Greece Crisis

THE GREECE MELTDOWNAn Effort to Understand its Impact on Euro

Union and the World.

THE CRISIS

THE EARLY WARNING BELLS Sung Won Sohn, an economics professor at California State University

statement on the seriousness of the debt crisis in Europe...."The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States“ (21st, June, 2011)

When confidence in the finances of a nation is lost, borrowing costs can go up very quickly.  The yield on two year Greek bonds is up to 28.6%. (16th, June, 2011)

A year of wage and pension cuts, benefit losses and tax increases has taken its toll: almost a quarter of the population now live below the poverty line, unemployment is at a record 16% and, as the economy contracts for a third year, economists estimate that about 100,000 businesses have closed.(2011)

The head of the eurozone's bailout fund, Klaus Regling is beginning attempts to persuade China to invest to the tune of 70bn Euros in a scheme to help rescue member countries facing debt crises. (28th Oct, 2011) though rejected by China.

Meanwhile French President Nicolas Sarkozy said debt-ridden Greece's entry to the eurozone was a mistake. (15th Oct, 2011)

WHAT HAPPENED WITH GREECEBroad strokes by Irish Economist, Karl Whelan The country's liabilities exceeded its real economic strength, with the

national debt amounting to 114 percent of the gross domestic product. Eurozone member criteria was 60%.

Athens was battling more than 14 percent inflation and the economy was shrinking.

Greece owed a bunch of money to European private banks that it could not pay.

Some figures to ponder upona) -28% Reduction in Public Sector Employment.

b) -28.5% drop in food consumption.c) -61% drop in average pension, to about Euro’s 833.d) 45% of pensioners living below poverty line.e) 26% unemployment, 50% among under 25’s

HOW GREECE SUFFERED The 2008 financial crisis pushed Europe into a recession. The unemployment rate reached 28 percent in 2013, more than rate US had

during the great depression. Being part of the Eurozone it could not print its currency, Drachma,

thereby impacting trade especially exports. Currently Greece is squeezed between a crushing debt burden — 177 percent of

GDP, about twice the level in the United States — and a deep depression that makes it difficult to raise the money it needs to make its debt payments due to monetary tightening.

Unfavorable or rather rich European nations with favorable trade surplus such as Germany believe they're simply insisting that Greece live within its means.

Rather than have Greece default, and then possibly need to bail out their own banks, European governments (Eurozone) gave Greece giant loans so that Greece could pay the banks what they owed.

This left Greece owing foreign governments money that it could not pay, which put Greece in a position of political subservience.

Missing the Referundum deadline of 27th June, 2015.

PICTURES OF GREECE SLIPPING

THE EUROZONE The Eurozone officially called as Euro area is a group of 19 European

countries. Monetary policy managed by European Central Bank (ECB). The Eurozone is represented politically by its finance ministers,

known collectively as the Eurogroup, and is presided over by a president, currently Jeroen Dijsselbloem.

The finance ministers of the EU member states that use the euro meet a day before a meeting of the Economic and Financial Affairs Council (Ecofin) of the Council of the European Union

PopulationGDP

% world GDP by

Purchasing Power Parity

Exports Imports

Eurozone 335 million $11 trillion 14% 27% GDP 25% GDP

United States

314 million $16 trillion 20% 14% GDP 17% GDP

China 1.354 billion $14.9 trillion 18% 26% GDP 24% GDP

India 1.200 billion $6.8 trillion 6.66% 24% GDP 31% GDP

Japan 128 million $5 trillion 6% 15% GDP 17% GDP

WHAT COULD SAVE GREECE The broader European economy has some pretty strong buffers in place to

support it— The euro is down 20 percent from where it traded a year ago,  Oil prices remain well below their peaks hit last year above $100 a barrel The European Central Bank (ECB) has a 1 trillion euro ($1.1 billion)

monetary stimulus program in place. International Monetary Fund (IMF), rather than private institutions, are

now the big holders of Greek government debt. That should help limit any ripple effects from a default.

Given its membership of the North Atlantic Treaty Organization (NATO) military alliance and its location near to the Middle East and not far from Russia, Greece is a surprisingly important country in geopolitical terms. 

The fact that a default in Greece has been anticipated for some time means that the actual event would be unlikely to come as a huge surprise to global markets, or have a destabilizing impact to the degree that the collapse of U.S. investment bank Lehman Brothers did in 2008

HOW GREECE CAN SAVE ITSELF July 20, 2015: Meet the Big payment due date to the ECB in which

Greece has to pay a total of 4.2 billion Euros to the ECB, in what BAML says is the “final deadline”.

PricewaterhouseCoopers issued a similar report in 2013 called Directions for Economic Recovery in Greece, advising a shift from government spending to private investment. The World Bank, the IMF, and the EU have also pressed their favorite ideas on the Greeks.

McKinsey’s study urged Greece to develop better air connections, build cruise embarkation points, streamline hotel licensing procedures, and turn itself into a year-round destination.

Greek shipowners control cargo vessels worth $106 billion, more than any other country. So the industry seems a natural source of more money. However, a lot of the employees in Greek shipping aren’t Greek, and under the constitution, the industry pays no tax on international earnings brought into the country.

Above all the governments must come out of their feuding policies.

THE REFERENDUM

Many of the reform ideas in the Troika proposal would actually be good for Greece. Greece has a corrupt and dysfunctional tax system badly in need of improvement. Its civil service suffers from widespread patronage.

But none of this is news to Greek leaders. They know that a fairer and more efficient tax system and a more competent civil service would greatly improve the finances of the Greek government.

Meanwhile, Greece's critics have a point when they say the Greek pension system is too generous given Greece's level of economic development. But many economists believe that sharp cuts in government spending during a recession will make a bad economy even worse. That's especially true if Greece stays in the Eurozone, because it won't be able to offset spending cuts with looser monetary policy.

In principle, leaving the euro and bringing back the drachma could have substantial macroeconomic benefits. By printing more drachmas, Greece could boost demand and bring down interest rates, stimulating investment. A devalued drachma could also make Greek exports and tourism more attractive.

However, devaluation wouldn't be a panacea. The Economist notes that trade is a modest share of the Greek economy, and Greece has already cut wages with little positive results.

Leaving the euro would also create some serious headaches for Greek policymakers. Right now, most contracts in Greece are denominated in euros. Re-writing those contracts in drachmas would spark years of litigation. And abandoning euros would mean the Greeks would pay higher interest rates for years to come.

A ‘Yes’ A ‘No’

Given a chance by Eurozone to adopt austerity measures in terms of stricter tax policies and tax measures, cut in governments non-productive expenses like pensions, etc. (People cast their vote on 05,July,2015, voting 62% in favor of a No.)

BENEFITS TO INDIAMajor brokerage and fund management houses like

Kotak AMC, Ambit Investment Advisors and Motilal Oswal Securities Ltd are of the opinion that fall of Greece will have a impact on the following fronts and help India:

Fall in crude oil prices Dollar strengthening No impact on Indian economy  Value buyingAbove all even China’s index has had a fall of 30%

in the past 1 month, auguring better for Indian markets.

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