Group 6, Section A Abhishek Arora 10P003 Harsh Maru 10P018 Krishna Chaitanya T 10P024 Nikhil Jain 10P034 Anup Rao 10P044 Sneha Vaidyanathan 10P054
Agenda
Current State Macroeconomic Outlook
Greece: An Overview
How it Happened
Greece: An Overview
Greece: Overview Current State How it Happened
24th Largest Economy by nominal GDP [1] Rated as a developed economy on the basis of:
Its per capita income Industrialization Human Development Index (HDI) 22nd in the world
Underwent impressive economic and social development post WW 2 Greek economic miracle
Average growth rate of 7% from early 1950s to mid 1970s Due to: Marshall Plans stimulation Devaluation of the Drachma High foreign investments Massive construction activities due to rebuilding of cities
Sources: TradingEconomics
Sources: TradingEconomics
Manipulations
Greece: Overview Current State How it Happened To join the European nion in 2001, Greece needed to: Reduce budget deficit to 3% of GDP Reduce inflation to roughly German levels In the 1980s and 90s, Greeks were regarded much less likely than Germans to repay loans Interest rates in Greece were 18%: ~10% higher than in Germany to compensate for the risk What Greece did: Moved pensions, defence expenses off the books through accounting shenanigans Froze prices for government-supplied goods like electricity and water, cut taxes on alcohol, gas and tobacco Substituted higher-price items from the CPI with cheaper ones the day inflation was measured
What Happened?
Greece: Overview Current State How it Happened Crisis: a result of fiscal intemperance, not euro competitiveness or financial recklessness
Had high domestic demand and was heavily dependent on (mainly German) imports Currency devaluation and lower Euro zone interest rates helped finance borrowing Subsequent governments were lax and indulged in unrestrained public spending and manipulated budgets Tourism and shipping exports helped sustain economy Wages and prices of goods went up steadily
2000-08
Sources: [1] World Bank Report (2009), [2] TradingEconomics, [3] Michael Lewis on Greece, Vanity Fair, [4] The Viewspaper
What Happened?
Greece: Overview Current State How it Happened
2008-09
Global Financial crisis hit! Exports of shipping and tourism sectors hit very badly down by 15% in 2009 Wages declined But prices of imported goods remained high
Sources: [1] World Bank Report (2009), [2] Market Melange, [3] Michael Lewis on Greece, Vanity Fair, [4] The Viewspaper
What Happened?
Greece: Overview Current State
2008-09 Election year tax collectors pulled off streets to keep voters happy Collections suffered Lower government revenues Cultural patterns: Nearly 30-40% of taxable income goes unrecorded in Greece Real estate and sales tax also evaded lower prices quoted for purchase as in India High cost of running government: High expenses Average government job pays 3 times an average private-sector job Retirement age for jobs classified as arduous: 50(F) and 55(M) yrs Get high pensions
How it Happened
Sources: [1] World Bank Report (2009), [2] TradingEconomics, [3] Michael Lewis on Greece, Vanity Fair, [4] The Viewspaper
What Happened?
Greece: Overview
New socialist government elected (Nov) massively revised 2009s forecast budget deficit from 6 to 8% to 12.7% (later revised to 15.4%)
2009
Current State How it Happened
45 Billion E /IMF bailout package activated to help service 8.5 Billion bonds due in May 2010 S&P downgraded Greeces debt rating to BB+ (junk status) yields hit 15.3%
April 2010
May 2010
4.8 Bn savings targeted (through public wages reduction and increased taxes) in austerity bill passed by Greece Germany agreed to 110 Bn for E /IMF bail out of Greece out over the next 3 years at 5% interest Protests and riots in Greece over spending cuts and tax increases Best case scenario: assuming GDP turns positive in 2012, fiscal deficit will decline to a still huge 8% of GDP, but gross national debt may reach 140% of GDP by 2014
Policy Response
Greece: Overview Current State How it Happened
Fiscal Austerity
3 packages unveiled by Government, worth 16 Bn (6.4% of GDP) since Oct 2009 Target sharp spending cuts, tax increases, improved collection
Tax Raises
Rise in VAT from 19% to 21% Tax raises on fuel, tobacco, alcohol, luxury products One-off 1% tax raise on incomes over 100,000
Spending cuts
Civil servant hiring freeze (5:1 retirement/recruitment ratio for new hires from 2010) 10% cut on civil servant bonuses 30% cut in public sector supplementary pay (~ 1 months salary) Freeze on state pensions
Devalue drachma, make exports more competitive, increase revenues and pay debts off faster? Cons: Will lose eligibility for low interest Euro loans
Contagion effect
Italy and Belgium have bloated debts like Greece Portugal and Spain have Greek-style overreliance on foreign lending Greek banks balance sheets stuffed with dodgy Greek bonds: Neighbouring Bulgaria and Romania rely on Greek banks for funding Could face a credit crunch
Sources: Eurostat
Iceland
Collapse of all 3 major commercial banks Couldnt refinance short-term debt Run on deposits in the K
Consequences
Krona declined in value Stock market capitalisation declined by 90% in 2009 Real GDP decreased by 5.5% in the first half of 2009
State
#1 in 2008 N HDI Now: De-facto bankruptcy Debt = 850% of GDP
Causes
Deregulated banks: Most rapid expansion of a banking system in the history of mankind 2003: 3 biggest banks had assets ~$10 Bn, 100% of GDP 2007: 3 biggest banks had assets ~$140 Bn, 1400% growth in 3.5 years Banks financed their expansion through loans on interbank lending market, foreign deposits, households (took on a debt of 213% of disposable income) Huge household debt led to huge inflation 2003-07: Banks lent Icelanders money to buy stocks and real estate: Stock market multiplied 9 times ( S: doubled) Real estate priced tripled Central bank held interest rates high (~15%) to control inflation encouraged more foreign deposits bubble, which burst
Questions?
Than You