A description of the Greek financial crisis (pre cursor to the current Euro Zone Crisis)

1. Greek Sovereign Debt Crisis
Aditya Lathe

2. The European Union
Greek Crisis Timeline
Causative Factors
Options

3. European Union- History
• Founded as European Economic Community in 1957
by 6 countries- Belgium, France, (West)
Germany, Italy, Luxembourg and Netherlands (in
response to greater integration after WWII).
• In 1992, under the “Treaty on European Union”
signed at Maastricht, the name „European Union‟
officially replaces „European Community‟.
• As of 2011, 27 countries in Europe are part of the
European Union.

4. EU – Member States

5. Eurozone
• Euro introduced as a common currency in 11 EU
countries in January 1999.
• Physical notes and coins introduced in January
2002, replacing all national currencies.
• As of 2011, 17 nations within the EU, use the Euro
as a common currency. The nations, implying a
monetary union, are together denoted as
Eurozone.

6. Eurozone GDP (Nominal) (Source: ECB)
GDP (2010)
S.No. Country GDP (2010) %
1 Austria 286.2 3.12%
Portugal 2 Belgium 354.4 3.87%
2%
Belgium 3 Cyprus 17.3 0.19%
Netherland Austria 4% Finland
6% 3%
2%
4 Estonia 14.3 0.16%
Spain 5 Finland 180.3 1.97%
12% 6 France 1932.8 21.09%
France 7 Germany 2476.8 27.02%
21%
8 Greece 227.3 2.48%
Italy
17%
9 Ireland 156 1.70%
10 Italy 1548.8 16.90%
Germany
27% 11 Luxembourg 40.3 0.44%
12 Malta 6.2 0.07%
Ireland 13 Netherlands 588.4 6.42%
2% 14 Portugal 172.8 1.89%
Greece 15 Slovakia 65.9 0.72%
2%
16 Slovenia 35.4 0.39%
17 Spain 1062.6 11.59%
Total €9165.8bn

7. The European Union
Greek Crisis Timeline
Causative Factors
Options

8. Crisis Timeline
Jan 2001: Greece joins the Eurozone, becoming
the 12th member to adopt the Euro
Nov 2004: Admits to fudging figures to gain entry
to the Euro. Says deficit was not below 3% of
GDP, as required by EU rules. Has been
consistently above 3% since 1999.
Mar 2005: Adopts austerity measures to reduce
deficit and improve finances post the hosting of
Olympics. Posts short recovery upto 2006, when
GDP grows by 4.1% in 3 months.

9. Crisis Timeline
Oct 2009: Recovery short-lived after Global Financial
Crisis. Debt fears mount. Economy contracts by
0.3%, national debt up by 56% in 5 years
(€242bn), deficit expected to be 6% of GDP. (Later
revised to 12.7% of GDP).
Dec 2009: Fitch downgrades rating from A- to BBB+, a
first in 10 years. Govt. proposes radical
reforms, including crackdown on corruption and
reining in public spending. Workers begin strikes.
Feb 2010: Deficit at 12.7%, debt at €300bn. 1st
Austerity measure announced, includes freeze on
public sector pay & higher taxes. Strikes intensify.
Goldman Sachs under Fed enquiry for helping Greece
“borrow” billions through Exchange Rate Swaps.

10. Crisis Timeline
Apr 2010: 16 Eurozone members announce bailout package. €30bn
3 year loan at 5% interest, to be provided over next 1 year through
the ECB. IMF to provide €15bn. S&P downgrades rating to BB+
(Junk status), as loan amount not seen as enough. 2nd Austerity
measures announced, include salary cuts, increase in taxes.
May 2010: Size of bailout package increased to avert sovereign
default. €110bn 3 year loan at 5% interest to be provided, with
Eurozone members share at €80bn and IMF share at €30bn. Deficit
at 13.6%. Govt. submits a 3year plan aimed at cutting budget
deficit from 13.6% of GDP in 2009 to below 3% of GDP in 2014.
May 2010: With default fears from Portugal and Ireland, EFSF
worth €750bn launched. €440bn loan backed guarantee and bilateral
loans by Eurozone members, €60bn balance of payment support by
EU members and upto €250bn by IMF support to be made available
to weak economies.

11. Crisis Timeline
Jul 11: 2nd Eurozone Bailout package announced.
€109bn to be provided through EFSF, at lower interest
rates (~3.5%) & with longer timeframe (15-30 yrs).
Private sector contribution at €37bn.
Present: Country barely being sustained on drip-feed
from the Troika “European Union, European Central
Bank & International Monetary Fund”. Fate of the
nation still uncertain.

12. The European Union
Greek Crisis Timeline
Causative Factors
Options

13. Causative Factors
Structural
rigidities
Reliance
High
on
fiscal
external
deficit
debt

14. Structural Rigidities
Large & Inefficient Public Administration
Costly pension & Healthcare systems
Tax Evasion & absence of the will to
maintain financial discipline

15. Structural Rigidities
• According to OECD, spending on public administration as a
percentage of total public expenditure in Greece was higher than in
any other OECD member, “with no evidence that the quantity or
quality of the services are superior”.
• Public sector plagued by overstaffing and poor productivity.
• An aging Greek population—the percentage of Greeks aged over 64
is expected to rise from 19% in 2007 to 32% in 2060—could place
additional burdens on public spending and what is widely
considered one of Europe’s most generous pension systems.
• Informal economy in Greece valued at between 25%-30% of GDP.
• Observers offer a variety of explanations for the prevalence of tax
evasion in Greece, including high levels of taxation and a complex
tax code, excessive regulation, and inefficiency in the public sector.

16. High Fiscal Deficit
High Govt. Spending on public
administration
High Govt. Spending on pension and
healthcare
Low Revenue collections

17. High Fiscal Deficit
• Greek government expenditures in 2009 accounted for 50% of
GDP, with 75% of (non-interest) public spending going to
wages and social benefits.
• Total Greek public pension payments expected to increase
from 11.5% of GDP in 2005 to 24% of GDP in 2050.
• Between 2001-2007, while central government expenditures
increased by 87%, revenues grew by only 31%.

18. High Fiscal Deficit

19. Large External Debt
Adoption of Euro
Lax EU Rules enforcement

20. External Debt
• With the currency bloc anchored by economic
heavyweights (Germany and France), and a
common monetary policy conservatively managed
by the ECB, perceived stability due to Eurozone
membership allowed access to capital at
artificially low interest rates
• Lax EU Rules enforcement: No financial penalty for
Budget deficit >3% and debt >60% of GDP
• Got away with hiding billions of dollars of debt
through currency exchange rate swaps

21. Central Govt. Debt- Dec 2010

22. Central Govt. Debt – June 2011

23. Central Govt. Debt – Maturity Profile

24. Debt (% of GDP) - Trend

25. Debt (% of GDP) - Comparative

26. Country Exposure

27. Comparative 10 yr Bond yields
German Bonds Greek Bonds

28. The European Union
Greek Crisis Timeline
Causative Factors
Options

29. Options
Outright Default
Bailout through EU support & austerity measures
Orderly Default
Exit from Eurozone

30. Option I: Outright Default
• German and French financial institutions are thought to hold
up to 35-40% of Greek debt and would be severely hit.
• The credibility of the ECB would suffer, and that could hurt
international investment in the eurozone.
• A default could bankrupt Greek banks, which together are
reckoned to hold about a quarter of the Greek sovereign debt.
• The fear is of contagion - the weaker eurozone countries
would find it more expensive to borrow in commercial
markets. The Irish Republic and Portugal might need a further
EU-IMF bail-out.

31. Option II- EU Support & Austerity
Measures
• Greece to survive on drip-support from Eurozone . Meanwhile, to
shore up finances by continuing with austerity measures.
• Austerity Measures:
• Taxes increased by €2.32bn, with additional taxes of € 3.38bn in
2012.
• Public sector wage bill to be cut steadily to shrink it by more than
€2bn by 2015. Measures include public sector wage cut of 15%, cap
on wages and bonuses.
• Defence spending to be cut by €200mn in 2012, and by €333mn
each year from 2013 to 2015.
• Health spending to be cut by €310mn in 2011 and a further €1.81bn
in 2012-2015.
• Social security to be cut by €1.09bn in 2011, €1.28bn in 2012 and
€1.03bn in 2013.
• €50bn euros to be raised from privatisations by 2015.

32. Option III- Orderly default
• Holders of Greek government bonds would have to accept less
than they were worth, "take a haircut".
• According to analysts, the size of that haircut could be
anything between 20% and 50%.
• If the settlement were negotiated in an orderly fashion, it
could form part of an acceptable solution - although it would
make investors reluctant to buy more Greek bonds in the
future.
• Another problem for Greece is that the ratings agencies would
probably treat a debt restructuring as a default anyway.
• It would also raise interest rates for bonds issued by other
troubled eurozone "periphery" economies - especially the
Irish Republic and Portugal - and depress the value of the
euro.

33. Option IV: Exit from Eurozone
• Being in the eurozone, Greece is unable to restore its
economic competitiveness by devaluing its currency.
• Greece could exit the Euro and return to the drachma at a new
exchange rate: one euro would equal one drachma.
• Such a measure would boost exports, tourism.
However, would negatively impact imports.
• However, it would increase the size of Greece's debt mountain
and Greece will experience hyperinflation. It may cause a run
on the banks.
• Speculation will be fueled regarding other similar orderly exits
of other countries (Ireland, Portugal and others).
• There is no legal procedure for leaving the eurozone and some
economists said treaty changes would have to take place
before an exit could happen.

34. Thank You

35. Coming soon to a country near
you:
• Irish Debt Crisis
• Portuguese Debt Crisis
• Italian Debt Crisis?
• Spanish Debt Crisis?