of themultiyear restructuring of thebond obligations, coupled withbond obligations, coupled withsubstantial deficit reduction, cansubstantial deficit reduction, canachieve a permanent adjustmentachieve a permanent adjustmentof Greeces fiscal obligationsof Greeces fiscal obligationswithout actually defaulting onwithout actually defaulting onthe paper and giving allthe paper and giving all

stakeholders a haircutstakeholders a haircut


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Daniel Gros, director of the Center forDaniel Gros, director of the Center for

European Policy Studies, a researchEuropean Policy Studies, a researchorganization in Brusselsorganization in Brussels--simply extendingsimply extendingthe maturity of existing notes by fivethe maturity of existing notes by fiveyears, at the same interest rate.years, at the same interest rate.

So, a fiveSo, a five--year bond paying 6 percentyear bond paying 6 percentannual interest would become a 10annual interest would become a 10--yearyearbond, still paying 6 percent interest.bond, still paying 6 percent interest.

Greece could concentrate on reducing itsGreece could concentrate on reducing itsdeficit, which stands at 13.6 percent ofdeficit, which stands at 13.6 percent ofgross domestic productgross domestic product


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Mr. WeinbergMr. Weinberg -- Total government debtTotal government debtwas 273 billion euros, or $365 billion, atwas 273 billion euros, or $365 billion, atthe end of 2009, or 115 percent of annualthe end of 2009, or 115 percent of annualgross domestic product.gross domestic product.

Interest alone could come to 97 billionInterest alone could come to 97 billioneuros, or $130 billion, over the next fiveeuros, or $130 billion, over the next fiveyearsyears


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THANK YOUTHANK YOU

greece bad debt and its impact

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