greece crisis

SDMIMD FINNACLE 2014-15

GREECE CRISIS

Imagine a poor kid who joined a club of rich friends to run away from his aggressive next door

neighbor. The poor kid hoped to get rich with his new connections. Instead, he was forced to

overspend to keep up the appearance. Eventually the days of living beyond his means caught up

to him. He borrowed a lot. His friends acted as the guarantor to his debts.

At some point, the poor kid was unable to repay the debt and the rich friends are now on the hook.

The debt is quite enormous, but the wives of the rich friends don't want to risk their money to clear

the debt of their poor friend. The debt is now due and no one is ready to pay. This has now strained

a wide range of relationships and there is a huge risk of very messy breakups and divorces due to

the financial problem.

OVERVIEW

The European debt crisis or Eurozone crisis has been taking place in several countries of Europe

since the end of 2009.The countries which are following the crisis are GREECE, PORTUGAL,

IRELAND, SPAIN, and CYPRUS.

Greece was the first developed country to have missed the payment on IMF in 2015.Greeces

default had a serious consequences on the countrys credit rating.

When the recession was taking place in late 2009, the European debt crisis erupted. At this time,

there were high government structural deficits and debt levels were accelerating. The countries

which were adversely affected by the crisis faced a high rise in interest rate spreads for

government bonds. Four Eurozone states had to be rescued by sovereign bailout programs,

which were provided jointly by the International Monetary Fund and the European Commission,

with additional support at the technical level from the European Central Bank. Together these

three international organizations representing the bailout creditors became nicknamed "the

Troika".

The detailed causes of the debt levels varied. In Greece, the debt increase was associated with

high public sector wage and pension commitments. During the course of 2010-12, it was evident

that Greece was facing negative growth prospects and increasing government debts.


GREECE STATISTICS

1. The Greek economy shrank by 6 percent during 2011, and it has been shrinking for five

years in a row.

2. The average unemployment rate in Greece in 2010 was 12.5 percent. During 2011, the

average unemployment rate was 17.3 percent, and now the unemployment rate in Greece

is up to 21.8 percent.

3. The youth unemployment rate in Greece is now over 50 percent.

4. The unemployment rate in the port town is Perama is about 60 percent.

5. In Greece, 20 percent of all retail stores have closed down during the economic crisis.

6. Greece now has a debt to GDP ratio of approximately 160 percent.

7. Some of the austerity measures that have been implemented in Greece have been

absolutely brutal. For example, Greek civil servants have had their incomes slashed by

about 40 percent since 2010.

8. Despite all of the austerity measures, it is being projected that Greece will still have a

budget deficit equivalent to 7 percent of GDP in 2012.

9. Greece is still facing unfunded liabilities in future years that are equivalent to

approximately 800 percent of GDP.

10. In the midst of all the poverty in Greece, several serious diseases are making a major

comeback.


CAUSES

The crisis resulted from combination of factors like globalization of finance, easy credit

conditions during 2002-2008, financial crisis of 2007-08, international trade imbalances, and the

recession of 2008-12

The fact that Greek debt exceeded of over $400 billion (over 120% of GDP) struck terror into

investors. Though market reaction was rather slow, Greek 10 year government bond exceeded

7% in April 2010.They coincided with large no of negative articles, leading to arguments of

international news media.

Greece was bailed out in 2010 with 110 billion euro direct loan by European Union and IMF.

After 2 years, another 130 billion euro loan was made.

EVOLUTION OF CRISIS

In the first few weeks of 2010, there was anxiety about increasing national debt, with lenders

demanding high interest rate from several countries. This in turn made difficult for the

government to finance further budget deficits, particularly when economic growth rates are low

and when a high percentage of debt were in the hands of foreign creditors.

To fight the crisis, government have focused on raising taxes and lowering expenditures.

GREEK DEBT CRISIS IN LAYMAN TERMS

Greece really likes taking care of his family. Some of his cousins and his older relatives

struggle to find work, others don't like to work, and plenty see themselves as "too old" to work.

So Greece helps out by sending them some money [Pensions and Unemployment].

Greece's job doesn't cover all the money he spends on his family, so Greece got a credit card

a long-time ago [National Debt].

Greece told himself that he could manage his credit card balances. His friends' credit cards

have much higher balances, and they can make their payments without any troubles. But


Greece ignores the obvious: his friends make a lot more money than he does, and their credit

card companies think that they'll continue to make more money. So they get better interest

rates [High Debt-to-GDP, High Interest Rates].

Butfor a long timethings seemed alright. When Greece's credit card got too high he used

a little accounting trick to say that he had more money than he did and he could make those

high credit card payments. As long as he didn't do this every day his credit card companies

didn't mind too much [Printing Money to Fund Deficits].

Then Greece saw his friends set up a cool club. Their club made it easy to do business with

each other and that made his friends and their families happy. Greece believed joining that

club would make him feel important, but when his friends joined they gave up some of their

autonomy. If they got into trouble with their credit cards they couldn't do those accounting

tricks that Greece did [Eurozone and the Euro and Ceding Monetary Control to the ECB].

Still, Greece really wanted in. Deep down he knew that he had a problem and he needed to

deal with it. Maybe he felt like an alcoholic. "If I join this club," he thought, "I can change my

life for the better. I'll stop being so irresponsible with my money." To get into the club, Greece

needed to show the other members that he wouldn't wreck their party if he joined. He made

the case that they could trust him. He said: "here's all my financial information." He probably

lied [Eurozone Reports].

The club let Greece in. He thought: "I've made it! I'm one of the best!" He needed to tighten

his belt. He knew that. But his family still counted on him to pay their rent. The club didn't

allow Greece to spend so much money above his income, but Greece did it anyway. He felt

an obligation to support his family. Maybelike an alcoholicGreece thought: "Tomorrow

I'll change." Always tomorrow. But Greece didn't change fast enough [Greece Continues to

Rack up Debt].

It didn't bother his club or his credit card companies too much at the time. When Greece got

in trouble he just took out another credit card, and he used those new cards to charge the

payments for his old cards [Issuing Debt to Make Debt Payments].

Greece lost his job. He found another, but it only paid about 75% of what his old job paid him.

And that job didn't always pay him what he deserved [Economic Downturn and Tax Fraud].


Credit card companies got scared. The credit card companies' friends lent to other clients and

got burned when some of those clients couldn't make their payments. They knew Greece

struggled to get by, so they decided not to loan to him anymore. Greece couldn't get another

credit card to pay his old cards. How would he support his family? And how would he get a

better job if he didn't have money to invest in himself? [2007-2010 Credit Crisis and Greece

Gets Cut Off].

Greece's club, with another bigger club, stepped into help. They didn't want to see Greece fail;

if he did it might hurt all of them. Greece owed some members of this club, and their families,

a lot of money. So they lent Greece the cash he needed to stay afloat. But that didn't make a

big, important member happy. The clubs, and this big member, made demands. The big ones?

Greece needed to ensure he got paid what he was due, and Greece could no longer support all

his family members [ECB and IMF Step In, Germany Doesnt like It, Conditions on

Loans].

Greece takes the money and now he can make his payments for another five years. But he

doesn't cut his family off like the clubs told him to, and he can't stand up to his boss to get his

rightful paycheck. Admittedly, Greece's family threatens to beat him up if he cuts them off.

But still [Greece Doesn't Meet Terms of Loans].

Greece's club worries about him. They make sure that if he can't pay they won't hurt. They

buy insurance in case Greece can't pay, and they sell off Greek debt to cousins with a taste for

risk [European Banks Hedge Risk of Greek Default].

Payment time. The big club that helped Greece needs a payment. But Greece can't/won't make

it. Greece can't bring himself to cut-off his family or ask his boss to stop cheating him. He

didn't like the conditions, but he struggled to tell the club "no." So he let his family decide;

they yelled "NO!" in their loudest voice, largely as a symbolic act of defiance. While the

members of the club certainly feel free to dissent the vote, in general, exasperated them and

made them feel like negotiations have just gotten tougher [Referendum on Bailout

Conditions, Voting down Expired Bailout Conditions, Various EU Members Respond].


IMPACT ON INDIA

1. India's largest trading partner is the EU. Trouble there will affect India's exports. India

exports nearly $40 billion every year to EU [Rs. 2.4 lakh crores]

2. World financial markets are closely linked. Just as kids in a class catch cold if just one

kid gets it, financial markets get screwed if one market goes down. Investors in US and

elsewhere would pull money out of India and other "foreign" stocks for the losses in

Greece [basic human psychology is that if we get into trouble with one person, we avoid

everyone similar to them]. When investors pull money away, Indian stock markets will

crash. That will affect Indian companies.

3. When world bond markets get into a problem, Indian government would find it tougher

to borrow money and that would affect domestic investments & growth. It would also

push down the currency [meaning imports will go up] and cause inflation.

DEBT CRISIS - TIMELINE

2009 December - Greece's credit rating is downgraded by one of world's three leading rating

agencies amid fears the government could default on its ballooning debt. PM Papandreou

announces program of tough public spending cuts.

2010 January- March - Government announces two more rounds of tough austerity measures,

and faces mass protests and strikes.

2010 April/May - Fears of a possible default on Greece's debts prompt Eurozone countries to

approve a $145bn (110bn euros; 91bn) rescue package for the country, in return for a round of

even more stringent austerity measures. Trade unions call a general strike.

2011 June - 24-hour general strike. Tens of thousands of protesters march on parliament to

oppose government efforts to pass new austerity laws.


Crisis deepens

2011 July - European Union leaders agree a major bailout for Greece over its debt crisis by

channeling 109bn euros through the European Financial Stability Facility.

All three main credit ratings agencies cut Greece's rating to a level associated with a substantial

risk of default.

2011 October - Eurozone leaders agree a 50% debt write-off for Greece in return for further

austerity measures. PM George Papandreou puts the deal in doubt by announcing a referendum

on the rescue package.

2011 November - Faced with a storm of criticism over his referendum plan, Mr. Papandreou

withdraws it and then announces his resignation.

Lucas Papademos, a former head of the Bank of Greece, becomes interim prime minister of a

New Democracy/Pasok coalition with the task of getting the country back on track in time for

elections scheduled provisionally for the spring of 2012.

New bailout plan

2012 February - Against a background of violent protests on the streets of Athens, the Greek

parliament approves a new package of tough austerity measures agreed with the EU as the price

of a 130bn euro bailout.

2012 March - Greece reaches a "debt swap" deal with its private-sector lenders, enabling it to

halve its massive debt load.

2012 May - Early parliamentary elections see support for coalition parties New Democracy and

Pasok slump, with a increase in support for anti-austerity parties of the far left and right. The

three top-ranking parties fail to form a working coalition and President Papoulias calls fresh

elections for 17 June.

2012 June - Further parliamentary elections boost New Democracy, albeit leaving it without a

majority. Leader Antonis Samaras assembles a coalition with third-placed Pasok and smaller

groups to pursue the austerity program.


ANTI-AUSTERITY PROTESTS

2012 September - Trade unions stage 24-hour general strike against government austerity

measures. Police fired tear gas to disperse anarchist rally outside parliament.

2012 October - Parliament passes a 13.5bn-euro austerity plan aimed at securing the next round

of EU and IMF bailout loans; the package - the fourth in three years - includes tax rises and

pension cuts.

2013 January - Unemployment rises to 26.8% - the highest rate in the EU.

2013 April - Youth unemployment climbs to almost 60%.

Public broadcaster closed

2013 June - Government suspends state broadcaster ERT in effort to save money.

2013 August - New state broadcaster EDT is launched.

2013 September - Government launches crackdown on far-right Golden Dawn party. Party

leader Nikolaos Michaloliakos and five other Golden Dawn MPs are arrested on charges

including assault, money laundering and belonging to a criminal organization.

2013 December - Parliament passes 2014 budget, which is predicated on a return to growth after

six years of recession. Prime Minister Samaras hails this as the first decisive step towards exiting

the bailout.

2014 February - Greek unemployment reaches a record high of 28%.

2014 March - Parliament narrowly approves a big reform package that will open more retail

sectors to competition, part of a deal between Greece and its international lenders.

2014 April - Eurozone finance ministers say they'll release more than 8bn euros of further bailout

funds to Greece.

Greece raises nearly four billion dollars from world financial markets in its first sale of long-term

government bonds for four years, in a move seen as an important step in the country's economic

recovery.


LEFT IN POWER

2014 May - Anti-austerity, radical leftist Syriza coalition wins European election with 26.6% of

the vote.

2014 December - Parliament's failure to elect a new president sparks a political crisis and

prompts early elections.

2015 January - Alexis Tsipras of Syriza becomes prime minister after winning parliamentary

elections, and forms a coalition with the nationalist Independent Greeks party.

2015 February - The government negotiates a four-month extension to Greece's bailout in return

for dropping key anti-austerity measures and undertaking a Eurozone-approved reform program.

2015 June - European Central Bank ends emergency funding. Greece closes banks, imposes

capital controls and schedules referendum on European Union bailout terms for 5 July.

Government reinstates former state broadcaster ERT as promised in Syriza manifesto.

Greece misses 1.6bn payment to International Monetary Fund.

2015 July - Greek voters overwhelmingly reject EU bailout terms in referendum.

Following tense talks with Greek government, Eurozone leaders approve third bailout - on

condition that Greece implements new austerity measures, and without agreeing any write-off of

Greek debt. The terms agreed are tougher than those rejected in the 5 July referendum.

Greece goes further into arrears by missing second debt repayment to IMF, which leaves it

owing 2bn to the Washington-based fund.


REFERENCES

http://www.quora.com/What-is-the-ongoing-Greek-economic-disaster-all-about-and-what-does-it-

mean-for-India

https://en.wikipedia.org/wiki/Greek_government-debt_crisis

http://www.usatoday.com/story/money/markets/2015/06/25/qa-greece-debt-crisis-loan/29284181/

http://www.bbc.com/news/world-europe-17373216

http://www.quora.com/In-laymans-terms-what-is-the-Greek-debt-crisis

http://useconomy.about.com/od/Europe/p/What-Is-The-Greece-Debt-Crisis.htm

greece crisis

Documents