Transcript GREECE DEBT CRISIS

GREECE DEBT CRISIS
Dareen Atef
Dina Wahba
Safiya Galal
Sarah Hani
Dr. Amir Nasry
Introduction
• Years of unrestrained spending, cheap lending and failure
to implement financial reforms left Greece badly exposed
when the global economic downturn struck. The debt
levels and deficits that exceeded limits set by the Eurozone were revealed & exposed.
• In the first quarter of 2010, the national debt of Greece
was put at €300 billion ($413.6 billion), which is bigger
than the country's economy. The country's deficit (its
expenditure in comparison to its revenue) is 12.7%.
Background
Greece during Financial Crisis
• Economy of Greece
• PIIGS: Greece has spread the risk to other
weak and indebted Euro-area economies.
The Actual Crisis
• Most countries have seen estimates for their
budget deficit swell over the course of 2009,
but the magnitude of the Greek revisions over
both 2008 and 2009 and the implications for
excessive external debt financing has been
shocking. The estimated 2009 deficit rose
from 5.1 % for 2009 as reported to the
European Commission during the spring to
12.7%
• Twin Deficits
Since y=C+I+G+N-X
and
Y= S+I+T
then (S-I) (T-G) = (X-M)
Impact of Crisis
• Southeastern Europe
Greece’s foreign policy focus on the region and
growing trade volumes between the
countries, neighboring Serbia, Albania,
Macedonia, Romania, Bulgaria and Turkey
cannot remain indifferent to the magnitude of
the crisis next door.
• Spill-over effect:
Some spillover effects have already started to
manifest themselves. As Greek 10-year bonds
fall and yields continue to remain above 6%,
sovereign debt issuance and the risk premium
investors demand to hold securities emitted
by Romania, Serbia, Bulgaria and Turkey have
been adversely affected.
• Greece is already in major breach of Eurozone rules on deficit management and with
the financial markets betting the country will
default on its debts, this reflects badly on the
credibility of the euro.
• Impact on private individuals:
The most obvious way would be through tax
bills, as Europe agrees to ride to the rescue
and help Greece deal with its mounting public
and foreign debts.
Any assistance to Greece will come at a cost that
will ultimately have to be borne by taxpayers
in the nations that contribute.
• Contagion Effect
Greek crisis has made investors nervous about
lending money to governments through
buying government bonds.
Everybody's interest rates are heading higher as
governments are having to pay a greater risk
premium to borrow money.
• Reduced wealth:
Take-home pay is likely to fall as it is eroded by
rising taxes and everyone will have to work
longer before they retire - by which time they
are likely to find that their pensions have
shrunk.
• Slower recovery
The crisis is also set to slow down the embryonic
economic recovery.
Resolution & Conclusion:
• Bailout plan
European governments and the International Monetary Fund
(IMF) have stunned global stock markets with a 750bn-euro
($975bn; £650bn) package of standby funds designed to
see off financial meltdown.
The 27 countries of the European Union (EU) will contribute
500bn Euros towards the financial safety net. They have
been joined by the International Monetary Fund (IMF),
which is providing other 250bn Euros.
The vast bulk of Europe's contribution comes from the 16nation Euro-zone bloc, which is promising 440bn in loan
guarantees. The European Commission is providing 60bn
Euros immediately.
• Germany and the Euro rescue plan
• Germany's parliament has approved the
country's contribution to a 750bn euro ($938bn,
£651bn) rescue deal for the Euro-zone.
• The German contribution is key to the plan, and
would amount to up to 148bn Euros. Chancellor
Angela Merkel warned that the Euro would be "in
danger" without strong action.
• The role of Greece
Greece has outlined plans to cut its budget deficit,
or the amount its public spending exceeds
taxation, to 8.7% of its GDP in 2010, and to less
than 3% by 2012.
• Just before the massive bail-out package was
announced the Greek government pledged to
make further spending cuts and tax increases
totalling 30bn euros over three years - on top of
austerity measures already taken.
Conclusion
• Greece’s Debt Crisis has put the EU under the
scope, & it has shifted the attention to the
efficiency & the success of the Euro-zone. It’s
considered as probably the biggest test the EU (&
the EMU-in particular) 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.
• It’s too early yet to measure the effectiveness of
the bail out plan.