6/24/13 Mrunal » [Economy Q] Greece crisis and Sovereign Default » Print

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[Economy Q] Greece crisis and Sovereign Default

Ankit Agarwal asked, I want to know about Europe crisis in 2010 and its effect??

Ans.

Greece Government was giving pension benefits, social security and welfareschemes (NREGA Mid-Day meal like stuff), mega PSUs to give jobs forwooing the voters, without realizing that money doesn’t flow from sky.Ultimately, the Expenditure became way tooooo higher than Government’sincome. (Deficit).So Greece started borrowing from market, by issuing bonds.

Adding insult to the injury, 2008′s American recession had snowballing effect onGreece : fall in exports, tourists stop coming and more. So Government’s taxcollection falls down.In this scenario, a seasoned player would not like to buy such Government bonds.So Government of Greece was misreporting its official economic statistics as wellas its borrowing status to make the country’s economic foundation appear strong onpaper.But later that was found out, and lead to a speculation that Greece is on a verge ofbankruptcy and will default on all its loans and borrowed money. (=Sovereigndefault)Such speculation makes share-market collapse, foreign players pulling out theirmoney from Greece.

This is Greece Crisis. It is originating from the fact that Government was spending way to more than itsincome (=Deficit) until they came on the verge of bankruptcy.Similarly Portugal, Spain, Ireland, Italy & UK also have huge deficits compared totheir GDP.Together it makes the Europe crisis of 2010 also known as Sovereign Debtcrisis.

European Union’s response to Greece

EU had two options:1. kick Greece out of their team. or2. Give it the money to recover.

Since #1 was not easily workable so EU had to do #2.

But unlike the Bollywood movies, EU cannot simply print suitcase full of Euros and

6/24/13 Mrunal » [Economy Q] Greece crisis and Sovereign Default » Print

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give it to Greece to solve its debt problems. (recall my earlier example: PM askingRBI to print more money to buy fight-jets, will lead to heavy-inflation when brokerbuys stuff from that extra-printed money.)

So when EU gives financial relief to Greece, it actually goes from other team-members’ wallets. (Germany, France.) So they’re not happy, especially Germany.

Effect of crisis on the nation itself

Monetary help from EU, IMF etc. comes with riders attached, like Greece wouldhave to stop its welfare schemes, reduce salary of Government employees, closedown their inefficient PSUs etc. that again leads to more strikes and anti-Government riots in Greece = further deterioration in tourism and trade.

Looking at such a grim picture of Greece, foreign players prefer to invest theirmoney in some other nations and the vicious cycle continues.

Effect of crisis on the world (From Indian Point of view)

1. Big players start pulling out their money from these troubled nations, andlook for opportunities to invest that money somewhere else with betterreturns. Since American market is also still recovering, they narrow downtheir investment-choice to emerging economies such as India.

2. European Union Is India’s largest trading partner, accounting for 20% of Indiatrade. So Downturn in EU means Indian exporters dealing in chemicals,textiles etc. get low orders from those EU nations [Portugal,Spain,Greeceetc.] + Non-EU nations of Europe (UK). Means European crisis is not goodfor Indian export industry.

URL to article: http://mrunal.org/2011/03/economy-q-greece-crisis-and-sovereign.html

Posted By On 14/03/2011 @ 18:45 In the category Economy