UNEMPLOYMENT IN GREECE, SPAIN, RUSSIA AND QATAR

AECON3 August 9, 2012

------------------------Submitted by BUNAGAN,ALMIRA COSALAN, DEA MIA AMOR TALOSIG,NOAH REX

Greece -DEVELOPED
Causes of unemployment in Greece: 1. Years of unrestrained spending Public sector wages, for example, rose 50% between 1999 and 2007 - far faster than in other eurozone countries. 2. Tax evasion People with high wages misdeclared their income to avoid taxes. This resulted to lower income than that spent by the government. 3. Costly hosting of the Olypics The cost of hosting the 2004 Olympics takes its toll. Greeces new government attempts to impose an austerity budget to try to slash the countrys deficit and get public finances back on track. 4. Greece lied to get into Euro The government admits its deficit has not been below 3 percent since 1999, as EU rules require. 5. Failure to make financial reforms The interest rates of Greece implemented for mortgages from 1990 to 2006 is very low compared to other European countries which resulted to catastrophe when the global financial crisis came. 6. Greece has big debts National debt, put at 300 billion ($413.6 billion), is bigger than the country's economy, with some estimates predicting it will reach 120 percent of gross domestic product in 2010. The country's deficit -- how much more it spends than it takes in -- is 12.7 percent. 7. Failure of bond payments When the exchanges and swaps are carried out, the major credit rating agencies are expected to classify the Greek government as officially in default, since bondholders will not get paid in full and on time as specified in the original bond contracts.

Table 1. TREND OF UNEMPLOYMENT IN GREECE TREND OF UNEMPLOYMENT IN GREECE YEAR 2008 2009 2010 2011 2012 Rate of unemployment 7.83 8.83 10.79 14.73 21.5

8. Mad citizens The government has started slashing away at spending and has implemented austerity measures aimed at reducing the deficit by more than 10 billion ($13.7 billion). It has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations. Workers nationwide have staged strikes closing airports, government offices, courts and schools. This industrial action is expected to continue. 9. Greece has low credit ratings Greece criticises Moody's(IMF) decision to cut its credit rating to Caa1, bringing it seven notches into junk territory, saying the move did not take into account the country's efforts to tidy up the country's finances. This meant that countries would be oblivious to lend to Greece because of the possibility of Greeces default in payments. Figure 1. TREND OF UNEMPLOYMENT IN GREECE
0.6 0.5 0.4 0.3 0.2 0.1 0 2008 2009 2010 2011 2012 Series1

Spain - DEVELOPED
Causes of unemployment in Spain 1. Maastricht Treaty This requires that countries converge on certain criteria, including interest rates, inflation rates, and government deficits. . Since 1990, Spain had faced budget deficits as large as 6.5% of GDP. Because of the strict requirements in the Maastricht Treaty, by 2005 the Spanish government began posting budget surpluses. The Maastricht Treaty also called for Spain to reduce its long-term interest rates. As a result, businesses and individuals saw their borrowing capacities increase because they could afford paying loans with lower interest rates. More people, especially those in their twenties who had recently graduated from a university, took out loans to purchase homes. Traditionally in Spain, the younger generation lived with their families after school until they married, but in the past ten years, more bought their own residences before marriage because obtaining credit was easy and interest rates were low. The construction market flourished because of the increased demand for housing. As more Spaniards bought houses, more construction companies required unskilled labor which prompted an increase in immigration to Spains labor market. From 2000-2008, Spains population grew from 40 million to 45 million, and from 1999 until 2007 the Spanish economy created more than one-third of all employment generated in the Eurozone. As more immigrants came to Spain, more housing was necessary and the cycle continued. During this time, prices of houses increased dramatically, as did the number of loans used to purchase them. The construction market continued to build, heedless that the growing housing market would inevitably begin to cool. 2. Sudden decrease in demand for housing Because of the dramatic increase in construction of new homes and the long time between the beginning and end of a construction project, by the time the demand for housing had slowed in 2007, available housing was just reaching its peak. By this time, construction accounted for 13 percent of total employment in Spain. When prices began falling and housing demand halted, unemployment jumped up 10 percent. 3. Unemployment Benefits As unemployment skyrocketed, so did unemployment benefits. In a welfare state like Spain, unemployment benefits are generous. However, what was a sustainable unemployment level quickly became a drain on the Spanish government. The reduction in the Spanish governments tax revenue, which is heavily dependent on real estate, exacerbated the problem. These drains on the economy turned a previous budget surplus of over 2 percent of GDP into a deficit of almost 4 percent of GDP, violating the limits of the Pact.
4

Table 2. TREND OF UNEMPLOYMENT IN SPAIN

TREND OF UNEMPLOYMENT IN SPAIN YEAR 2008 2009 2010 2011 2012 Rate of unemployment 9.63 17.36 20.05 21.29 21.29

4. The Spanish Banking System Spanish regional savings and loan banks, called cajas, account for half of Spains banking system. There are around 24,000 branches of cajas throughout Spain to serve its 46 million residents (one branch for approximately every 1,900 people). The United Kingdom, in comparison, with a population of around 62 million, has only 10,000 total bank branches (one branch for every 6,200 people). Cajas are not publically traded, and usually regional politicians control the cajas instead of shareholders. The majority of cajas clients are families, small and medium-sized business, and non-governmental organizations such as health care facilities, environmental groups, and cultural groups. Before the crisis, cajas often loaned to those that the larger banks turned away because they were considered undesirableclients that were less likely to pay back their loans. Unlike the rest of the banking system, cajas were relatively unregulated, and they were not required to disclose certain information such as collateral on loans, repayment history, and loan-to-value ratios. This nondisclosure prevented the Spanish government from understanding cajas financial situations before and during most of the crisis. The government was also unaware of the depth of cajas investment in the real estate market. When Spains two largest banks, Santander and BBVA, slowed lending in 2007, the cajas continued to lend heavily into the cooling housing market. By 2009, cajas owned 56 percent of the countrys mortgages, and loan payments from property developers accounted for one-fifth of the cajas assets. Because the cajas were not required to disclose much of their investment information to the government, their continued lending to the real estate market went relatively unchecked.

When the housing market crashed in 2009 and debtors fell into bankruptcy and bad loans dramatically increased, the cajas were paralyzed by a lack of income from these delinquent loans and the high costs attributable to this bloated caja system. The Bank of Spain estimated the amount of potential troubled loan exposure in the Spanish banking system (any problematic loans that may face default) in the real estate market was around 180.8 billion in mid-2010. According to some analysts, Spanish banks were only capable of handling losses of only a third of that amount, and the cajas could handle much less. By 2009, the construction industry owed billions of euros to the Spanish banking system. Many construction companies had already gone bankrupt. The regular, listed banks had delinquent loans including construction loans of approximately of 3.2 percent of their portfolios, while troubled loans at cajas reached 4.4 percent. In March 2009, the Spanish government announced its first bailout of a caja. Although there is a difference between cajas and banks, investors saw this first bailout as an indicator of the unhealthy status of the Spanish financial sector as a whole. After the bailout, investor confidence in Spanish banks plummeted, causing bank shares to plunge. Banks needed more cash to pay the depositors who lined up to extract their deposits, creating a run on the banks. During the first four months of 2010, depositors withdrew 21.6 billon. This caused more bank bailouts by the Spanish government. While these government bailouts kept the banks from going bankrupt, investor confidence in the Spanish economy sunk even lower. 5. Recourse loans The main cause for concern when banks have made too many loans is that the borrowers will not pay back the funds and the banks themselves will go bankrupt. In the United States, for example, this is especially concerning because most U.S. loans are non-recourse. In a non-recourse loan, the creditors recovery is limited to the loan collateralthe asset the borrower commits as a guarantee of repayment. When a borrower defaults, the creditor is only allowed to foreclose on the collateral (i.e., a residence) and cannot go after other assets of the borrower. Even if the collateral is worth less than the value of the loan, that is the extent of the creditors recovery. Unlike the United States, Spanish loans are typically recourse loans. With a recourse loan, if the borrower is unable to make payments on the loan, the creditor is not limited to pursuing the collateral for loan recovery but can pursue the borrowers personal assets. Because of this, most Spanish borrowers have continued, however possible, to make their loan payments out of fear of losing all their assets. In an economy such as Spains right now, people will not begin borrowing again anytime soon because many are still trying to repay their previous loans. Less money will be spent in other sectors because more money will be needed to make mortgage payments each month. Therefore, some analysts claim recourse loans generally ensure people make their loan payments but also hinder the rest of the economy. However, in Spains case, recourse loans might lure possible investors in the cajas as part of their recapitalization efforts.

The current statistics surrounding Spains economy illustrate the dire economic situation. As of February 2011, unemployment in Spain still hovers around 20 percent of the labor force (4.3 million people), the highest in the industrialized world. Unemployment for Spaniards under 25 years old is a staggering 40 percent. The unemployment rate for Spanish residents with university degrees is at 9.4 percent, twice than in the rest of the EU. Not surprisingly, the Spanish government estimated that 70% of the jobs lost after 2008 were related to the construction sector. However, despite the staggering unemployment (which leads to higher government spending on public benefits), Spains public debt as of 2010 was estimated to be 63.4 percent of GDP, lower than the debt of the United Kingdom and Germany. Finally, analysts estimate that there are 1.5 million vacant homes in Spain, and it will take an estimated six years to sell all these properties. Summary of causes There were many contributing factors to the Spanish financial crisis. The failure of the Stability and Growth Pact highlights the lack of regulatory authority within the Eurozone. Despite the Pacts reform, there is still little supervision. Although the Eurozone members use the same currency, and the Pact sets guidelines, there is no oversight of fiscal policies. Eurozone nations are left to self-regulate, even though the Eurozone economies are integrated. An easy target to blame is the Eurozone itself. The introduction of the euro meant that Eurozone countries had the same monetary policy but completely different fiscal policies. Because there was no uniformity between member states fiscal policiesmeaning that members were able to maintain their own spending and taxing policiesmember states have found themselves in the vastly different economic positions, and the inability to devalue the currency has hindered recovery. Although the euro was seen as the next logical step in integrating Europe, it has become a major hindrance in the Spanish (and European) crisis. Critics warned against some of these eventualities, but by the time danger was apparent, it was too late. Another factor causing the Spanish financial crisis was the lack of regulation of Spanish lending institutions and the real estate market. As previously mentioned, cajas made too many loans to individuals and corporations (especially to those less likely to be able to repay the loans in a crisis). Many of these individuals and corporations invested those loan proceeds in the real estate market. Because the cajas had not released their information to the government, the extent of their real estate exposure was unknown. The instability of Spanish banks has led to low investor confidence in the Spanish market. Many investors have pulled out of the Spanish banking market or have refused to invest in the ailing cajas, hindering the Spanish recovery.

Figure 2. TREND OF UNEMPLOYMENT IN SPAIN

0.6 0.5 0.4 0.3 Series1 0.2 0.1 0 2008 2009 2010 2011 2012

Russia- DEVELOPING
Causes of Unemployment in Russia 1. Substantial dependence on oil and gas sales for export revenues and government revenues. Russia has one of the largest deposits of gas and it exports largely to the market. Russian government revenues are expected to be adversely affected because of the drop in oil revenues, but also because of the decline in income tax revenues, which will cause the Russian government to incur a budget deficit for the first time in ten years, a deficit of perhaps 8% of GDP in 2009. Russia was showing signs of economic problems when world oil prices plummeted sharply around the middle of 2008, diminishing a critical source of Russian export revenues and government funding. Table 3. TREND OF UNEMPLOYMENT IN RUSSIA TREND OF UNEMPLOYMENT IN SPAIN YEAR 2008 2009 2010 2011 2012 Rate of unemployment 6.4 8.4 7.5 6.2 5.4

2. Russia has also been adversely affected by the world-wide credit crunch that ostensibly began with the proliferation of subprime mortgages in the United States and the subsequent burst of the real estate bubble. Because low interest credit was not available domestically, many Russian firms and banks depended on foreign loans to finance investments. As credit tightened, foreign loans became harder to obtain. 3. Good economic decisions a. The Russian government has responded to the crisis with various measures to prop up the stock market and the banks. The packages, valued at around $180 billion, are proportionally larger in terms of GDP than the U.S. package that Congress approved in September 2008. In midSeptember, the government made available $44 billion in funds to Russias three largest state-owned banks to boost lending and another $16 billion to the next 25 largest banks. It also lowered taxes on oil exports to reduce costs to oil companies and made available $20 billion for the government to purchase stocks on the stock market
9

In late September, the government announced that an additional $50 billion would be available to banks and Russian companies to pay off foreign debts coming due by the end of the year. On October 7, 2008, the government announced another package of $36.4 billion in credits to banks. b. In 2009, the government changed strategies by focusing on macroeconomic measures rather than measures to assist specific industries or firms. For example, the government reduced the corporate tax rate from 24% to 20% and the tax rate on small companies to try to stimulate investment. The government expects to rein in expenditures as it anticipates lower revenues but still anticipates its first budget deficit in 10 years, which the government will be able to finance at least for the time-being from accumulated reserves. 4. Increase in oil prices Russia remains highly dependent on oil and natural gas exports as a source of income. If world oil prices continue to be depressed, the Russian economy would likely experience slow growth, if any. The increase in the demand for oil made employment in Russia.

Figure 2. TREND OF UNEMPLOYMENT IN RUSSIA

0.6 0.5 0.4 0.3 Series1 0.2 0.1 0 2008 2009 2010 2011 2012

10

QATAR-DEVELOPING Qatar has the second lowest unemployment rate in the world at 0.5 percent. There have been no official forecasts in to unemployment figures, however historic data from the past 4 years suggests it's unlikely to increase. One possible reason for Qatars low unemployment rate is the amount of expatriates who currently reside and work in Qatar. While official statistics don't provide precise numbers, it's estimated nearly three-quarters of Qatars 1.7 million population in 2010 were foreign nationals with temporary residency status. Foreign nationals also represented a large majority of Qatars 1.202 million labour force. According to a 2008 report by Qatars General Secretariat for Developmental Planning, 93 percent of the labour force were non-Qataris. The influx of non-Qataris is expected to fuel Qatars population growth over the next few years with an annual growth rate of between 3.97 to 4.03 percent from 2010 to 2014, reaching a total population of 2.068 million in 2015. Table 3. TREND OF UNEMPLOYMENT IN QATAR TREND OF UNEMPLOYMENT IN GREECE YEAR 2008 2009 2010 2011 2012 Rate of unemployment 0.4 0.4 0.5 0.4 04

Abdullah bin Nasser Al Khalifa (pictured), the chairman of the Board of Trustees of the Doha International Institute for Family Studies and Development (DIIFSD) expressed his concern on Tuesday regarding the increase in unemployment rate and poverty worldwide. During an event held by the institute entitled Decent Work & Poverty Reduction, the Chairman told Qatar News Agency (QNA) that the State of Qatar does not suffer from unemployment. He added that there are no Qatari Youth suffering from unemployment and that work opportunities are there and all the youth have to do is to search well and find a suitable job. He said that the biggest proof is that Qatar uses foreign labour, which would mean that it is impossible that any nationals are suffering from unemployment.
11

He called on, during his speech in the event, all involved to work together to end unemployment and provide suitable job opportunities. He added that there should be national and international policies placed to solve the problem. He added that the discussions held during the event aim to provide guidelines on how all involved can work together to reach their goal of eliminating unemployment. He noted that the challenge of unemployment, poverty and social integration are the biggest tests facing the world today. He noted that unemployment rates remain high worldwide, with youth and women the main groups affected. He said that the lack of job opportunities and marketable talents were the main reasons behind the high rates of unemployment.

Figure 3. TREND OF UNEMPLOYMENT IN QATAR

0.6 0.5 0.4 0.3 Series1 0.2 0.1 0 2008 2009 2010 2011 2012

12

SOURCES : Greece unemployment: http://www.bbc.co.uk/news/business-13798000 http://edition.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html http://www.telegraph.co.uk/finance/economics/8580720/Timeline-of-a-crisis-how-Greecestragedy-unfolded.html http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=132.STS.M.GR.S.UNEH.RTT000.4.000 Spain unemployment Sgherri, Silvia, and Edda Zoli. 2009. Euro Area Sovereign Risk During the Crisis. The International Monetary Fund Working Paper 09/222. Surez, Javier. 2010. The Spanish Crisis: Background and Policy Changes. Centre for Economic Policy Research Discussion Paper 7909. Loungani, Prakash. 2008. House Prices: Corrections and Consequences. Washington: World Economic Forum IMF. Krugman, Paul. 2009. The Pain in Spain The New York Times. January 19, 2009. Bentolila, Samuel, Juan Jos Dolado, and Jos Francisco Jimeno. 2008. Two-Tier Employment Protection Reforms: The Spanish Experience. CESifo Database for International Comparisons in Europe (DICE) Report 4/2008. http://www.doiserbia.nb.rs/img/doi/1452-595X/2011/1452-595X1103309C.pdf http://ebook.law.uiowa.edu/ebook/content/spanish-financial-crisis http://www.bbc.co.uk/news/business-15762517 http://www.bbvaresearch.com/KETD/fbin/mult/WP_1131_tcm348-270325.pdf?ts=2642012

Russia unemployment http://www.indexmundi.com/russia/unemployment_rate.html http://www.tradingeconomics.com/russia/unemployment-rate . http://www.fas.org/sgp/crs/row/RL34512.pdf

13

http://www.forbes.com/sites/markadomanis/2012/06/23/a-tale-of-two-labor-markets-theshocking-divergence-in-russian-and-american-unemployment/ http://www.worldbank.org/content/dam/Worldbank/document/rer-27-march2012-eng.pdf http://www.nationsencyclopedia.com/economies/Europe/Russia-OVERVIEW-OFECONOMY.html Qatar unemployment http://www.economywatch.com/world_economy/qatar/economic-forecast.html http://www.qatarisbooming.com/2011/10/26/qatar-has-no-unemployment-problems-says-diifsdboard-of-trustees-chairman/

14