Euro Crisis

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  • Topic: Eurozone, European Central Bank, Euro
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  • Published : March 4, 2013
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European CRISIS: An Overview of Facts
EU rules state that no nation in the euro bloc should have an annual budget deficit which is higher than 3% of its gross domestic product. The Greek government aims to shrink it to 9.1% of overall economic output this year, down from 12.7% last year. Meanwhile Greece’s national debt stands at about 300bn euros ($419bn, £259bn). Following downgrading by Fitch, Moody's and S&P, Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. Although all Greek government bond auctions held in 2010 have been massively over subscribed, yields have risen, particularly in the wake of successive ratings downgrading.

On 27 April 2010, the Greek debt rating was decreased to 'junk' status by Standard & Poor's amidst fears of default by the Greek government. Yields on Greek government rose to 15.3% on two-year government bonds following the downgrading. Some analysts question Greece's ability to refinance its debt, which equates to 115% of its gross domestic product, which is higher than the accumulated government debt of Belgium and considerably less than that of Japan. Standard & Poor's estimates that in the event of default investors would lose 30– 50% of their money.

Downgrade of credit ratings for Euro zone countries:: Standard and Poor's has downgraded Spain's credit rating from "AA+" to "AA" with a negative outlook.. S&P lowered Portugal's credit rating from "A+" to "A-."

The main options available with Greece are:
Enormous Cut in Government spending
High tax revenue ousting the government expenditure.
High Imports as compared to small imports: The Imports by the country are 18% of the GDP whereas the exports are 6% of GDP. This huge difference is adding to the country woes. To improve the conditions the country has to start decreasing the imports and promoting its exports in one way or other. The biggest challenge here with Greece is that it does not have its own currency. Therefore it cannot print money and pay off the debt. Moreover it cannot devalue the currency, thus encouraging exports and cause Greek firms and households and firms to substitute domestic products for imported goods.

Greek five-year credit default swaps (CDS) briefly rose to a record 911.6 basis points indicating an implied default rate of 52.6 percent.
Greek Bank Ratings Cut to Junk at S&P after Downgrade of Greece: Greek banks including National Bank of Greece SA, the country’s largest lender, and EFG

Euro Crisis-Analysis||1

Eurobank Ergasias SA had their credit ratings cut to junk at Standard & Poor’s following a downgrade of Greece. Greek banks are directly exposed to the sovereign’s deteriorating credit quality through their large portfolios of Greek government debt. In addition, the deteriorating economic conditions that we expect through 2010 are likely to lead to tougher operating conditions than those we had previously incorporated into our ratings on Greek banks. Greek banks, which hold around 40 billion euros in debt on their books, and raise the specter of capital hikes in a market that has seen foreign investors, flee as the debt crisis intensifies. Analysts say default or restructuring could shave anywhere from 20 to 50 percent off the value of Greek debt, a major part of the portfolios of Greek banks. National Bank has the biggest exposure with 17.9 billion euros or 16 percent of total assets and 223 percent of equity, followed by Eurobank with 7 bln euros, and Piraeus with 6.5 billion.

According to UniCredit, even a 20 percent haircut would chop NBG's equity Tier-1 capital to 4.7 from 10 percent, Piraeus' to 4.1 pct from 7.7 pct, and Eurobank's to 5.1 pct from 7.9 pct, making recapitalizations necessary.

Greek bank deposits shrink 10.6 bln euros in Q1. Compared to the February, deposits were down 0.9 percent to 227.4 billion euros at the end of March, according to the Bank of Greece. Most of that decrease is probably due to capital flight because of the...
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