Project on Greece Crisis and Impact for Economic Environment of Business

Crisis and Impact

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Introduction financial crisis of 2007–2008 Greek government-debt crisis Causes for deteriorated economic Tax evasion and corruption Unsustainable and accelerating debt-to-GDP ratios Impact of the Greece Economic Crisis on India India’s Crisis Responses and Challenges

Country Profile Entry in EMU Euro as base currency

Fraud revealed Hosting of Olympics After Olympics

Deficit Rating declined Crisis

How Crisis Started?

Effect on Greece stocks Impact on Greece Impact on Banks

Impact on Europe Impact on US Impact on India

Measures taken Austerity and bail out plan Situation solved or not

Impact of Crisis!

Introduction of Greece Economy

Population: 11.2 million (UN, 2009) Capital: Athens Major Language: Greek Major Religion: Christianity Monetary unit: 1 euro = 100 cents GNI per capita: US $28,650 (World Bank,2008)

Inflation rate: 1.2% (2009) Unemployment rate: 9% (2009) Greece is the 15th largest economy in the 27 member EU Greece is ranked 29th in the world at $27,875 nominal GDP 33rd in the world $27,624 for purchasing power parity(PPP) Greece is a member of EU, WTO, OECD, BSECO

Introduction of Greece Economy

• Greece has Democratic Government.

• Current Ruling party of Greece is PASOK(Pan Hellenic Socialist Kleptocrats).

• Current Prime Minister of Greece is George Papandreou.

• Current finance minister George Papaconstantinou

Industry Contribution to GDP

GDP

service sector 80%

industry 12%

agriculture 5%

Greece main business is Tourism, Mining, Petroleum, Chemicals, Food Processing, Textile, Metal Products and Tobacco Processing.

Government budget deficit, inflation, GDP growth and debt-to-GDP ratio (1970–2015)

Source: Eurostat and European Commission

Greek national

account 2006 2007 2008 2009 2010 2011 20122 20132 20142

Public

expenditure4 (%

of GDP)

45.0 47.2 50.5 54.0 51.3 51.7 50.7 49.6 48.1

Structural

deficit5 (% of

GDP)

6.8 7.9 9.6 14.7 8.7 5.4 1.5 -0.7 -0.4

GDP

deflator6 (annua

l %)

2.4 3.3 4.7 2.3 1.1 1.0 -0.5 -1.2 -0.4

Real GDP

growth7 (%) 5.5 3.5 −0.2 −3.1 −4.9 −7.1 −6.0 -4.2 0.6

Public

debt8 (billion €) 224.2 239.3 263.3 299.7 329.5 355.7 344.6 347.6 349.3

Nominal

GDP8 (billion €) 208.6 223.2 233.2 231.1 222.2 208.5 195.0 184.5 185.0

Debt-to-GDP

ratio (%)

- Impact of

Nominal GDP

growth (%)

- Stock-flow

adjustment (%)

- Impact of

budget deficit

(%)

- Overall yearly

ratio change

(%)

107.5

-7.6

8.1

5.7

6.3

107.2

-7.0

0.3

6.5

-0.3

112.9

-4.6

0.5

9.8

5.7

129.7

1.0

0.1

15.6

16.8

148.3

5.2

2.7

10.7

18.6

170.6

9.7

3.1

9.4

22.3

176.7

11.8

-12.5

6.8

6.1

188.4

10.1

-3.8

5.5

11.7

188.9

-0.5

-3.6

4.6

0.5

Entry in European Union(EU) • EU formed in 1958 by six

countries(Belgium,France,Italy,Luxembourg,Netherlands,West Germany)

• Main object to remove regional disparity, improve economy and and inflate trading.

• Greece joined EU in 1981

Entry in European Economy and Monetary Union(EMU)

Greece entered in EMU in 2001.

Switch dratchma and adopted Euro currency.

Single market through a standardized system of laws which apply in all member states.

Financial crisis of 2007–2008 :

• the worst financial crisis since the Great Depression of the 1930s

• threat of total collapse of large financial institutions

• the bailout of banks by national governments

• downturns in stock markets around the world

• housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment.

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Result in fall of long term interest rates

Fall in annual GDP

Greek government-debt crisis:

• GDP growth rates

• Government deficit

• Government debt-level

• Budget compliance

• Statistical credibility

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• in 2004, Eurostat revealed that Greece understated the budgetary statistics.

• Eurostat used ESA95 methodology.

Country

Inflation rate

annual government

defecit to GDP

Long term interest rate

Reference value

max. 1% max. 3% max. 6%

Greece 2.5 3.4 6.4

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Democratic government, Socialist population

Welfare schemes Hiring of more Government jobs increase in of Government employees Salary Evasion of tax

High taxes witch lead to high tax evasion loosing 30 billion Euros per year 36.6% of the gross government revenue

Reasons of internal Greece Crisis

Government spending focussed on consumption expenditure Greek government expenditure approximately 104 billion Euros which is equal to 49% of the GDP Large spending on Interest payment 20% of government revenues diverted into long term investment expenditure Fraudulent Government and Fiscal Indiscipline Accumulated debts Secretly borrowing from Private and foreign investors to hide deficits Because of government borrowing supply for the private sector decreased

Reasons of Greece Crisis

Hosting the 2004 Olympics

• many factors were behind the crippling debt crisis, the 2004 Summer Olympics in Athens has drawn particular attention.

• The 2004 Athens Olympics cost nearly $11 billion

• The tab for security alone was more than $1.2 billion.

After Olympic…

• Athens was questioned on $15 billion expenses by the Greece Government

• After Olympics stadiums are vacant and not in use

ORIGINS OF GREECE'S DEBT CRISIS

BOOM 1999-2001 and 2005-07 Private debt increases much more than public debt Private debt increases spectacularly

BUST 2002-04 and 2008-09. economy is driven into a recession government revenues decline social spending increases. government is forced to issue its own debt to rescue private institutions.

Rising debt levels 12.7% of GDP in 2009 Rising borrowing cost High social spending

On 27 April 2010, the Greek debt rating was decreased to BB+ by Standard & Poor

Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back

Stock market and Euro currency declined The euro declined by 1.6 % to $1.3175 The dollar jumped 1% on a trade-weighted basis on haven flows The yield of the Greek two-year bond reached 15.3%

Effects of declined rating

Industrial Production dropping by 11%. Mining fell by 6.4% manufacturing decreased by 11.3% electricity production dropped 12.2%

Greek banking sector is also in trouble

• Banks stocks were the worst affected because of crises

• Decline in bank stock prices by 47% since November 2009

• Greek bank deposits have fallen to 8.4 billion Euros

Exposure of banks to Greece bonds

Name of Banks Holdings

BNP Paribas €5 billion

Dexia €3.5 billion

Generali (Italy) €3 billion

Commerzbank (Germany) €2.9

Greek banking sector is also in trouble

The industrial production is low In 2011- unemployment rate gone to 15.9%

The crisis has reduced confidence in other European economies Financing needs for the euro zone in 2010 come to a total of €1.6 trillion Ireland, with a government deficit in 2010 of 32.4% of GDP, Spain with 9.2%, and Portugal at 9.1% are most at risk.

Impact on European Union

Europe

Greece

Other

USA

Asia

Greece Government Bond ownership by region

Asia

3%

Impact on US

U.S. exports to the EU could be impacted if the crisis slows growth In the EU and causes the euro to depreciate against the dollar. As the crisis continues, increased perceptions of risk are impacting U.S financial markets. CDT DOW dropped more than 992 points. The panic in Greece caused one of the most turbulent days ever on Wall Street. In a matter of minutes, stocks plunged 900 points. The Dow managed to recover but still ended in negative territory, The Dow closed down 347 points.

Greek imports from India include cotton, synthetic fibres, fabrics, vehicles, iron, steel and fruit. while Greek exports to India include fibres, fertilizers, organic chemicals, pharmaceutical products, leather goods, metal processing machinery, etc. Only 0.05% of India's exports go to Greece and Indian banks have virtually no direct exposure to Greece. There will be some additional capital flows coming in in search of a safe haven and a small drop in exports. Euro which was quoting at around Rs.67 before crisis is way below at Rs.55.92 currently.

Impact on India

Austerity Package

Privatization

Bailout Package

Measures Taken

Internal Measures

External Measures

First Austerity Package announced on 9th Feb 2010 The Greek Parliament votes 155-138 in favor of $40 billion in painful budget cuts and tax increases over the next few years. Tax Increases Income Tax People will now pay tax on income over €8,000 a year, down from €12,000 This basic rate of tax will be set at 10% 1% for earning between €12,000 (£10,800) and €20,000 a year 2% for earning between €20,000 and €50,000 3% for earning between €50,000 to €100,000 4% for earning €100,000 or more Lawmakers and public office holders will pay a 5% rate

Internal measures

Austerity Package

Sales Tax VAT rate for restaurants and bars is being hiked from 13% to the new rate of 23% This rate already covers many products in the shops, including clothing, alcohol, electronics goods and some professional services. Wealth Tax Tougher luxury levies will be introduced on yachts, cars and swimming pools, along with higher property taxes The changes should bring €2.32bn this year, rising to €3.38bn in 2012, €152mn in 2013 and €699mn in 2014 Spending Cuts Public Sector wages Social benefits and pension Social contribution Public investment The austerity programe also states that €7bn will be raised in 2013, €13bn in 2014 and €15bn in 2015.

Internal measures

Stakes in various state assets will be placed on the auction block, in an effort to raise €50bn by 2015.

2011 Stake in Hellenic Telecom to Deutsche Telecom

Greece decided to sell 10% stake in Hellenic telecom which is state owned to German telecom company Deutsche Telecom for €400m. Deutsche Telekom already owns a 30 percent stake in O.T.E. that it bought in 2008.

Hellenic Post bank and Thessaloniki Water are also scheduled for sale

Hellenic post bank is a retail bank of greece which owned by Hellenic Republic. It’s a state owned company. Thessaloniki Water Supply And Sewerage Company SA is a Greece owned company that supplies water to the Thessaloniki urban complex.

Privatization

2011

Stakes in betting monopoly OPAP

OPAP - Greek Organisation of Football Prognostics

Two port operators, Piraeus Port and Thessaloniki Port, will also be partially

Piraeus Port Authority S.A. is a Greece owned company engaged in the management and operation of Piraeus port. Thessaloniki Port Authority SA is a Greece-based company involved in the management and operation of Thessaloniki port.

Privatization

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Introduced new Austerity package on 2 May 2010. Greece and its international lenders have agreed to revise the country's five-year austerity plan to include more tax increases and less spending cuts. The revised 2011-2015 fiscal plan is the key to unlocking

further EU-IMF loans for the debt-laden country.

It includes a total €28.4bn (£25.3bn) of fiscal measures, €155m more than in an initial version of the plan. The revised plan foresees a total €14.32bn of spending cuts, about €490m less than in the previous version. It also calls for €14.09bn of tax measures, €649m more than in the initial version.

Revised Austerity Package

Tax increases Taxes will increase by €2.32bn this year, with additional taxes of

€3.38bn euros in 2012, €152m in 2013 and €699m in 2014.

Cutting public sector wage By €770m in 2011, and €600m in 2012, €448m in 2013, €300m in 2014

and €71m in 2015.

Cuts in social benefits By €1.09bn this year, €1.28bn in 2012, €1.03bn in 2013, €1.01bn in

2014 and €700m in 2015.

Austerity Package

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In May-2010 IMF and EU proposed a bailout plan for Greece worth EUR 110 bn

Greece Bailout Distribution (in bn Euros)

2010 2010 (Actual)

2011 2011 (revised)

2012 2013 Total

IMF 10.4 10.4 13.3 10.8 8 5.8 30

EU 27.6 21.1 26.7 35.6 16 2.2 80

Total 38 31.5 40 46.4 24 8 110

External Measure

Now situation has become critical and Greece debt has increases to 370bn. We consider the three broad options open to Greece, the EU and the IMF: no restructuring (essentially an extension of EU/IMF loans), voluntary restructuring and a hard restructuring event. Our conclusion is that a voluntary restructuring is the most likely outcome.

Situation Solved or not

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