GATHERING TROUBLES

The Greek Crisis Tragedy or opportunityGroup 2OverViewAmna Tariq ButtCurrent ScenarioDaily Crisis Debt write off War Amount 200 Billion Euro Approx. Promise to strengthen social protection GDP deficit of 2009 (3.5%) to 2010 (15%) Higher interest rates demanded by market Help from IMF & EU Structural reforms Reversal policies Bonds yield 8.7% Greece 2.6% GDP of the Euro area

Overview Re - Elections Weak Political System Budget DeficitsTriple times than expected Mistreated Seeking help from international organizations IMF & EU Back supporting currency as compared to dollar Reserve currency Euro shouldn't default Euro Area nations (Germany & England) did not support

Cont.Hidden agendas

Stability for survival

Pressure handling

HistorySyed Iqbal JafferyGreek HistoryThe government of 1950 adopted conservative fiscal and monetary policies.The currency committee directed private loans to financing trade and high-values-add industries such as oil refineries.Greece became an important tourist destination. Shippers invested in the economy, income from tourism and shipping helped in increasing Real per Capita GDP.In 1963 papandreou formed a government which is thrown off by Jantu. Then karmanalis return to run the transition government.

Greek HistoryGreek is the cradle of European Civilization.Greek defaulted four times on its debt in the nineteenth century.Greeks nineteenth century economy was based on agriculture and shipping.Post world war II Hitler conquered Greece and drained all its resources.Once its was liberated by allies it was ruled by political dynasties. Karamanilis who provided leadership under George Papandreou I during decade starting from 1980 and then George Papandreou II in 2009.The New Greek PolityThe new governments claim was seek to create conditions of employment for all citizens and requiring all universities to be public.During this period Tax evasion and bribery become endemic.4.4.2 rule was in practice. Nationalization of Banks and Airways.Proposed joining of European Community.Greece Joining European Union.Greece was not upto the criteria for the joining the EU.EU welcomed Greece as they just became Democracy.Populist Years - 1980PASOK won elections on the basis of social protection and income redistribution.Increase in real minimum wages and pensionsGranted large raises to public sector employeesEstablished a universal free national health systemIncrease the weight of Public sector.Nationalizing many industries.Public spending increased from 29% to 48% of GDP.Due to oil shocks of 1970 inflation averaged almost 20%.Un employment remained below EC average.European Union: 19901992 EC members signed the Maastricht Treaty.Politically influenced.German agreed with French alliance in EU provided French help in German unification.The EC declared greek fiscal deficit including interest was only 1.6% of GDP and inflation was 20%On Jan 2001, Greece joined Euro area.GATHERING TROUBLESFaiqa QamarGathering Troubles20% unemployment provoked demonstrationsGeorge Papandreou led POSAK to victorySelected George Papaconstantinou, as Finance MinisterActual deficit was understated by previous governmentsIn 2009, deficit would be 12.5% of GDPMeeting with EU leaders in BrusselsGovernment passed 3 deficit-reduction packages, cumulatively cutting the deficit down to 5% of GDPHigher value added taxHigher tax on fuels, tobacco & alcoholExpenditure reductions (public sector wages, bonuses & state fund pensions)Structural reforms to make labor relations flexibleCont.Things kept going wrongEuro state determined that Greeks statistical office was giving false dataParliament established an independent statistical office3 largest rating agencies kept downgrading the Greek governments debtForced to pay higher interest rates & had to refinance $ 53 billion in 2010The Troika: 3 international institutions might help the Greek government to prevent the fiscal collapseThe European CouncilThe European Central BankInternational Monetary FundCont. The European CouncilWorst dilemma since the creation of EuroAny solution would have to be approved by the 17 euro area nations that would shoulder the most costNations outside euro area ruled out participating in the rescueBritainGermanyFrance favored to help Greece EU members had self interest reasons to support GreeceEuro area banks were in France in Germany & estimated to hold $60 to $120 billion Greek government bondsUK & Switzerland were estimated to hold $25 to $50 billion bondsCont.The European Central BankRole was to maintain price stability & lender of Euro area banksHad standard financing toolsWeekly main refinancing operations (MROs)Influence the rate at which banks lend & borrow from each otherLong Term refinancing operations (LTROs)Cap & Floor the Interest ratesBanks deposit funds at an int. rates lower the overnight in the interbank markletIntroduced the expansionary monetary policy by lowering benchmark rate on MRO to 1%International Monetary FundProvides loans to nations contingent on reformsDisburses loans after verifying that reforms were implemented on schedule

Mounting PressureAmna Tariq ButtMounting PressurePossibility of an instrumentsMaturity of loans

European Political Pressure France Agrees to Loan: Terms Radical reforms in details

Liquidity to pay back loan if the system fails

Crunch Time Rescue Plan by IMF 15 Euro Billions Still not politically stable as per Govt. suspensions (Euro 45 Billion)Not enough to inject stability

Second Attempt Euro 110 Billion 3 years in markets Re payment of loans in 3rd Quarter Structural reforms Global Stock market plunge

Cont. The new Safety net

Euro 750 Billion

Loss of regional elections

Stock & awe strategy from ECB (Buying stocks from Govt)

Banks were losing independence from political pressures

Positive reaction from investors

Banking on Europe Rana Faizan Trouble in Public Sector

Leakages in GDP & other Components Fiscal deficit

Taxation

Up gradation of Taxation systemWhat Future holds?Hira AjmalFuture Holds??Problem: Stabilize debt to GDP ratio

Problem: Political reform required - No stable policy

Problem: GDP triple deficit - EU hidden agendas

CONCLUSION1- Can Greece be politically stable for several years?

2- How much growth Greece could have by structural reformation?