GREECE DEBT CRISIS Final Presentation 1

GREECE DEBT CRISIS
HIMANSHU CHANDRA
Page 1
Why has Greece Garnered so much Attention lately?
Greece has the worst combination of high debt level, large budget deficit and large
external debt
) A country of 11.2 million and GDP of US$ 360 billion, representing 2.8% of
Eurozone and 27th biggest economy in the world
) Has one of the highest debt-GDP ratios in the world: 113% of GDP
) Has one of the highest budget deficits in the world: 12.9% of GDP
) Has a large current account deficit: 11.0% of GDP
) Has a high degree of net foreign debt: 70% of GDP
) Has not had a credible financial reporting of its fiscal position
) Is viewed as the first domino in a potential first world sovereign debt crisis
) Greece’s total outstanding public debt amounts to 290 billion euro
) If Greece were to default on its debt payments it would amount to the biggest
sovereign default in history, bigger than that of Russia and Argentina combined
) If Greece were to default, it would raise fears that the crisis will spread to other
Eurozone members and this could cause the collapse of the euro currency
Page 2
Why has Greece Garnered so much Attention lately?
But because it part of the Eurozone, has given up control pf monetary policy and
the printing press
) Since it joined the Eurozone, it has ceeded control of monetary policy to the
ECB and can no longer print money
) Wages have risen faster than in Germany and has not adapted its economy
rapidly enough to global competition, especially from Asia
) Two of its largest industries, maritime shipping and tourism were hit strongly
from the global economic downturn
) The Eurozone has not injected the same degree of monetary liquidity as did the
UK and the USA while the ECB has maintained a more contractionary
monetary stance than the other two central banks
) The euro has appreciated by about 65% since 2001 against the US Dollar and
by 47% against the Chinese Yuan
Page 3
10-Yr and 1-Yr Greek Government Bond (GGB) Yields: 1998-2010
Greece’s entry into the Eurozone has allowed long-term interest rates to be cut in half and
short-term rates to be cut 5 -fold which stimulated borrowing
12
10
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1-yr GGB 10-yr GGB
Page 4
USD/EUR Exchange Rate Since Greece’s Entry Into the Eurozone:
2001-2010
Between January 2001 and January 2010 Euro has appeciated by 65% against the US Dollar,
undermining the competitiveness of Greek exports
USD/EUR Exchange Rate
1.6
1.5
1.4
1.3
1.2
1.1
0.9
0.8
0.7
0.6
20012001200120022002200320032004200420052005200620062007200720082008200920092010
2010-12
USD/EUR Exchange Rate
Page 5
Greece's Troubles
• Greece's debt woes came to light late in 2009 when a new
government took office and revealed that the country had been
overspending. It was also under-reporting its debt, which had
ballooned to 12.7% of GDP - more than four times the limit allowed
by the European.
• several credit rating agencies have downgraded Greece's credit
rating, including Standard & Poor's, which has stated that a further
downgrade of Greece's credit rating (currently at BBB+) is possible
within a month. These actions have fostered fear among potential
investors in Greek bonds, making it very difficult for the country to
borrow money to fund its debt.
Page 6
Greece's Troubles
• Greece is one of the 16 EU nations that has adopted the
euro as its sole currency. As of March 1, the euro had
dropped to $1.348, close to a nine-month low.2 Further
declines seem likely if Greece and the EU are unable to
resolve the crisis. If Greece were to default on its debt,
banks in Greece and elsewhere as well as other
countries holding Greek bonds would suffer. A Greek
default would also present the first real economic and
political viability test for Europe's single-currency
financial system.
Page 7
CONCLUSION
Crucial Days for Greece and
Summary - Greece’s debt crisis is reaching a critical period as huge debt repayments are due in the coming weeks. For Greece,
this debt crisis is likely to usher in a period of prolonged economic stagnation as government spending is cut dramatically amid a
very weak economic climate in Greece and across Europe. For the European Union, the Greek crisis has highlighted the fragility of
the euro as a common currency and has foreshadowed potentially larger debt crises in other European Union member states.
Greek Weakness:
Europe
• Few were surprised when it was revealed that the Greek government had been
lying about the size of its budget deficit last year.
• However, the scale of the true budget deficit, caught investors off-guard and led to
fears that the Greek government would default on its debt.
• These fears led to a sharp depreciation of the euro and highlighted many of the
weaknesses of the European common currency.
• Moreover, the euro has proven to be a major problem for Greece, as it cannot
devalue its currency in order to lessen its debt burden and to boost exports, and as
it has exposed the weakness of the Greek economy in relation to other Eurozone
members, most notably Germany.
Germany Holds the Key: What to Watch For:

• With Greece threatened with a default, European Union leaders have been • In the past, Germany would have
debating potential rescue deals for the Greek economy. given in to pressure from France
• Most EU leaders, as well as the governments of most EU member states, support and other European Union
a bailout package for Greece to help it survive this debt crisis. member states, but a more
• However, Germany has proven to be highly reluctant to fund such a bailout, as a confident and assertive Germany
majority of German voters oppose such a move and as the center-right German is beginning to stand up for its
government faces a key state election in Germany’s largest state in the near own interests within the European
future. Union.
• If Germany blocks an EU bailout for Greece, there will be little choice for the
Greek government but to turn to the IMF, a move that will likely be greeted with
hostility in many EU member states, but one that is acceptable to Germany.
8 Page 8
Is the Greek Crisis Coming to America ?
Page 9

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1-yr GGB 10-yr GGB

USD/EUR Exchange Rate

Germany Holds the Key: What to Watch For:

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