Greece Debt Crisis

ByHarshavardhan Jagdale

Swapnil Mali

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• What is sovereign debt crisis?

• How did the Greek crisis originate ?

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What is sovereign debt crisis?

• Sovereign debt crisis means the sovereign government's borrowing from domestic and external markets is in excess of its capacity to repay, resulting in loan defaults requiring rescheduling of loans or bailout packages from other countries or multilateral institutions such as IMF.

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How did the Greek crisis originate ?

• The crisis in Greece surfaced in 2007-08 , when it came to be known that Greece was not in a situation to meet its repayment obligations to its external creditors. The budget deficit of Greece was in the range of 13.6% of its gross domestic product. The stock of debt was equivalent to 115% of the gross domestic product. The debt problem was further compounded by the fact that nearly three-fourths of the government debt was held by foreign institutions, particularly foreign banks. Reportedly, investment banks misled investors into investing in government bonds of Greece by being secretive about the actual state of affairs. The rating agencies played accomplice and allegedly 'failed' to assess the correct fiscal position.

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Euro zone

• 27 members• Freely transferring capital , goods etc• Encourage financial activities after world war II • NO political intervention

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ECB

• 1998 – Main aim is to control inflation and have encouraging financial policies

• Common currency from Jan 1 , 1999• Admin this currency• Member like UK decided to go with own

currency and monitory policy

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Crisis• PIIGS• Portugal , Ireland , Italy , Greece , Spain

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Greece

• From 2000 to 2007 growth rate about 4.2%• Deficit increased very high from 1993

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

€ billion 122.3 141 151.9 159.2 168 183.2 195.4 224.2 239.4 262.3 298.7 328.6

% GDP 94 103.4 103.7 101.7 97.4 98.6 100 106.1 105.4 110.7 127.1 142.8

GDP growth 3.4 4.5 4.2 3.4 5.9 4.4 2.3 5.2 4.3 1.0 –2.0 –4.5

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Key Terms

• Bailout – Act of loaning or giving capital to an entity that is in danger of failing , in attempt to save it from bankruptcy

• Austerity – Policy of deficit cutting , lower spending & reduction in public benefits or services. While reducing spending , coupled with increase in taxes to pay back creditors to reduce debt.

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A high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond)

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Important happenings

5 March,2010ECONOMIC PROTECTION BILLSave €4.8 Billion

23 April , 2010

EU- IMF bail out package

Immediate €45 billions

Total €115 Billion 5% interest rate

27 April ,2010Rating decreasedInvestors may have fear to loose 30 to 40 % of investment

World Market crashed

9 May , 2010

27 members of Euro Zone come together and formed EFSF

European Financial Stability Facility

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What if Greece defaults debt ?

• Governments rarely default on the entire value of their debt. Instead, they often enter into negotiations with their bondholders to agree on a delay or partial reduction of their debt payments, which are often called a debt restructuring or 'haircut'.

• Investor will loose money , market may collapses

• Value of € may fall down

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Social & Political problem

• Social – Against Austerity• Political willingness to help needed• If totally bailout Greece other from PIIGS

expect the same• Unique problem – Central monitory policy but

individuals need to run on own

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EURO

• We can’t predict that its end of EURO• But certainly it raises doubts over currency• Question over its trust of creating option of

currency reserves to £ Pounds ,¥ Yen , $ Dollar

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Thank You