Greek Sovereign Debt CrisisJason Lee

Mike PerezSophie Steilen

The European Union

Greek Crisis Timeline

Causative Factors

Current Actions

European Union- History• Founded as European Economic Community in

1957 by 6 countries- Belgium, France, (West) Germany, Italy, Luxembourg and Netherlands (in response to greater integration after WWII).

• In 1992, under the “Treaty on European Union” signed at Maastricht, the name ‘European Union’ officially replaces ‘European Community’.

• As of 2011, 27 countries in Europe are part of the European Union.

EU – Member States

Eurozone

• Euro introduced as a common currency in 11 EU countries in January 1999.

• Physical notes and coins introduced in January 2002, replacing all national currencies.

• As of 2011, 17 nations within the EU, use the Euro as a common currency. The nations, implying a monetary union, are together denoted as Eurozone.

Eurozone GDP (Nominal) (Source: ECB)

S.No. Country GDP (2010) %1 Austria 286.2 3.12%2 Belgium 354.4 3.87%3 Cyprus 17.3 0.19%4 Estonia 14.3 0.16%5 Finland 180.3 1.97%6 France 1932.8 21.09%7 Germany 2476.8 27.02%8 Greece 227.3 2.48%9 Ireland 156 1.70%

10 Italy 1548.8 16.90%11 Luxembourg 40.3 0.44%12 Malta 6.2 0.07%13 Netherlands 588.4 6.42%14 Portugal 172.8 1.89%15 Slovakia 65.9 0.72%16 Slovenia 35.4 0.39%17 Spain 1062.6 11.59%

Total €9165.8bn

Austria3%

Belgium4% Fin-

land2%

France21%

Germany27%

Greece2%

Ire-land2%

Italy17%

Nether-land6%

Portu-gal2%

Spain12%

GDP (2010)

The European Union

Greek Crisis Timeline

Causative Factors

Current Actions

Crisis Timeline

Jan 2001: Greece joins the Eurozone, becoming the 12th member to adopt the Euro

Nov 2004: Admits to fudging figures to gain entry to the Euro. Says deficit was not below 3% of GDP, as required by EU rules. Has been consistently above 3% since 1999.

Mar 2005: Adopts austerity measures to reduce deficit and improve finances post the hosting of Olympics. Posts short recovery upto 2006, when GDP grows by 4.1% in 3 months.

Crisis Timeline

Oct 2009: Recovery short-lived after Global Financial Crisis. Debt fears mount. Economy contracts by 0.3%, national debt up by 56% in 5 years (€242bn), deficit expected to be 6% of GDP. (Later revised to 12.7% of GDP).

Dec 2009: Fitch downgrades rating from A- to BBB+, a first in 10 years. Govt. proposes radical reforms, including crackdown on corruption and reining in public spending. Workers begin strikes.

Feb 2010: Deficit at 12.7%, debt at €300bn.

Crisis TimelineMay 2010: With default fears from Portugal and Ireland, European Financial Stability Facility worth €750bn launched. €440bn loan backed guarantee and bilateral loans by Eurozone members, €60bn balance of payment support by EU members and upto €250bn by IMF support to be made available to weak economies.

Jul 11: 2nd Eurozone Bailout package announced. €109bn to be provided through EFSF, at lower interest rates (~3.5%) & with longer timeframe (15-

30 yrs). Private sector contribution at €37bn.

Fifth austerity package only introduces a new tightening of €13.5bn for 2013–14, but in addition there is also a fiscal tightening of €2.5bn being

implemented during the years as leftover from the earlier packages, resulting in €16bn of tightening for 2013–14.

Present: The GDP which was over 350 billion in 2008 has dropped to 242 billion in 2013. Unemployment went from 8 to 27 from 2008 to 2013, and it

doesn’t look like it is getting better anytime soon. Extreme contractionary policies have been put in place in order to fight to countries debt as well as to

get bailout loans that it desperately needs

The European Union

Greek Crisis Timeline

Causative Factors

Current Actions

Causative Factors

Structural

rigidities

High fiscal deficit

Reliance on

external debt

Structural Rigidities

Large & Inefficient Public Administration

Costly pension & Healthcare systems

Tax Evasion & absence of the will to maintain financial discipline

Structural Rigidities• According to OECD, spending on public administration as a

percentage of total public expenditure in Greece was higher than in any other OECD member, “with no evidence that the quantity or quality of the services are superior”.

• Public sector plagued by overstaffing and poor productivity.• An aging Greek population—the percentage of Greeks aged over

64 is expected to rise from 19% in 2007 to 32% in 2060—could place additional burdens on public spending and what is widely considered one of Europe’s most generous pension systems.

• Informal economy in Greece valued at between 25%-30% of GDP.• Observers offer a variety of explanations for the prevalence of tax

evasion in Greece, including high levels of taxation and a complex tax code, excessive regulation, and inefficiency in the public sector.

High Fiscal Deficit

High Govt. Spending on public administration

High Govt. Spending on pension and healthcare

Low Revenue collections

High Fiscal Deficit• Greek government expenditures in 2009 accounted for 50% of

GDP, with 75% of (non-interest) public spending going to wages and social benefits.

• Total Greek public pension payments expected to increase from 11.5% of GDP in 2005 to 24% of GDP in 2050.

• Between 2001-2007, while central government expenditures increased by 87%, revenues grew by only 31%.

High Fiscal Deficit

Large External Debt

Adoption of Euro

Lax EU Rules enforcement

External Debt

• With the currency bloc anchored by economic heavyweights (Germany and France), and a common monetary policy conservatively managed by the ECB, perceived stability due to Eurozone membership allowed access to capital at artificially low interest rates• Lax EU Rules enforcement: No financial

penalty for Budget deficit >3% and debt >60% of GDP• Got away with hiding billions of dollars of debt

through currency exchange rate swaps

Debt (% of GDP) - Trend

Debt (% of GDP) - Comparative

Country Exposure

The European Union

Greek Crisis Timeline

Causative Factors

Current Actions

Current Actions• Austerity Package: A state of reduced spending and increased

frugality in the financial sector. Austerity Package generally refer to the attempt taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.

• In 2010 the government made their first attempt to avoid a major crisis, by creating three austerity packages.

• It started with a “total fiscal tightening of €41 billion of which €28bn was related to 2010–11 and the remaining €13bn scheduled for 2012–14.”

• However, the recession was worse than predicted so in 2011 and 2012 they created more austerity packages so that in 2012 the the budget cuts equaled 31.9% of the country's entire GDP.

Current Actions

Feb 2010: Deficit at 12.7%, debt at €300bn. 1st Austerity measure announced, includes freeze on public sector pay & higher taxes. Strikes intensify. Goldman Sachs under Fed enquiry for helping Greece “borrow” billions through Exchange Rate Swaps.

Apr 2010: 16 Eurozone members announce bailout package. €30bn 3 year loan at 5% interest, to be provided over next 1 year through the ECB. IMF to provide €15bn. S&P downgrades rating to BB+

(Junk status), as loan amount not seen as enough. 2nd Austerity measures announced, include salary cuts, increase in taxes.

May 2010: Size of bailout package increased to avert sovereign default. €110bn 3 year loan at 5% interest to be provided, with

Eurozone members share at €80bn and IMF share at €30bn. Deficit at 13.6%. Govt. submits a 3year plan aimed at cutting budget deficit from 13.6% of GDP in 2009 to below 3% of GDP in 2014.

Current ActionsJul 11: 2nd Eurozone Bailout package announced. €109bn to be provided through EFSF, at lower interest rates (~3.5%) & with longer timeframe (15-30 yrs). Private sector contribution at €37bn.

Fifth austerity package only introduces a new tightening of €13.5bn for 2013–14, but in addition there is also a fiscal tightening of €2.5bn being

implemented during the years as leftover from the earlier packages, resulting in €16bn of tightening for 2013–14.

Greece’s creditors considered yet another reform plan. This one will raise €3 billion ($3.3 billion) from greater privatization,

higher taxes on alcohol and cigarettes, and steps to clamp down on tax evasion. Greece says it will run out of money on April 20 th

if its creditors don’t agree to release more bailout funds.

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