Preethy Vignesh
When after an earlier failure, Greece was finally allowed into the euro zone in 2001, people cheered. Two thirds of the ten million Greeks enthusiastically welcomed the end of the drachma and the arrival of euro notes and coins. The finance minister at the time said the euro meant stability and symbolized Greece’s full acceptance into the European club.
Now the Greeks don’t know what hit them and they’re already wishing they still had their tattered drachmas. Why? Because if this debt crisis had happened in the 1990s, they could have devalued the drachma and even boosted their major industry—tourism. This is because with devaluation a vacation in the Greek islands would be made cheaper. A deep recession could have been avoided.
But by having the euro the devaluation option is unavailable. The only remedy today is for Greeks to swallow the bitter medicine of austerity. That means wage and pension cuts plus new taxes, those measures which creditors insist upon as the price of the bailout.
Looking back, Greeks didn’t realize back in 2001 that their politicians had cheated to meet the euro’s membership requirements. In a country where tax evasion is a national pastime, citizens assumed that if the bureaucrats in Brussels accepted the official fiscal deficit numbers, they must be correct. Never in their wildest dreams did Greeks imagine that just nine years later they would discover that a financial crisis was the true price of euro zone membership.
November, 2009
What started in the last three months of 2008 came to a climax in the first quarter of 2009. Greece’s economy entered its first recession in 16 years in the first quarter of 2009. The economy has suffered quarterly GDP contractions since the last three months of 2008. Two consecutive quarterly contractions in output mean an economy is in recession. The 250 billion euro economy contracted 0.3 per cent in the third quarter of 2009 after shrinking by a revised 0.1 per cent in the second quarter. The figures show that the Greek economy is going through a very difficult period and, unfortunately, there is no easy way out.
Economists polled by a news agency were expecting the economy to contract at a quarterly 0.8 per cent clip in the third quarter. This was due to the revision of quarterly growth rates, in combination with the revision of the accounts of general government and the evaluation of most recent sectoral indicators, which led to new estimates for the first two quarters of 2009.
Unemployment is rising, credit conditions remain tight, and taxes are going up. All these factors weighed down on consumer expenditure during the remaining of the year.
Moreover, inflation, which had been trending downwards during the first semester of 2009, rose again, which put consumers under further pressure. Larger inflation differentials vis-a-vis other Eurozone countries, the relative strength of the euro will also dampen export growth.
May, 2010
The stock market’s slump reflects a widespread concern among many economists that the European debt crisis could slow the U.S. economic recovery.
Very few people expected the problems in Greece and other European nations such as Portugal and Spain to drag the United States back into recession. But the crisis has increased the uncertainty facing U.S. business leaders.
Today market leaders feel that the perception of risk has just changed in a major way and that there is more risk in the world economy than they did in April 2010. A weaker European economy could reduce demand for U.S. exports, as European consumers cut back their purchases of autos, appliances and other goods. And as the euro declines in value compared to the dollar, U.S. goods become more expensive in the 16 countries that use the European currency.
Michael Mussa, senior fellow at the Peterson Institute for International Economics said that the impact in Europe will likely be greater. While Greece’s economy isn’t that large, many major European banks hold billions of dollars of its debt. If Greece defaults on or restructures its debt, which many economists expect, those banks — still recovering from the 2008-2009 financial crisis — may cut back lending to conserve cash. That’s even more likely if other highly indebted nations, such as Ireland, Spain, or Portugal also run into problems financing their deficits. Tighter credit would slow Europe’s economy. And efforts by Greece and the others to reduce their deficits, through tax increases and spending cuts, could also worsen their economies.
The growing European debt crisis has sent stock markets on a wild ride.
There are worries that Europe’s debt crisis could tip the 16 countries that use the euro back into a recession. The euro area comprises the second-largest economy in the world, after the United States. And as in the United States, Europe’s economy had been slowly recovering from recession.
The situation reminds one of the collapse of Lehman Brothers in the fall of 2008. The resulting chaos caused banks to clamp down on lending. Nervous consumers stopped spending. Companies facing plummeting sales cut back on production and laid off millions of workers.
Barry Eichengreen, an economics professor at the University of California, Berkeley reports that no one had seen this kind of thing before and that they are questioning the competence of their leaders to deal with it, and rightly so. European consumers may soon cut back on purchases of new cars or appliances.
Economists are skeptical of President Barack Obama’s goal of doubling U.S. exports over the next five years is unlikely to be reached under these conditions. More so if the dollar remains strong and one of the leading economic areas enters a deep recession. A $140 billion rescue package agreed to by the International Monetary Fund and European leaders has failed to resolve concerns in the financial markets that Greece might default on its debts.
Economists feel that the concerns are amplified, because memories of the 2008 crisis are still fresh. Before the recession, many experts, including Federal Reserve Chairman Ben Bernanke, said the fallout from the subprime housing bust wouldn’t spill over to the broader economy.
As recently as last month April 2010, the Greek economy was expected to decline by 2% in 2010. But with the austerity measures, forecasts have been revised sharply downwards. Now a 4% decline is expected and some economists, like former chief economist at the International Monetary Fund Simon Johnson, believe that number is overly optimistic. He predicts the Greek economy will contract by 12% over the next 18 months, i.e by the end of 2011.
Greece now faces twin problems of solvency and competitiveness. Short-term, the solvency issue was addressed on May 9th, because of the bailout by the I.M.F. and European Union. But to regain competitiveness–absent devaluation– cuts of up to 20% in wages and prices are needed. The Greek government may be unable to deliver this.
Latvia, the former Soviet republic on the Baltic Sea, provides something of a case study for what the Greeks are trying to accomplish. Latvia in 2008 was hit by a financial crisis in which its currency came under speculative attack. But since Latvia–like Greece in 2001–was determined to hold its exchange rate steady in order to be admitted to the euro zone, policy makers rejected the advice that they devalue. Instead, the Latvians slashed wages and government spending by 10 to 20% and deliberately engineered a deep recession in the hopes of getting their budget deficit down to the prescribed levels for euro zone entry. While Latvia has succeeded in holding its exchange rate steady, the ensuing recession has been the deepest in the European Union. In 2009 the Latvian economy contracted by 18% and unemployment rose to 20%. This is the kind of calamity that may be awaiting the Greeks, where unemployment is already 11.3%, a six-year high.
For Greeks to endure the kind of austerity that the Latvians have experienced, there must be some perceived reward for the hard times and sacrifice. For Latvians that is still the hope of membership in the euro zone. But for Greeks who already have the euro, what’s the payoff?
A volatile Eurozone sees Russia with almost no exposure to national debt, but with markets pricing in a wider contagion, Russia would be affected by a return to recession. With the budget woes of Greece now well and truly being implicated in debt markets across the Eurozone, markets are increasingly pricing in the prospect continuing problems, with the PIIGS nations of Portugal, Italy, Ireland, Greece and Spain all seen as financial disaster areas, and sentiment in the northern European nations, such as Germany and the Netherlands, which have some scope for offering assistance, wearing thin.
Russia’s direct exposure to the emerging Euro-contagion is limited according to Andrew Howell, CFA Emerging Markets Strategy at Citigroup.
It is almost certain that the tightening of debt markets and mass investor desertion of government debt from the PIIGs nations will lead to a slowdown in a European economic recovery that has barely come out of the last recession, and in the directly affected nations, hasn’t come out of recession at all. With the EU, the world’s largest single economy, and Russia’s largest trading partner, the implications for Russia – despite it not being a buyer of Euro debt – are enormous.
“Real contagion and that has to do with a direct impact of slower economic growth in Europe on the emerging markets and there you do worry if you’re going to see major downgrades to the European growth. But the losers from that would be those countries which are exposed to the European import markets.”
Europe is the important customer for Russia’s energy and commodity exports. A major downturn in revenues from these will quickly be felt in Russia’s current account and budgetary position. Another key factor is that the EU is a major provider of many products that Russia imports. The devaluation of the Euro against the Rouble – it has dropped from more than 43 to 1, to less than 38 to one in less than 2 months – means that those exports are now more competitive against any domestic producers.
Elina Ribokova, Citigroup Chief Economist says that Russia’s underlying budget and corporate debt environment is particularly sound meaning it is in a good position to weather a downturn if worse comes to worst.
“If you look at balance sheets of different sectors of the economy we see that the sovereign balance sheet is very healthy, the corporate balance sheets have stabilized. And then the final and most important aspect in Russia’s economy balance sheet is the household balance sheet and that one has a particularly healthy debt to GDP ratio of households at less than 10%.”
But even with a sound debt position to help square up to any renewal of a global economic downturn, Russia’s economy and economic leaders, would prefer to avoid it. The country is still barely gaining traction on an economic rebound with the 1Q 2010 GDP figures worse than forecast, and only massive government expenditure warding off major social consequences of the 8.9% contraction of 2009. As the government looks to wean the economy off its expenditure in 2010 and beyond, any further reversal into recession in the EU could leave the Russian economy more exposed, a second time around.
The Greek Prime Minister George Papandreou in May 2010, embarked on a whirlwind tour of western capitals to drum up support for his crisis-stricken country. Beginning with Berlin, where he met the German chancellor Angela Merkel, before travelling on to Paris and Washington DC for talks with presidents Sarkozy and Obama, Papandreou’s diplomatic offensive was supposed to determine whether Greece can secure help from its fellow eurozone members or whether the IMF will eventually be called in. What’s at stake is no longer just Greece’s creditworthiness, but also Europe’s credibility.
If Athens can raise about €22bn (£20bn) to pay off maturing debt in April and May, then the risk of a sovereign debt default spreading to other heavily indebted euro countries will subside. If not, then in the absence of a rescue operation from euroland, the Greek government would have no other option but to beg the IMF for help – further undermining the status of the euro as a credible alternative to the dollar.
Papandreou’s mission comes about a month after a special EU summit in Brussels pledged collective European solidarity in exchange for tough Greek action. By announcing a third round of spending cuts and tax increases to reign in its budget deficit, Athens is fulfilling its part of the agreement. Now it’s the turn of the eurozone to help Greece bring down the cost of borrowing – otherwise the economic reforms could lead to social unrest and bring down the Greek government.
By refusing to provide financial guarantees to state-owned banks buying Greek bonds which would help reduce the interest rate on Greek debt, Berlin is forcing Athens to devote more money to servicing debt and make even deeper cuts to public spending. This lethal mix is pushing Greece back into economic recession, reducing tax revenues, increasing the real value of its debt and requiring yet more savage cuts – a vicious spiral of debt-deflation that could plunge the country into an unprecedented social recession.
Afflicted by soaring youth unemployment and mass public sector lay-offs, not just in Greece but also in Spain, Portugal and Italy, the future of Europe’s “Club Med” is dire. With hindsight, the Brussels agreement looks increasingly like a Faustian pact with the debt devil concluded by the German iron chancellor.
The sale of national assets is almost exactly the advice given by Goldman Sachs to the Greek government to “pay” for euro membership back in 1999. After the collapse of neoliberalism, it is worrying that the current German government prefers fiscal austerity and the pressure of global finance over sound economic judgment and political leadership. But the latter is exactly what the operation of markets requires, otherwise there will be more speculative attacks and irrational herd-like movements against Greece and other vulnerable euro members.
By contrast, France is leading the way in arguing for a rescue operation now to avoid a fully fledged eurozone bailout or an IMF-orchestrated structural adjustment programme and thereby to mitigate Europe’s social recession. With strike action and protest movements spreading across euroland, Merkel’s hardline stance is unnecessarily exacerbating a crisis that could bring down the European common currency – Germany’s main contribution to Europe since reunification.
19th May, 2010
Greece’s industrialists believe that the government has done too little too late to avert a steep economic downturn and urged structural reform to boost the flagging productivity of the economy. The SEB industry federation called on Greece’s conservative government, which has fallen behind in polls over a series of scandals and its handling of the economy, to boost public investment and cut taxes to create jobs and stimulate businesses.
The government’s 28-billion-euro plan to increase liquidity at Greek banks, which have avoided the worst of the credit crisis, provided no guarantee of reviving lending to the slowing real economy.
Despite average growth rates of around 4 percent a year for a decade, Greece has seen the competitiveness of its 240-billion-euro economy decline as high inflation has pushed up labour and manufacturing costs. Surveys consistently rank Greece as one of the euro zone’s most corrupt and difficult places to do business.
Greece’s manufacturing sector shrank at a record pace in November due to a fall in new orders, a monthly survey showed on Monday. The purchasing managers’ index (PMI) fell to 42.3 points from 48.1 in October, reflecting a fall in both domestic and foreign demand.
Economists say the risk of deflation in some of Greece’s main trading partners could harm its competitiveness even further, as inflation differentials widen. The conservative government has forecast Greece’s economic growth rate will fall to 2.7 percent in 2009 from 3.2 percent this year, but many economists say this is too optimistic. The OECD predicts Greek growth will drop to 2.0 percent next year.
Greece has one of Europe’s highest current account deficits, at around 15 percent of GDP, and its stock of sovereign debt equates to almost the whole of its annual economic output.
21st May, 2010
The Greek debt crisis roiling markets worldwide may at most “influence” India, but will have limited “adverse impact” on the country according to the Finance minister Pranab Mukherjee. He signaled the government’s determination to walk the path of fiscal prudence it was forced to abandon during the 2008 global financial meltdown.
India, according to him, had very little direct exposure to European countries at the centre of the crisis, with the country’s banking system having no direct links with them and exports to Greece, Spain, Portugal and Italy only 4% of total exports.
Fears of a global contagion from the Greek crisis have cast its shadow on the country’s stock markets, knocking the Sensex 8% down in the last six weeks From April 2010 till mid-May 2010, and also caused volatility in the foreign exchange markets as a battered euro and volatile global currencies raised concerns about capital flows into India.
That crisis tipped much of the developed world into a recession and forced the government to put fiscal prudence on the back burner as it had to launch a series of fiscal stimulus measures to stimulate demand in the economy. But as the global economy recovered from that crisis, the government returned to the path of fiscal prudence and in its budget for 2010-11, spelt out a medium-term plan to cut fiscal deficit.
It has set itself a target of containing the deficit to 5.5% of GDP this year and cut it further to 4.1% in the next financial year. The deficit stood at 6.7% in 2009-10.
The finance minister said good monsoon rains would have a huge “psychological impact” and help tame inflationary expectations. Rising inflation and high prices, especially in the wake of last year’s drought, has been a major problem for the UPA government, leaving it vulnerable to attacks from the opposition and even some of its own coalition partners.
Euro 130 b bailout package for Greece to avert default – 22.02.2012
The total debt of Greece is expected to hit 120.5 per cent of gross domestic product by 2020.
Private creditors accept deeper write down of 53.5 % Profits from ECB bondholdings to be used.
Eurozone finance ministers sealed a 130-billion-euro ($172 billion) bailout for Greece on 21.02.2012 to avert a chaotic default in March, 2011 after persuading private bondholders to take greater losses and Athens to commit to deep cuts.
After 13 hours of talks, ministers finalised measures to cut Greece’s debt to 120.5 per cent of gross domestic product by 2020, a fraction above the target, to secure its second rescue in less than two years and meet a bond repayment next month.
By agreeing that the European Central Bank would distribute its profits from bond buying and private bondholders would take more losses, the ministers reduced the debt to a point that should secure funding from the International Monetary Fund and help shore up the 17-country currency bloc.
But the austerity measures wrought from Greece are widely unpopular among the population and may hold difficulties for a country, which is due to hold an election in April. Further protests could test politicians’ commitment to cuts in wages, pensions and jobs.
Every government in the currency union will also have to approve the package. Northern creditors, such as Germany, had pressed for even tougher measures to be placed on Greece, but Finance Minister Wolfgang Schaeuble said he was confident a majority in Parliament would approve the package.
“We have reached a far-reaching agreement on Greece’s new programme and private sector involvement that would lead to a significant debt reduction for Greece … to secure Greece’s future in the euro area,” Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.
The euro gained in Asia after the bailout was agreed.
Some economists say there are still questions over whether Greece can pay off even a reduced debt burden.
A return to economic growth could take as much as a decade, a prospect that brought thousands of Greeks onto the streets to protest on Sunday. The cuts will deepen a recession already in its fifth year, hurting government revenues.
“We sowed the wind, now we reap the whirlwind,” said Vassilis Korkidis, head of the Greek Commerce Confederation. “The new bailout is selling us time and hope at a high price, while it doggedly continues to impose harsh austerity measures that keep us in a long and deep recession.”
Extra relief
A report prepared by experts from the European Union, the European Central Bank and the International Monetary Fund said Greece would need extra relief to cut its debts near to the official debt target given the worsening state of its economy.
If Athens did not follow through on economic reforms and savings to make its economy more competitive, its debt could hit 160 per cent by 2020, said the report, obtained by Reuters.
“Given the risks, the Greek programme may, thus, remain accident-prone, with questions about sustainability hanging over it,” the nine-page confidential report said.
The accord will enable Athens to launch a bond swap with private investors to help put it on a more stable financial footing and keep it inside the eurozone.
About euro 100 billion of debt will be written off as banks and insurers swap bonds they hold for longer-dated securities that pay a lower coupon. Private sector holders of Greek debt will take losses of 53.5 per cent on the nominal value of their bonds. They had agreed to a 50 per cent nominal write down, which equated to around a 70 per cent loss on the net present value of the debt. Mr. Juncker said he expected a high participation rate in the deal, but some bondholders might balk at the new terms.
Greece said it would pass legislation that would allow it to enforce losses on bondholders who would not take part. Eurozone central banks will also play their part in reducing the debt.
A Eurogroup statement said the ECB would pass up profits it made from buying Greek bonds over the past two years to national central banks for their governments to pass on to Athens “to further improve the sustainability of Greece’s public debt”.
The ECB has spent about euro 38 billion on Greek government debt that is now worth about euro 50 billion.
The private creditor bond exchange is expected to launch on March 8 and complete three days later, Athens said on Saturday. That means a 14.5-billion-euro bond repayment due on March 20 would be restructured, allowing Greece to avoid default.
The vast majority of the funds in the 130-billion-euro programme will be used to finance the bond swap and ensure Greece’s banking system remains stable.
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