Greek Crisis

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Greece Crisis:
Analysis, Learnings and Takeaways
Greece Crisis:
Analysis, Learnings and Takeaways

PGP28303 Aakanksha Sharma
PGP28300 Abhishek Sivaraman
PGP28302 Sandeep K. Singh
PGP28301 Upasana Rustagi
PGP28303 Aakanksha Sharma
PGP28300 Abhishek Sivaraman
PGP28302 Sandeep K. Singh
PGP28301 Upasana Rustagi

Contents

Greek Crisis: Background2
Greek Crisis: Consequences of sub-prime3
Greek Crisis: Troika steps in3
Should Greece leave the Euro Area?4
Alternatives5
Key Learnings6
Takeaways for India7

Greek Crisis: Background

Through this write up, we are trying to explain the circumstances which led to the sovereign debt crisis in Greece. European Union was established in the year 1992 through the Maastricht treaty. The purpose of formation was to create something powerful on the lines of the USA, The United States of Europe. Also, the idea was to establish and maintain peace in the turbulent regions. In the year 1999, Euro zone was formed and a common currency, Euro, came into being. Countries set aside the currencies they each were using previously and instead dealt themselves Euros. Greece undertook the same operation. It relinquished its drachmas and received an equivalent amount of Euros. Henceforth Greek firms and Greek citizens could buy goods and services anywhere in the Euro zone with their Euros. Greece has always been an overspending economy. It’s a leisure driven economy where the government always tends to spend more than its means. This trend went to a new level when the Greek government got access to cheap and easier financing. Due to the introduction of the common currency, they could borrow as easily as a strongly backed Germany. The government previously used to monetise its deficit by printing currency. Since the choice of printing currency was no longer available due to the introduction of the monetary union, the government now resorted to borrowing lavishly to meet its deficit. The debt to GDP ratio also increased during the period.

During 2004-2009, output in the Greek economy increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues. Public sector wages rose by over 50% between 1999 and 2007. Greece lived under the helm of a welfare state, with excessive spending on wages and early retirement benefits. Greek Crisis: Consequences of sub-prime

Tourism and shipping are the two biggest revenue generators for the Greek economy. Both the sectors were badly hit when the sub-prime crisis wrecked global economy. There was a significant drop in the government revenue due to the shrinking of earnings from these sectors. Also, tax evasion, which was always an area of concern for the country, took full shape during this period. This led to high fiscal deficit and even higher levels of debt. In October 2009, Fitch downgraded the sovereign debt of Greece to BBB+. This lead to widening of bond yield spreads and CDS spreads. In April 2010, Greek debt was further downgraded to junk status, which effectively closed the availability of capital market financing to the country. This all was a part of a large vicious cycle. Poor ratings and excessive debt led to higher yields. Tax revenues fall due to tax evasion and GDP shrinkage. This led to higher deficit which warranted borrowing more to finance the deficit, which led to even higher cost of debt. Greek Crisis: Troika steps in

The European Commission, The European Central Bank and IMF are called the troika, the three pillars on which the Greek and Euro zone hopes are resting. Amidst concerns that Greece will default on its payments and might exit the Euro zone, the troika steeped in to bail out the country. Phases of bailouts were given, based on the following measures: Austerity measures to restore fiscal balance

Privatisation of government assets worth €50bn by the end of 2015 Structural reforms to improve growth prospects
Also,...
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