The Great Greek Crisis

Meghavi MehtaPratima JainTY-MBA(PT)

Greek budget deficit

Budget Deficit

Introduction of Greece EconomyIntroduction of Greece Economy

Population: 11.2 million (UN, 2009)

Capital: Athens

Major Language: Greek

Major Religion: Christianity

Monetary unit: 1 euro = 100 cents

GNI per capita: US $28,650 (World bank,2008)

Inflation rate: 1.10% (Sept 2013)

Unemployment rate: 40% (2013)

Introduction of Greece Economy

• 27th largest GDP in the world agriculture: 3.4% industry: 20.8% services: 75.8%

• 22nd highest human development• Greece main business is Tourism, Mining,

Petroleum, Chemicals, Food Processing, Textile, Metal Products and Tobacco Processing.

MARITIME INDUSTRY

The shipping industry is a key element of Greek economic activity dating back to ancient times.

Piraeus is the largest marine – based shipping centre of Greece and also the commercial hub of

Greek shipping, with most of Greece's ship-owners basing their commercial operations

there.

TOURISM

An important percentage of Greece´s income comes from

tourism.

TOURISM INDUSTRY

Economic Overview

Greece has a capitalist economy with the public sector accounting for about 40% of GDP and with per capita GDP about two-thirds that of the leading euro-zone economies.

The Greek economy grew by nearly 4.0% per year between 2003 and 2007.

The economy went into recession in 2009 as a result of the world financial crisis, tightening credit conditions, and Athens' failure to address a growing budget deficit.

The economy contracted by 2% in 2009, and 4.8% in 2010.

Why is Greece in Trouble?

• Greece’s reported budget deficits averaged 5% per year, compared to a Eurozone average of 2%, and current account deficits averaged 9% per year, compared to a Eurozone average of 1%.

• Between 2001 and 2008, Greece’s government borrowed heavily from abroad to fund substantial government budget and current account deficits.

• Greece funded these twin deficits by borrowing in international capital markets, leaving it with a chronically high external debt (179% of GDP in 2012).

•The Greek economy became embroiled in a huge debt crisis in the aftermath of the global financial crisis from 2007 onwards.

• As a direct consequence of the Global Financial Crisis:•Most of Greece’s main trading partners went into a deep recession – cutting exports

•There was a 2% fall in world output (unusual) but worse, a 12% fall in global trade

•Greece suffered badly because her economy was heavily dependent on tourism and construction, two sectors badly hit by the sharp fall in demand and production.

Why is Greece in Trouble?

• Greece’s current economic problems have been caused by a mix of domestic and international factors.

• Greece is facing sovereign debt crisis since it accumulated high levels of debt during the decade before the financial crisis when the market was highly liquid.

• Reasons– High Government Spending and Weak Government

Revenues– Structural Policies and Declining International

Competitiveness– Increased Access to Capital at Low Interest Rates

Why is Greece in Trouble?

Hosting the 2004 Olympics

Many factors were behind the crippling debt crisis, the 2004 Summer Olympics in Athens has drawn particular attention.

The 2004 Athens Olympics cost nearly $15 billion

The tab for security alone was more than $1.2 billion.

Initial proposed budget of $1.6 billion

The Big Bailout..

• It was saved when other European countries and the International Monetary Fund stepped in with two massive bailouts. In exchange, Athens has had to make harsh spending cuts and tax increases to rein in the runaway deficits. Its economy has been put under strict supervision from the IMF, European Commission and European Central Bank, known collectively as the "troika."

• First bailout package of $147 billion in May 2010 prevented bankruptcy.

• Second deal of $174 billion in October 2011 forgives about 50% of Greece overall debt.

• Greece’s public debt stood at 305.3 billion euros, or 160.5 percent of GDP, in the first quarter of this year.

IMPACT!!

RATING DECLINE

On 27 April 2010, the Greek debt rating was decreased to BB+ by Standard & Poor

Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back

Effects of declined rating

Stock market and Euro currency declined

The euro declined by 1.6 % to $1.3175

The dollar jumped 1% on a trade-weighted basis on haven flows

The yield of the Greek two-year bond reached 15.3%

Industrial producti on gone down

Industrial Production dropping by 11%.

Mining fell by 6.4%

manufacturing decreased by 11.3%

electricity production dropped 12.2%

Impact on private individuals

• The most obvious way would be through tax bills, as Europe agrees to ride to the rescue and help Greece deal with its mounting public and foreign debts.

• Any assistance to Greece will come at a cost that will ultimately have to be borne by taxpayers in the nations that contribute.

Greek banking sector is also in trouble

• Banks stocks were the worst affected because of crises

• Decline in bank stock prices by 47% since November 2009

• Greek bank deposits have fallen to 8.4 billion Euros

Greek banking sector is also in trouble

Exposure of banks to Greece bonds

Name of Banks Holdings

BNP Paribas €5 billion

Dexia €3.5 billion

Generali (Italy) €3 billion

Commerzbank (Germany) €2.9

Unemployment increasedThe industrial production is lowIn 2011- unemployment rate gone to 15.9%

IMPACT ON EUROPEAN UNION

The crisis has reduced confidence in other European economies

Financing needs for the euro zone in 2010 come to a total of €1.6 trillion

Ireland, with a government deficit in 2010 of 32.4% of GDP, Spain with 9.2%, and Portugal at 9.1% are most at risk.

Impact On Euro Zone

• High interest rates on bonds • High unemployment • Foreign trade badly affected • Exchange rate of Euro was adversely affected • Downgrading of rating of euro zone nations • Low confidence of global investors • The financial crisis caused slow down in euro zone

and global economy

EuropeGreeceOtherUSAAsia

Greece Government Bond ownership by region

Europe 60$

Greece 29%

Other 5%

USA 3%

Asia 3%

Impact on USImpact on US U.S. exports to the EU could be impacted if the crisis slows growth in the EU and causes the euro to depreciate against the dollar.

As the crisis continues, increased perceptions of risk are impacting U.S financial markets.

CDT DOW dropped more than 992 points.

The panic in Greece caused one of the most turbulent days ever on Wall Street. In a matter of minutes, stocks plunged 900 points.

The Dow managed to recover but still ended in negative territory, The Dow closed down 347 points.

Greek imports from India include cotton, synthetic fibres, fabrics, vehicles, iron, steel and fruit.

Greek exports to India include fibres, fertilizers, organic chemicals, pharmaceutical products, leather goods, metal processing machinery, etc.

Only 0.05% of India's exports go to Greece and Indian banks have virtually no direct exposure to Greece.

There will be some additional capital flows coming in in search of a safe haven and a small drop in exports.

Euro which was quoting at around Rs.67 before crisis is way below at Rs.55.92 currently.

Impact on India

What level of debt is sustainable – 60-85% of GDP

• Pension reforms including raising the official state retirement age• Privatization of state assets both to raise revenue and to increase

competition• Cuts in the national minimum wage• Measures to reduce entry barriers to certain occupations• Cutting taxes on employing workers to boost employment• Making the Greek judicial system more efficient• Stronger measures to tackle tax evasion by individuals and

businesses

REFORMS

Tourism is Greece's number one industry, accounting for 15% of GDP. Greece should be one of the world's foremost destinations for cruise ships. But highly restrictive laws have long discouraged foreign tour operators

In 2010, under orders from the troika, the Greek government enacted a new law that promised reform, but failed to deliver in practice.

It required cruise lines to sign a three-year contract guaranteeing visits to Greek ports. Not a single cruise line entered the market under that law.

The new government has pledged to enact a measure that removes both the tax and the contract requirement for non-EU carriers.

The Cruise Industry

The shockingly high cost of road transport is socking both Greek exports and domestic production. To operate a trucking fleet, companies need a license for each truck, and no new ones have been granted since the 1970s.

As a result, trucks are in short supply, so manufacturers need to pay inflated prices to move merchandise within Greece, or to foreign markets.

In 2010, the parliament passed a law enabling the government to issue new licenses at minimal cost. But the reform was delayed for three years -- leading to questions over whether it would really happen. In 2012, the parliament eliminated the transition period, and fully opened the trucking market as of January

The Truck Industry

PharmaceuticalsThe government guaranteed pharmacies a 35% markup on all drugs. So a patented, $200 a month heart medicine got $70 tacked onto the retail price. The incentive to over-prescribe was immense. It explains why Greece has the highest level of pharmaceutical consumption per capita in the EU.

Under a new law, pharmacies are limited to imposing a margin of 15% on inexpensive drugs, and far less on expensive therapies. On average, the markups should fall from the old 35% to well under 15% on average, a major victory for consumers.

In Greece, areas outside of cities do not have zoning laws. That doesn't mean you can build freely on islands or in rural areas. On the contrary, development is severely restricted. Only a single law allows for master plan development, and it requires that the villas and homes be constructed around a major hotel.

The law also prevents the developer from selling homes or villas; only rentals are allowed. A new law provides two improvements. First, it reduces the requirement of two environmental impact statements to just one, virtually cutting the approval time in half, from two years to a bit over twelve months. Second, it now allows developers to sell many of the apartments and homes in their resorts, instead of merely renting them out. That change alone could make Greece a prime destination for retirees.

Resort Development 

In 2012, the government and the unions negotiated a new "minimum wage" annually, mandating that the lowest-paid employees get a raise of, say, 5%. Then, a second round of negotiations would occur for each industry, with the 5% national agreement as a minimum raise. So the department store employees might get an extra 2%.

That caused Greek goods to become more overpriced, year after year, than competing products from Germany, which held wages in check.

The unemployment in Greece stands at 21%. Wages are still so high that many employers pay workers cash, off the books, to avoid social security taxes.

New law passed has a 22% decrease in the minimum wage for most workers, & a 32% drop from employees under the age of 24.

The labor market

Greek youth unemployment rose above 60 percent this February!

Macroeconomic Options

Conclusion

• Euro Zone crisis has been the combined result of US financial crisis and excessive debts with slow GDP growth rates.

• This crisis has badly affected the financial market, capital market and global economy.

• ECB, IMF, International creditors and stronger nations are considering various options to resolve the crisis.

• The situation is grim and there is no immediate solution to the problem and it has long term affects on global economy.