A macroeconomic review of the Greek debt crisis

1. The Greek Dilemma
A macroeconomic review
of the Greek debt crisis
Abhaysing Bainade
Bangyu Liu
Jummai Arome
Olubunmi Makanjuola
Yuri Shogenov

2. Outline
•
A brief history of the Greek debt crisis
•
Key drivers for the debt crisis
•
The Greek dilemma
•
Scenario 1. Staying in Eurozone
•
Scenario 2. Withdrawing from Eurozone
•
The adjustment programme
•
Assumptions
•
Macroeconomic assessment & recommendations
•
Conclusion

3. A brief history of the Greek debt crisis

4. A brief history of the Greek debt crisis

5. Greece Vs Ireland

6. Key drivers of the debt crisis

7. Key drivers for the debt
crisis
High living standard and weak economic competitiveness.
Greece ranking 22nd 2011

9. Source: World Economic Forum

10. Key drivers for the debt
crisis standard and weak economic competitiveness.
High living
High Government Spending and Weak Government
Revenues

11. Key drivers of the debt crisis
High living standard and weak economic competitiveness.
High Government Spending and Weak Government
Revenues
Sovereign debt soaring out it’s bear ability.
Fitch Moody's Standard & Poor's
CCC Ca CC

14. The Greek Dilemma
Austerity measures v sovereign default
Structural reforms v withdrawal from Eurozone
•
60% of Greeks are opposed to the bailout & austerity
measures deal
•
70% of Greeks want to stay in Eurozone
(RBS European Economics, 2011)

15. Scenario 1. Greece Staying in
Eurozone
• The Euro will lend more credibility to Greece’s economy
and increase both investors’ and creditors’ confidence
about Greece’s ability to service its debts.
• Greece can curb its high inflation rate because it will have
the support of other members of the Euro zone especially
access to competitive loan rates and also to low rates of
the Eurobond market.
• Greece continue to undertake the austerity measures
which included the much needed reforms that will make
the country a more manageable state and give it a more

16. Scenario 2. Greece leaves
Eurozone
If Greece leaves the euro zone, good economic reasons
will be that by devaluing its currency, exports can rise
therefore cash will come in.
Disadvantage is that being the 1st country to leave the
euro, it could lead to a massive bank run.
A debt default and decision to abandon the Euro would
affect the reputation of the economy.
Greater pressure on other Eurozone economies

17. Scenario 2. Greece leaves
Eurozone
No funds will be made available from Europe or IMF
except they accept austerity measures
They will lose EU regional aid and farm subsidies worth
over 9billion euros every year.
Greece’s banking system would collapse, inflation would
explode and contagion would even kill the entire euro
edifice.

18. The adjustment programme
Implement structural reforms to achieve the recovery
of the economy, Its sustainability and promote growth
What reforms?
•
Fiscal reforms
•
Labour market reforms
•
Product market reforms

19. Assumptions
§
Greece is going to stay in economic monetary union (EMU)
§
Greece will implement fiscal and structural reforms fully
§
EU will NOT create barriers in implementation of fiscal and structural
reforms
§
Structural reforms that are underway won’t be taken into account
§
Access to the capital markets at reasonable cost
§
The basic interest rates on Greek bonds will NOT go up significantly

20. Structural fiscal reforms
•
Formulate sustainable fiscal framework and monitoring
mechanisms
•
Top-down approach to budgetary preparation
•
Set government expenditure ceiling
•
Limitations on borrowing capacity for the various public
entities.
•
The requirement to seek parliamentary approval if
expenditures exceed budget.
•
The requirement to publish regular data on budget
execution.
•
Cracking down Government corruption.

21. Structural fiscal reforms
Improving the tax system and tax collection.
• Greece tax compared with other OECD countries, it
has stand at high level. So improve tax rate is not wise
choice.
• Simple and transparent tax system, and broaden tax
base
• Enhance tax collection by using audits, improving
punish of tax evasion, cracking down bribery.

22. Macroeconomic Development since
2000

23. Public and external imbalances (% of
GDP)

24. Efficiency, Productivity
•
Relative to the simple average of the highest OECD Countries in terms of GDP per Capita,
based on 2008 PPPs. The sum of percentage gap in labour resource utilization and labour
productivity do not add up exactly to the GDP per capita since decomposition is
multiplicative
•
Labour resources utilization is measured as total number of hours worked per capita
•
Labour productivity is measured as GDP per hour worked

25. Way towards Sustainability….
Efforts should be made to boost growth and getting
people back to work is important
Reforms to improve labour market outcomes should
be implemented rigorously
Reforming product markets is imperative for
sustainable jobs, greater competition and more
investment
Progress in improving the business environment
should continue

26. Getting people back to work and
boosting longer term growth
Recently, non-subsidized sub-minimum wages for youth
was introduced to boost jobs. Training should be provided
to enhance their skills
Firm-level wage agreements were introduced and to
promote it, the administrative extension of the sectoral
agreements to firms that were not party to the negotiations
should be eliminated.
The use of fixed-term contracts should be promoted through
a reduction in the early termination costs. This will ease
further employment protection for temporary work.
Remove employment protection legislation distinctions

28. Reforming product markets
 Be business friendly
 Implement export strategy with vigor and reduce bureaucratic barriers to exports
 Privatization of railway services and the liberalization of the sector.
 Like other OECD countries, adopt a system for Regulatory Impact assessment.
 Develop a “competition culture”

29. Reforming product markets
 Set clear and adequate rules for planning private investment and frequently monitor land
use plans.
 Remove identified regulatory restrictions to entry in tourism, retail and wholesale sectors.

30. Conclusion
Greece should stay in European Union and economic monetary
§
union
Recovery, sustainability and growth of the Greece economy can be
§
achieved through strict implementation of the structural reforms
§
Government’s ability to respond to unanticipated shocks is crucial
for persuading markets that the programme of the reforms is credible

31. Questions

32. Output gap, GDP and other key indicators