Project on Greek Crisis

Submitted By : Amit Shah , Sohil Jivani Batch : XMBA 11

Greece's debt problems have dominated European financial news in 2010. At the start of the year, the country had the highest budget deficit in the EU (12.7% of GDP) and the second-highest debtto-GDP ratio.

About Greek
The economy of Greece is the twenty-seventh largest economy in the world by nominal gross domestic product (GDP) and the thirty-third largest by purchasing power parity , according to the data given by the International Monetary Fund for the year 2008. Its GDP per capita is the 26th highest in the world, while its GDP PPP per capita is the 25th . Greece is a member of the OECD , the World Trade Organization , the Black Sea Economic Cooperation , the European Union

and the Eurozone . The Greek economy is a developed economy with the public sector accounting for about 40% of GDP. The service sector contributes 75.7% of the total GDP, industry 20.6% and agriculture 3.7%. Greece is the twenty-fourth most globalized country in the world and is classified as a high income economy .

Economic history of Greece and the Greek world

GDP Growth of Greece compared to the Eurozone between 1996 and 2006 The evolution of the Greek economy during the 19th century (a period that transformed a large part of the world due to the Industrial revolution) has been little researched. Recent research examines the gradual development of industry and further development of shipping in a predominantly agricultural economy, calculating an average rate of per capital GDP growth between 1833 and 1911 that was only slightly lower than that of Western European nations. Other studies support this view, providing comparative measures of standard of living. The per capita income (in purchasing power terms) of Greece was 65% that of France in 1850, 56% in 1890, 62% in 1938,75% in 1980, 90% in 2007, 96.4% in 2008, 97.9% in 2009 and larger than countries such as South Korea, Italy, and Israel. The country's post-WWII development has largely been connected with the Greek economic miracle. In 2004, Eurostat , the statistical arm of the European Commission, after an audit performed by the New Democracy government, revealed that the budgetary statistics on the basis of which Greece joined the European monetary union (budget deficit was one of four key criteria for entry), had been massively underreported by the previous Greek government (mostly by not recording a large share of military expenses). However, even according to the revised budget deficit numbers calculated according to the methodology in force at the time of Greece's application for entry into the Eurozone, the criteria for entry had been met. Official Eurostat calculation according to the current methodology is still pending for the 1999 budget deficit (entry application reference year); according to the same calculations, the budget deficit criterion was met in 2006.

The Greek economy today Greece is a developed country , with a high standard of living and "very high" Human Development Index, ranking 25th in the world in 2007, and 22nd on The Economist's 2005 worldwide quality-of-life index. According to Eurostat data, GDP per inhabitant in purchasing power standards (PPS) stood at 95 per cent of the EU average in 2008. Greece's main industries are tourism , shipping , industrial products , food and tobacco processing , textiles , chemicals , metal products , mining and petroleum. Greece's GDP growth has also, as an average, since the early 1990s been higher than the EU average. However, the Greek economy also faces significant problems, including rising unemployment levels, an inefficient government bureaucracy and widespread corruption. In 2009, Greece had the EU's second lowest Index of Economic Freedom (after Poland), ranking 81st in the world. The country suffers from high levels of political and economic corruption and low global competitiveness relative to its EU partners. Although remaining above the euro area average, economic growth turned negative in 2009 for the first time since 1993. An indication of the trend of over-lending in recent years is the fact that the ratio of loans to savings exceeded 100% during the first half of the year. By the end of 2009, as a result of a combination of international (financial crisis) and local (uncontrolled spending prior to the October 2009 national elections) factors, the Greek economy faced its most severe crisis after 1993, with the highest budget deficit (although close to those of Ireland and the UK) as well as the second highest debt to GDP ratio in the EU. The 2009 budget deficit stood at 12.7% of GDP. This, and rising debt levels (113% of GDP in 2009) lead to rising borrowing costs, resulting in a severe economic crisis. Greece tried to cover up the extent of its massive budget deficit in the wake of global financial crisis. The Greek labor force totals 4.9 million, and it is the second most industrious between OECD countries, after South Korea. The Groningen Growth & Development Centre has published a poll revealing that between 1995 and 2005, Greece was the country with the largest work/hour ratio among European nations; Greeks worked an average of 1,900 hours per year, followed by the Spanish (average of 1,800 hours/year). 2010 European sovereign debt crisis In the first weeks of 2010, there was renewed anxiety about excessive national debt. Some European think-tanks such as the CEE Council have argued that the predicament some mainland EU countries find themselves in today is the result of a decade of debt-fuelled Keynesian economic policies pursued by local policy makers and complacent EU central bankers. Many economists have recommended the imposition of a battery of corrective policies to control public debt, such as drastic austerity measures and substantially higher taxes. Some senior German policy makers went as far as to say that emergency bailouts should bring harsh penalties to EU aid recipients such as Greece or Ireland. However, such plans have been described as unacceptable infringements on the sovereignty of eurozone member states and are opposed by key EU nations such as France. Also, there has been harsh criticism against speculators manipulating markets: Angela Merkel has stated that

"institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere". In early 2010, fears of a sovereign debt crisis developed concerning eurozone countries such as Greece, Spain, Ireland, and Portugal. This led to a crisis of confidence as well as the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other eurozone members, specifically Germany and France. At the beginning of February 2010, a 500 million government bond auction in Portugal only successfully raised 300 million, raising the cost of insuring against a Portuguese debt default. The failed Portuguese bond auction further intensified the fear that the emerging sovereign debt issues could become a global contagion. These fears led to a weakening of the euro and a widespread global stock and commodity selloff in February 2010.
Greece had also sold euro390 million though the reopening of a 5.9 percent bond that comes due on Oct. 22, 2022. The Public Debt Management Agency had said it had been seeking to raise up to euro1 billion in the sale, which came a day after the country raised euro5 billion with a seven-year bond issue. Finance Minister George Papaconstantinou said the fact that the seven-year bond had an interest rate of below 6 percent was "a significant improvement." The country had raised euro5 billion from a 10-year bond issue in early March at an interest rate of about 6.4 percent. Greece's borrowing costs remain high despite an agreement reached in Brussels last week to rescue the country if it finds itself unable to pay its debt or borrow on the market. Athens hopes the plan, in which the 16 eurozone countries promised loans together with funding from the International Monetary Fund to assist Greece, will help restore market confidence and bring down borrowing costs. But the rescue plan could only be used as a last resort and it requires unanimity from all 16 eurozone countries and the markets so far appear unconvinced. The interest rate gap, or spread, between Greek 10-year bonds and equivalent German issues considered a benchmark of solidity climbed to 3.43 percentage points on Wednesday from 3.06 points on Monday. A wider spread means weaker confidence in a country's debt as investors demand a higher risk premium to hold it. The spread translates to a borrowing cost for Greece that is roughly twice that of Germany's, and one that the government has said is unsustainable. However, European Central Bank President Jean-Claude Trichet said in Stockholm Wednesday that he expected market confidence in Greece to gradually increase. Trichet said he expects "the credibility of these measures will be progressively recognized by all market participants."

Summary of Greece in short

GDP GDP growth GDP per capita GDP by sector Inflation (CPI) Population $343 billion (nominal, 2008 est.) 339.2 billion (PPP, 2008 est.) -2.0% (2009) $32,100 (nominal 2008 est.); $30,856 (PPP 2009 est.) agriculture: 3.4%; industry: 20.8%; services: 75.8% (2009 est.) 1% (2009 est.) < 2.0% (2009)

below poverty line Gini index Labour force Labour force 33 (2005) 5.01 million (2009 est.) agriculture: 12.4%; industry: 22.4%; services: 65.1% (2005 est.)

by occupation Unemployment Main industries 9.8% (October 2009) tourism; shipping; Industrial products, food and tobacco processing, textiles; chemicals, metal products; mining, petroleum

External Exports $18.64 billion (2009 est.)

Export goods

food and beverages, manufactured goods, petroleum products, chemicals, textiles

Main export partners Imports Import goods Main import partners Gross external debt Public finances Public debt Revenues Expenses Foreign reserves

Italy 11.5%, Germany 10.5%, Bulgaria 7.1%, Cyprus 6.2%, US 5%, UK 4.7%, Romania 4.4% (2008) $61.47 billion (2009 est.) machinery, transport equipment, fuels, chemicals Germany 12.1%, Italy 11.7%, Russia 7.4%, China 5.6%, France 5.1%, Netherlands 4.7% (2008) $552.8 billion (30 June 2009)

$405.7 billion (125% of GDP) $108.7 billion (2009 est.) $145.2 billion (2009 est.) $3.473 billion (31 December 2008 est.)

Overview
Greece has been gripped by a financial crisis since late last year, when the newly elected Socialist government drastically revised its projected budget deficit for 2009 to 12.7 percent from previous estimates earlier that year of below 4 percent. The government has announced a series of harsh austerity measures to bring its debt under control, including cutting civil servants' pay, hiking taxes and freezing pensions. But the loss of market confidence has left the country facing high borrowing costs that are about twice those of Germany's. "Although additional measures taken to address fiscal imbalances at the national level may have a positive impact over the longer term, Greece's fiscal challenges will weigh negatively on economic growth over the short to medium term," The recession in Greece is likely to lead to higher unemployment, lower consumer spending and reduced profitability for small and medium sized enterprises. "Experts expects the upward trend in non-performing loans, which began in 2008, to continue in 2010 and, possibly, 2011. Combined, these factors will place additional pressure on the banking sector's already weakened asset quality and profitability." Greece's borrowing costs remain high despite an agreement reached in Brussels last week to rescue the country if it finds itself unable to pay its debt or borrow on the market. Athens hopes the plan, in which the 16 eurozone countries promised loans together with funding from the International Monetary Fund to assist Greece, will help restore market confidence and bring down borrowing costs. But the rescue plan could only be used as a last resort and it requires unanimity from all 16 eurozone countries and the markets so far appear unconvinced.