INTERNATIONAL ECONOMICS

GROUP MEMBERS
Prathvi Shah (64) Rahul Simalkar (6) Shreya Jain (83) Shahil Bheda (112)

Priyal Timbadia (118)

FLOW OF THE PRESENTATION

Background (Build up and Outbreak of the Crisis) Causes (Domestic and International factors) Reforms Resolution (Bail Out Plan) Implications

EXCESS DEBT LEADS TO CRISIS???

BACKGROUND
Greece has been a member of European Union since 1981 and the eurozone since 2001 The Greek economy (GDP) expanded at an average annual rate of 4% from 2004 2007 and 2% during 2008 Reliance on financing from international capital markets Greece's main industries are tourism and shipping

BUILD UP OF THE CRISIS

Greece funded their two deficits (budget and current a/c) by borrowing in international capital markets Chronically high external debt (115% of GDP in 2009) The EUs Stability and Growth Pact calls for budget deficit ceilings of 3% of GDP and external debt ceilings of 60% of GDP. Investors had become increasingly nervous about Greeces ability to repay its maturing debt obligations, estimated at 54 billion ($72.1 billion) for 2010 Greece's financial mismanagement had been ongoing for decades

OUTBREAK OF THE CRISIS

In October 2009, the new socialist government, led by Prime Minister George Papandreou, revised the estimate of the government budget deficit for 2009 Greece is in its third-straight year of recession, with national income on course to plunge by nearly 5% in 2011 and to fall further in 2012 50, 000 businesses closed in 2010 and unemployment has shot up 19 major credit rating agencies including Moodys downgraded Greeces bond rating

 Greeces economy, the Greek government was able to successfully sell 8 billion ($10.6 billion) in bonds at the end of January 2010, 5 billion ($6.7 billion) at the end of March 2010, and 1.56 billion ($2.07 billion) in mid-April 2010, albeit at high interest rates 0.15. Before the crisis, Greek10-year bond yields were 10 to 40 basis points above German 10-year bonds. With the crisis, this spread increased to 650 basis points in April 2010, which was at the time a record high. After much foot-dragging, the European commission, the IMF and the European Central Bank (otherwise known as the troika) agreed in May 2010 to lend Greece 110bn. Greece adopted a number of austerity measures since 2010

Causes of Greece Crisis

Domestic Factors
International Factors

Domestic Factors High Government Debt

Euro () Billion

Year 2001

Govt. Debt 151.9

% of G.D.P 103.7

G.D.P Growth % 4.2

Deficit % -4.5

2002
2003 2004 2005 2006 2007 2008 2009

159.2
168 183.2 194.5 224.2 239.4 262.3 298.7

101.7
97.4 98.6 100 106.1 105.4 110.7 127.1

3.4
5.9 4.4 2.3 5.2 4.3 1 -2

-4.8
-5.6 -7.5 -5.2 -5.7 -6.4 -9.8 -15.4

2010

328.6

142.8

-4.5

-10.5

High Government Spending & Weak Government Revenues

GOVERNMENT TAX RECEIPTS/CAPITA

OTHER DOMESTIC FACTORS

Structural Policies Declining International Competitiveness Arrested Development Misallocation of Resources

INTERNATIONAL FACTORS
Increased Access to Capital at Low Interest Rates Issues with EU Rules Enforcement

REFORMS
Fiscal Austerity and Tax reforms
3 separate packages of fiscal austerity measures- estimated $21.6 billion, or 6.4% of GDP.
The specific longer-term budget deficit targets established by the government are 8.7% of GDP in 2010; 5.6% of GDP in 2011; 2.8% of GDP in 2012; and 2% of GDP in 2013.

Policy solutions - Contractionary fiscal policies and expansionary fiscal policies)

STRUCTURAL REFORMS (PUBLIC SECTOR RESTRUCTURING)

Reforms in Greeces public administration pension health care tax evasion Boost Greek economic -increased private sector development, and supporting research, technology, and innovation. Attracting new foreign investment in Greece

FINANCIAL ASSISTANCE FROM THE EUROZONE MEMBER STATES

Bilateral loans from Eurozone countries (approx $40 bn) , supplemented by an additional (approx $20 bn) from the IMF.

Germans are strongly against providing financial assistance to Greece,

TOURISM SECTOR STRATEGY

2015 Arrivals, mln Integrated Resorts Tourism products VAT (%) 20 10 100 10

AGRIFOOD SECTOR STRATEGY

2015 Greenhouse units 50

Develop links between farmers, retail areas and exports Raise product quality Use of innovative production models

SHIPPING SECTOR STRATEGY

2010 Revenue from Shipping, bln Ancillary Revenue, bln Total Revenue, bln 15 1 16 2015 22 3 25

Develop an International Shipping Centre Develop ancillary services Further develop duty free zones

DETAILS OF SECOND GREEK BAILOUT PLAN (22ND JULY, 2011)

160 billion euros will be freed up for Greece by 2014, with 109 billion euros coming from the EU and IMF and 50 billion euros of the bailout will come from the private sector

LENDING
Creditors will be able to voluntarily swap their Greek bonds for longer maturities at lower interest rates. But they are unlikely to get back all the money they lent and this could put Greece in what is termed selective default Euro zone nations will provide credit guarantees for Greek banks

BORROWING
Interest will be cut to around 3.5 percent from a maximum of 5.8 percent now Maturities will be extended from 7.5 years to 15 years

EUROPEAN FINANCIAL STABILITY FACILITY

 Greeces Debt Crisis has put the EU under the scope, & it has shifted the attention to the efficiency & the success of the Euro-zone. Its considered as probably the biggest test the EU has gone through. How the EU & Greece are handling the crisis with the whole bail-out plan will reflect to what extent the EU is able to function on its own as a powerful economic entity.

BROADER IMPLICATIONS OF GREECES CRISIS

CONTAGION
if Greece defaults, there is a risk of contagion to other Southern European countries, including Portugal, Ireland, Italy, and Spain (which, along with Greece, have been nicknamed the PIIGS or GIIPS) However there are important differences among the PIIGS that would make contagion from Greece to these other European countries unlikely National savings ( % of GDP ) Greece 7.2%, Portugal 10.2%, Spain 19%, Ireland 17%, EU average 20%

BROADER IMPLICATIONS OF GREECES CRISIS

EUROPEAN INTEGRATION
There is a mismatch between the EUs advanced economic and monetary union and an incomplete political union Single monetary policy but 16 separate national fiscal policies Analysts have proposed that the EU create a new European Monetary Fund (EMF) that would allow it to respond more smoothly to financial crises within individual member states in the future, operating much like the IMF but on a regional, rather than global, basis. Greeces crisis has brought to light imbalances within the Eurozone.

BROADER IMPLICATIONS OF GREECES CRISIS

US ECONOMY
The value of the euro will weaken. A weaker euro would likely lower U.S. exports to the Eurozone and increase U.S. imports from the Eurozone, widening the U.S. trade deficit. The United States has a large financial stake in the EU. Widespread financial instability in the EU could impact trade and growth in the region, which in turn could impact the U.S. economy. Greek default could have implications for U.S. commercial interests. $14.1 billion of Greeces debt obligations are owed to creditors within the United States.

BROADER IMPLICATIONS OF GREECES CRISIS

There are strong similarities between Greeces financial situation and the financial situation in the United States. Debates over imbalances between current account deficit and current account surplus countries within the Eurozone are similar to the debates about imbalances between the United States and China.