TOPIC greece’s debt crisis and the negative impact to european currency community

NATIONAL ECONOMIC UNIVERSITY ---***---GROUPASSIGNMENT SUBJECT: INTERNATIONAL FINANCE TOPIC: Greece’s debt crisis and the negative impact to European currency community.. As investor conf

NATIONAL ECONOMIC UNIVERSITY

-*** -GROUPASSIGNMENT SUBJECT: INTERNATIONAL FINANCE

TOPIC: Greece’s debt crisis and the negative impact

to European currency community.

Class: EEP of Corporate Finance 61A

Members:

Leader: Chu Nguyễn Khánh Vân

Lê Quỳnh Trang; Nguyễn Thị Hà Trang;

Trần Thùy Trang; Cao Ngọc Phương Trinh;

Nguyễn Hoàng Minh Tuấn; Trần Hoàng Yến Nguyễn Thu Trang

TABLE OF CONTENT

I THE OVERVIEW OF DEBT CRISIS 3

1 Definition of debt crisis 3

2 Classification of debt crisis 3

II GREECE’S DEBT CRISIS 4

1 Overview of Greece’s economy before the debt crisis (before 2018) 4

2 Timeline of Greece’s debt crisis (from 2008 to 2018) 4

III IMPACT TO EUROPEAN CURRENCY COMMUNITY 9

1 Economic aspect 9

2 Political aspect 10

3 Social aspect 10

IV LESSON FOR OTHER COUNTRIES AND VIET NAM 10

1 Should not be too dependent on foreign loans 11

2 Strictly manage loans and have a reasonable spending plan 11

3 Review the way to calculate public debt 11

3 Create confidence for foreign investors 12

REFERENCES 13

I THE OVERVIEW OF DEBT CRISIS:

1 Definition of debt crisis

- Debt crisis is a situation in which a country is unable to pay back its government debt A country can enter into a debt crisis when the tax revenues of its government are less than its expenditures for a prolonged period In any country, the government finances its expenditures primarily by raising money through taxation When tax revenues are insufficient, the government can make up the difference by issuing debt That is done primarily by selling government treasury bills in the open market to investors

- A government with a good reputation and little debt or an established track record

of paying back what it has borrowed usually does not face much difficulty in finding investors who are willing to lend to it However, if the debt load of a government becomes too large, investors begin to worry about its ability to pay back, and they start demanding higher interest rates to compensate for the higher risk That results in an increase in the cost

of borrowing for that government As investor confidence deteriorates further over time, pushing the cost of borrowing to higher levels, the government may find it more and more difficult to roll over its existing debt and may eventually default and enter into a debt crisis

2 Classification of debt crisis:

a Household Debt Crisis: A household debt crisis occurs when a family starts

falling behind on monthly payments There are three types of household debt:

- Home mortgages

- Credit card debt

- Auto, furniture, and student loans

b Business Debt Crisis: A business debt crisis is when a company has trouble

repaying its loans, known as bonds They get downgraded as a poor investment by a credit rating agency

Once this happens, it becomes more expensive for the company to issue new

bonds Unless the company can convince creditors it has made the changes to do better, it can go into a downward spiral where servicing the debt takes up the cash flow that would otherwise go into new business development

c Sovereign Debt Crisis: A sovereign debt crisis occurs when a country can no

longer pay the interest on its debt Just like a business, the nation finds that worried

lenders demand greater interest payments on new debt

- There are three critical differences between sovereign debt and household or business debt that lays the groundwork for this crisis: There is no international bankruptcy court that lenders can go to for fair adjudication That makes it easier for countries to default

- Sovereign debt is not secured by any collateral In that regard, it is more like credit card debt than a mortgage or auto loan Most countries can print their currency to pay off a debt

II GREECE’S DEBT CRISIS

1 Overview of Greece’s economy before the debt crisis (before 2008):

On January 1, 1981, Greece became the 10th member of the European Union the country's economy and finances were in good shape, with a debt-to-GDP ratio of 28% and

a budget deficit below 3% of GDP However, in Oct 1981, the Panhellenic Socialist Movement (PASOK), two new party appeared, a party founded by Andreas Papandreou in

1974, came into power on a populist platform and the New Democracy Party that was also founded in 1974 Over the next three decades, PASOK alternated in power with Both parties lavished liberal welfare policies on their electorates, creating a bloated, inefficient, and protectionist economy Since then, the situation deteriorated dramatically over the next 30 years because fiscal profligacy, which is defined as wasteful and excessive expenditure, caused deficits and debt levels to explode As a result of low productivity, eroding competitiveness, and rampant tax evasion, the government had to resort to a massive debt binge to keep the party going Greece's admission into the Eurozone in Jan

2001 and its adoption of the euro made it much easier for the government to borrow But that growth came at a steep price in the form of rising deficits and a burgeoning debt load And the beginning of the financial crisis

2 Timeline of Greece’s debt crisis (from 2008 onward)

a Events triggered the crisis and Greece’s responses

* 2008 - The global recession:

Many European countries had huge government debts but Greece was worst affected, with a spiralling spending deficit Greece had borrowed much more money than

it was able to make in revenue through taxes Literally, because the world was all suffering from the great recession, there was no payment-pending for Greece anymore

* 10/2009 - Greece’s announcement of its deficit figures for years (raising alarms about the soundness of Greek finance):

At this time, Leader of the Greek Socialist party (Pasok) George Papandreou after having won national elections - became prime minister Within weeks, Papandreou reveals that Greece’s budget deficit will exceed about 12% of GDP The figure was later revised upward to 15.2 % Rating agencies Fitch, Moody's, and Standard & Poor's lowered Greece's credit ratings That scared off investors and raised the cost of future loans

y made Greec

* 2/5/2010 - First Bailout for Greece:

In 2010, Greece said it might default on its debt which would threaten the viability

of the Eurozone itself To avoid default, the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) (the Troika) agree to provide Greece with 110 billion euros ($146 billion) in loans over three years.(Germany provides the largest sum, about 22 billion euros, of the EU’s 80 billion euro portion)

In exchange, Prime Minister Papandreou commits to austerity measures, structural reforms and privatization of government assets, including 30 billion euros in spending cuts and tax increases

A year later, a worsened recession along with the poor performance of the Greek government in achieving the conditions of the agreed bailout, forced a second bailout The eurozone proposed to launch the second bailout worth €130 billion

Amid public anger over austerity, Prime Minister Papandreou calls for a national referendum on a second bailout agreement under negotiation However, Papandreou calls off the referendum after the center-right opposition agrees to back the revamped EU-IMF deal Papandreou is forced to step down, and economist Lucas Papademos is appointed to head a unity government tasked with implementing further austerity and structural reforms

* 21/2/2012 - Second Bailout for Greece Approvement:

Finance ministers approve a second EU-IMF bailout for Greece, worth 130 billion euros ($172 billion) The deal includes a 53.5% debt write-down for private Greek bondholders In exchange, Greece must reduce its debt-to-GDP ratio from 160 percent to 120.5 percent by 2020

* 10/4/2014 - Greece Returns to International Bond Market:

As eurozone finance ministers agree to release more funds, Greece is active again on international markets, raising $4 billion in its first sale of long-term government bonds in

4 years

* 8/2015 - Third Bailout for Greece:

The Greek parliament adopts a new rescue package from the EU, a third bailout deal, worth 86 billion euros In exchange, EU creditors require Greece to implement tax reforms, cut public spending, privatize state assets, and reform labor laws, among other measures

* 20/8/2018: Greece Exists Final Bailout Program

In total, Greece now owes the EU and IMF roughly 290 billion euros ($330 billion), part of a public debt that has climbed to 180% of GDP To finance this debt, Athens commits a budget surplus through 2060, accepts continued EU financial supervision, and imposes additional austerity measures

b The consequences of Greece’s debt crisis

+ Greek GDP's worst decline,

−6.9%, came in 2011, a year in

which seasonally adjusted

+ In February 2012, it was reported that 20,000 Greeks had

In 2011 it gave rise to the

anti-austerity Movement

of the Indignant in

industrial output ended 28.4%

lower than in 2005 From 2009 to

2012, the Greek GDP declined by

more than a quarter, causing a "

depression dynamic" in the

country

+ 111,000 Greek companies went

bankrupt

+ Unemployment rate grew from

7.5% in September 2008 to a then

record high of 23.1% in May 2012,

while the youth unemployment rate

rose from 22.0% to 54.9%

+ Taxation dramatically raised:

One researcher found that the poorest

households faced tax increases of

337% The VAT deficit due to tax

evasion was estimated at 34% in early

2017 Tax debts in Greece are now

equal to 90% of annual tax revenue,

which is the worst number in all

industrialized nations

been made homeless

during the preceding year, and that 20% of shops in the historic city centre of Athens were empty

+ By 2015, the OECD reported that nearly twenty percent of Greeks lacked funds

to meet daily food

expenses.

+ There was an

increased suicidality

amid the economic

crisis in Greece, an increase of 36% from

2009 to 2011

+ 1 in 3 Greek

citizens lived under

poverty conditions in

2016

Syntagma Square The two-party system which dominated Greek politics from 1977 to 2009 crumbled in the double elections of 6 May and 17 June 2012

c Causes of Greece’s debt crisis:

Causes

The government's

fiscal policies that

included too much

spending

Explanation and example

The labor costs have risen significantly faster than productivity

Example: The salaries for workers in the public sector rose automatically every year, the pension increases represented 11% of Greece's GDP, the highest in the eurozone

In addition to the usual level of public spending, Greece also has to pay the huge price of 2004 Olympics

Greece had high That means Green consumed more foreign and own goods current account deficits than produced -> The external debt of the Greek state already

went up between 2001 and 2007 -> falling prices and increasing in the yield on Greek government bonds -> the liquidity of the state was directly threatened

Unsustainable Growth Greece's financial situation was sound when it entered the EU

in the early 1980s, but deteriorated substantially over the next thirty years

The 2007-2008 crisis In the 2007-2008 crisis, Excessive borrowing by Greek

companies and households was responsible for the development of sovereign and foreign debt

The change of currency

(external cause)

These supposedly positive effects such as easier accessibility

to capital and the reform of the Greek banking sector, the reduction of the reserve requirement of 12% to the usual 2%

in the EU That lead to the Greece can easily lose control of their own currency

d Summary:

Greece before debt crisis Greece after debt crisis

The - The gap in real per capita income

financial between Greece and the EU–15 has

aspect narrowed significantly

- From 2000, Greece saw high levels of

GDP growth above the Eurozone

average, peaking at 5.8% in 2003 and

5.7% in 2006

-> In this period, although Greece’s GDP growth has been higher than the

EU average, the Greek economy

continues to face significant problems

-Greece received three successive packages, totalling €289bn

(£259bn; $330bn), but they came with the price of drastic austerity measures

-In 2018, Greece's GDP for

2018 was $212.25B, a 6.06% increase from 2017 And Greece’s unemployment rate is still the highest in Europe, a gradual decrease is monitored

(high unemployment levels, tax evasion, corruption and low global competitiveness)

The - During 2001 to 2006, the Crime

social Index rate was 1.19 - 0.98 percent of

aspect total population

- Greece's unemployment rate from

2001 to 2006 was about 10.46% -9.01%

-> 2018 is certainly a positive year for Greece’s economy

-Greece crime rate & statistics for

2018 was 0.94, a 15.63% increase from 2017

-Greece unemployment rate for 2018 was 19.29%, a 2.2% decline from 2017,

=> After the debt crisis, Greece's economy is recovering and growing again In addition, Greek society is gradually becoming more stable and people have more faith in government and policy

III IMPACT TO EUROPEAN CURRENCY COMMUNITY

1 Economic aspect:

The ongoing debt crisis in Greece has exposed significant fault lines in the conduct

of economic policy and in the economic performance of Eurozone members Although members of the Eurozone have experienced different levels of economic performance since the currency union’s founding, the financial crisis and associated economic recession widened the gap in economic performance among the Eurozone’s members The debt crisis in Greece caused the euro index to fluctuate widely and even depreciate From 2000 to 2012, the Euro index decreased by 16,1% The euro fell 8,6% relative to USD, 15,8% to GBP, and 20,5% to JPY After the crisis, it seemed like the euro started to lose its position as a strong currency and was on the verge of collapse

For the Eurozone as a whole, low oil prices, an accommodative monetary policy by the ECB, and stronger exports due to a weakened Euro have added to a weak cyclical recovery amid projections of slightly improved economic conditions in 2017: the OECD projects the annual Eurozone growth rate will remain around 1.6% through 2018

In addition, Eurozone members face a challenging set of issues:

(1) rates of unemployment and debt remain high across the Eurozone as a whole: unemployment rate was 15% and debt-to-GDP was 89% in 2017

(2) interest rates and inflation are projected to remain low, contributing to the risks for low rates of economic growth; despite near-zero inflation, the purchasing power

Governments finances have also been affected due to the deterioration in the received taxes; because when there is less or negative growth, the state receives less taxes and vice versa, and less people working is equal to less income tax and as a result less people spending which means less Value Added Taxes

(3) business investment, a key factor in future economic growth, remains low;

(4) productivity and competitiveness gains have nearly disappeared

In its 2016 assessment of the Eurozone, the IMF concluded that the area is “at a critical juncture Without more decisive actions to boost growth and strengthen the monetary union, the euro area remains at risk of instability and repeated crises of confidence.”

In 2015, the IMF concluded that Eurozone banks’ returns on assets had only partially recovered from the financial crisis, with Eurozone institutions earning less than half their previous levels, and had high levels of debt The banks also had €900 billion ($1 trillion)

in nonperforming loans, with the majority of these loans concentrated in six of the Eurozone countries Such nonperforming loans limit the ability of Eurozone banks to provide credit and, therefore, act to reduce the effectiveness of quantitative easing and to restrain economic growth Due to concerns over the EU’s financial and economic health, the ECB began in late 2014 to tighten the rules defining capital and to notify the largest Eurozone banks, or those deemed to be systemically important, that they needed to increase their capital base above the formal regulatory requirements, further restraining credit availability in the EU

2 Political aspect

The crisis in Greece is one of several challenges facing the Eurozone and EU that some analysts believe could contribute to halting or reversing at least some aspects of European integration for the first time since the end of the Second World War Chief among these is the United Kingdom’s vote in 2016 to leave the EU Among other dynamics related to the crisis, continued economic stagnation across the EU and Eurozone, the rise of euroskeptic political parties, and growing distrust and tensions among EU member states could also have the potential to hurt the efforts to widen and deepen European integration Questions about the democratic legitimacy of EU institutions, particularly in setting economic policy, could pose a particularly difficult challenge

3 Social aspect

Greece's debt crisis not only adversely affected the life of the Greek, but also the life

of Eurozone citizens Eurozone countries’ streets were filled by crowds of people protesting against poverty, layoffs and new social security policies