Greece's debt crisis is due to the poor financial management of public finances coupled with government spending that is too great to surpass.. Possible causes of Greek public debt are:
Trang 1National Economics University
-o0o -International Finance
Topic:
Greece’s debt crisis and the negative impact to European currency community
Class: Banking 56 Group Member:
1 Cung Quynh Anh
2 Nguyen Ngoc Kieu Anh
3 Nguyen My Linh
4 Pham Hong Tu Linh
5 Vu Ha Linh
6 Vu Trinh My Linh
7 La Thu Phuong
8 Hoang Phuong Quynh
Hanoi, April 17th , 2017
Trang 2I Overview: Greece before crisis
II The reasons of Greece’s debt crisis
III Timeline of Greece’s debt crisis: Greece’s action, Bailout of Eurozone and
other organizations
IV Negative impacts on Greece’s economy, Eurozone
V Greece’s current situation
VI Conclusion
Trang 3I Overview: Greece before crisis:
Greece is classified as an advanced,high-incomeeconomy, and was a founding member of the Organisation for Economic Co-operation and Development (OECD) and of the Organization of the Black Sea Economic Cooperation (BSEC) The country joined what is now the European Union in 1981 In 2001 Greece adopted the euro as its currency, replacing the Greek drachma at an exchange rate of 340.75 drachmae per euro Greece is a member of the International Monetary Fund and of the World Trade Organization, and ranked 34th on Ernst & Young's Globalization Index2011 World War II (1939-1945) devastated the country's economy, but the high levels of economic growth that followed from 1950 to 1980 have been called the Greek economic miracle From 2000 Greece saw high levels of GDP growth above the Eurozone average, peaking at 5.8% in 2003 and 5.7% in 2006
II The reasons of Greece’s debt crisis
Greece's debt crisis is due to the poor financial management of public finances coupled with government spending that is too great to surpass As a result, Greece's budget deficit exceeded 13% of GDP and total public debt accounted for nearly 130%
of GDP (2010) Possible causes of Greek public debt are:
Firstly, low domestic savings led to external borrowing for public spending: In the
1990s, the average saving rate for Greece was only 11%, much lower than the 20% Countries such as Portugal, Italy, and Spain tend to plummet Therefore, domestic investment is heavily dependent on external capital inflows; Bond yields continued
to fall as a result of joining the European Union (1981) and the wave of sell-offs of bonds showed that Greece had managed to slip away from an already-mobilized channel of government Greece strengthens its debt financing for public expenditure
Second, high public spending leads to budget deficits: Greece's GDP growth is still
acclaimed with an average annual growth rate of 4.3% (2001-2007) compared to the regional average The eurozone area is 3.1% However, at this stage, government spending increased by 87% while government revenue increased by only 31%, resulting in a budget deficit that exceeded the EU's 3% GDP According to economists, the cumbersome and ineffective public sector of Greece is a major factor behind the country's deficit
According to the Organization for Economic Co-operation and Development (OECD), public expenditure on public administration in total public expenditure in Greece in
2004 was much higher than in other OECD countries while the quality and quantity
Trang 4Service is not much improved In 2008, the global financial crisis erupted into Greece's key industries The tourism and shipping industry, revenue declined by more than 15% in 2009 Greek economy is also in a difficult situation, the revenue source to finance the state budget is narrowed dramatically Meanwhile Greece must increase public spending to stimulate the economy Post-crisis stimulus spending in 2008 also exacerbated public debt As of January 2010, Greek public debt was estimated at 216 billion euros and the debt level reached 130% of GDP Aging and pension systems in the most generous European region of Greece are also considered as one of the burdens for public expenditure It is predicted that the proportion of people over 64 years of age in Greece will increase from 19% in 2007
to 32% in 2060 Retirees receive an amount equal to 70-80% of the official salary before retirement The benefits from other supportive mechanisms with full 35 years
of service compared to 40 years in other European countries Estimated total payment for public sector pensions in Greece will increase from 11.5% of GDP (2005)
to 24% (2050)
Third, declining revenues are also a factor leading to budget deficits and increasing public debt Tax evasion and underground economic activity in Greece are factors
that reduce budget revenues According to the World Bank, the informal economy in Greece accounts for 25-30% of GDP (compared to 15.6% of Vietnam's GDP, 13.1% of GDP in China and Singapore 11.3% of Japan's GDP) The high tax rate and complex laws, together with the excess and ineffective regulation of regulators, are responsible for tax evasion and underground development in Greece
According to Transparency International, Greece is one of the countries with the highest levels of corruption in the EU Not only do workers not pay taxes, but the bribe is quite popular from central to local In 2008, more than 13% of the Greeks spent up to 750 million euros in envelopes for public and private sector leaders, including doctors who demanded more money for the surgery; City planners are the ones who decide the time when building permits are granted and local officials are also involved in bribery cases Greek Prime Minister George Papandreou acknowledged that "systematic corruption" was the most fundamental problem that led to Greece's public debt The damage that corruption causes to Greece is estimated at about 8% of GDP Corruption not only caused tax evasion, it also increased government spending, aimed at maintaining high salaries for civil servants and executing large investment projects rather than targeting projects that created many jobs Make and improve labor productivity High salaries not only create a budget burden but also make the competitiveness of the Greek economy weak High salaries, the euro appreciated from 1 euro to 0.8 US dollars to 1 euro to 1.6 euros during the period 2000-2008 makes the competitiveness of Greek goods weak and consequent Inevitably a constant trade deficit
Trang 5Fourth, easy access to foreign capital and ineffective use of capital: In addition,
joining the Eurozone in 2001 was a great opportunity for Greece to gain access to capital markets Internationalization with the use of a currency guaranteed by the major economies of Germany and France, together with the monetary policy management of the European Central Bank (ECB) Thanks to joining the Eurozone, Greece has a steady and stable image in the eyes of investors, easily attracting foreign investment at low interest rates For nearly a decade, the Greek government has been selling bonds for hundreds of billions of dollars This amount could have helped Greece's economy move a long way if the government planned to spend reasonably However, the Greek government has spent too much (mostly for infrastructure) spending hardly paying attention to repayment plans leading to increasing debt levels
Fifth, the lack of transparency and confidence of investors: The lack of transparency
in Greek statistics has lost the confidence of the investors it has created as a A member of the Eurozone and rapidly emerging the wave of capital withdrawal massively from the banks of Greece, pushing the country into difficulties in raising capital in the international capital markets Dependence on foreign finance has made Greece very vulnerable to changes in investor confidence In the era of international economic integration, transparency is always a big demand of investors The public debt crisis in Greece is due to the government's lack of transparency of data, trying
to draw a rosy picture of the budget status of forthcoming policies to overcome budgetary constraints or problems As a result of macroeconomics, the effect of such policies will be severely curtailed
III Timeline of Greece’s debt crisis: Greece’s action, Bailout of Eurozone and
other organizations.
1 From 2001 to 2014:
2001: Calm before the storm: Greece joins eurozone
January 1, 2001
Formerly invited in June 2000, Greece becomes the twelfth country to adopt the single euro currency, ditching its former drachma
To qualify, Greece had to demonstrate signs of a healthy economy, including meeting targets for price stability and public finances The country had not qualified
to join bloc when it was established in 1999
2004: Greece confesses to exaggerating figures
November 15, 2004
Trang 6To enter the euro zone, certain economic conditions must be met In late 2004, however, Greece's government admits that it has under-reported the country's budget deficit figures between 2000 and 2003
A deficit of under 3 percent was required to enter the single currency—however, after a review by the EU's statistics agency Eurostat, Greece's finance minister said it had not fallen below this level since 1999
2009: Downgrades: Greece is taken down a peg
December 8, 2009
Fitch downgrades Greece's credit rating to "BBB+" from "A-" marking the first time in
a decade that the country has fallen below "A" status
It comes after the then-finance minister, George Papaconstantinou, warned that Greece's deficit could climb to 12.5 percent of gross domestic product (GDP) during 2009—much higher than expected
Over the following weeks, a number of other agencies also lower their credit ratings for Greece, fearing its economic recovery is losing its footing Greece unveils stability programme on January 14, saying it will aim to cut its budget gap to 2.8 percent of GDP in 2012 from 12.7 percent in 2009
2010:
Greece approves harsh austerity package, anger ensues
March 3, 2010
Greece must refinance 54 billion euros ($66.6 billion) in debt in 2010, with a crunch
in the second quarter as more than 20 billion euros becomes due and market yields for Greek debt soar The Greek government approves a tough austerity package, including public sector pay cuts, pension freezes, and tax rises on cigarettes, alcohol and fuel
Trade unions in Greece react with anger, setting the stage for violent protests in Athens as the cuts take hold
Greece: The economic rescue begins
May 2, 2010
The International Monetary Fund and euro zone members agree on a financial aid package for Greece worth 110 billion euros ($146 billion), amid fears that the country's fragile economy could put the whole region in jeopardy
Trang 7Greece accepts more cuts as part of the deal, but violent demonstrations erupt as protesters demand an end to austerity
Euro zone leaders agree to create joint financial safety net, with IMF, to help Greece and to try to restore confidence in euro
Since 2010, Greece has received two bailouts worth 240 billion euros
May 10 - Global policymakers install an emergency financial safety net worth about
$1 trillion to bolster financial markets and prevent the Greek crisis from danaging the euro
2011:
Greece gets a major debt haircut
October 26–27, 2011
After negotiations lasting a whole night, Europe's leaders agree to slash Greek debt
as the country's financial problems continue
Private investors will take a 50 percent "haircut"—or writedown—on their Greek bonds, which will be converted into new loans
Greek PM Papandreou resigns
November 6–11, 2011
After assuming office in October 2009, George Papandreou's time as Prime Minister
of Greece is marked by (often unpopular) efforts to deal with the country's financial crisis
After weathering the storm for two years, he resigned following a coalition agreement between his PASOK party and conservative rivals
2014:
Resurrection: Greece returns to bond markets
April 10, 2014
Investors celebrate as Greece makes its official return to the bond markets, after a four-year break
High demand for its five-year bonds led some to dub this the "beginning of the end" for Greece's bailout—although this now looks a little premature
Prime Minister loses key vote
Trang 8December 29, 2014
Greece's government, led by the New Democracy Party, is thrown into turmoil after parliament refuses to endorse then-Prime Minister Antonis Samaras' presidential candidate
A snap election is called for January, and the popularity of radical left-wing party Syriza raises some concerns about the future of its bailout program
EXPLANTION
The debt crisis started in 2009 when Greece announced its actual budget deficit was 12.9% of Gross Domestic Product (GDP), more than quadruple the 3% limit mandated by the European Union (EU) Credit rating agencies lowered Greece's credit ratings, driving up interest rates
Usually, a country would just print more money to pay its debt However, in 2001 Greece had adopted the euro as its currency For several years, Greece benefited from its euro membership with lower interest rates and foreign direct investment, particularly from German banks Unfortunately, Greece asked the EU for the funds to pay its loans
In return, the EU imposed austerity measures Worried investors (mainly German banks) demanded that Greece cut spending to protect their investments Greece government agree with this deal and received aid package
However, these measures lowered economic growth and tax revenues As interest rates continued to rise, Greece warned in 2010 that it might be forced to default on its debt payments The EU and the IMF agreed to bail out Greece but demanded further budget cuts in return That created a downward spiral
By 2012, Greece's debt-to-GDP ratio was 175%, one of the highest in the world It was after bondholders, concerned about losing all their investment, accepted 25 cents on the dollar Greece is now in a depression-style recession, with a 25% unemployment rate, political chaos, and a barely functioning banking system That mean people cant affort to buy more and led to the decrease of GDP even much worse
Moreover, gorverment cut down salary and pension for citizens, which made the anger in all country This made the decision of citizens to Prime Minister loses key vote and the austerity package stopped immediately
2 2015:
Trang 9Syriza elected
January 25, 2015
Led by Alexis Tsipras, anti-bailout party Syriza sweeps to victory and forms an unexpected coalition with right-wing Independent Greeks party
Electing a party that aims to abolish austerity may have lifted Greek spirits, but investors across the world were worried amid growing fears of a possible "Grexit"—
or Greece exiting the euro zone
Euro zone approves bailout extension
February 24, 2015
Euro zone finance ministers approve a four-month bailout extension for Greece, after the country's new government submitted reform proposals just ahead of the deadline
The measures include controlling public spending and cracking down on corruption and tax avoidance
Greece is given a schedule of repayments to different creditors between April and June 2015, however not all of these dates have been met
Misses IMF payment
June 30, 2015
Investors and politicians watch Brussels and Athens with baited breath, as Greek prime minister, Alexis Tsipras, and creditors went back and forth over reform proposals However, midnight on June 30 comes and goes without a deal and Greece's international bailout expired
The country also effectively defaults on a 1.5-billion-euro ($1.7 billion) debt repayment to the International Monetary Fund (IMF) This makes Greece the first country to miss a payment to the IMF since Zimbabwe in 2001
Referendum goes Tsipras' way
July 5, 2015
In a shock move, Greek Prime Minister Alexis Tsipras holds a public vote on whether
to accept the austerity-heavy creditor proposed bailout deal
Tsipras advises Greek to vote "no," which they duly do—61 percent come out against accepting a deal
The referendum is viewed by the Syriza party as strengthening Tsipras' hand against accepting further austerity However, it also increases the risk that creditors will give
up hope of any deal, potentially pushing Greece towards a "Grexit" from the euro zone
Final, final deadline?
July 12, 2015
Members from all 28 countries in the European Union will meet on Sunday to discuss Greece's latest deal proposals, which are due to arrive on Thursday
Trang 10The Sunday summit will follow a meeting of euro zone finance ministers on Saturday and is widely seen as the last chance for Greece to strike a deal and avoid a forced exit from the single currency zone
On Tuesday, European Council President Donald Tusk said that this week was the last chance for a Greece agreement
"I have to say it loud and clear that the final deadline ends this week All of us are responsible for the crisis, and all of us have a responsibility to resolve it," he told reporters at a press conference
The poverty rate of Greece had risen from 2.2% in 2009 to 15% in 2015, equivalent to 1.6 million people
Obviously, the economic crisis had spread not only from the national scale, but also from small localities in the country
In January 2015, the leftist government of Prime Minister Alexis Tsipras won the general election with a commitment to say no to “austerity” But after months of tense negotiations with European creditors, Tsipras is still forced to accept a third rescue package, despite strong opposition from Greece and willingness to leave the Eurozone Common Europe (Eurozone)
In addition, creditors are also forced to reach a budget surplus of 3.5% by
2018, and the same amount will be used
Estimatedly, Greece's debt / GDP ratio is currently at 180% of GDP, which means that the country remains one of the world's most indebted economies Meanwhile, the latest figures show that Greece's unemployment rate remained high at 23.3% in April this year (the highest in the EU)
In many small cities, it is only possible to meet citizens over the age of 60 or under 20 This shows that many working-age people have left the country and are looking for opportunities in the background Other European economy
Anyway, Greece still has a bit of hope to hold on to The country unexpectedly reported GDP growth of 0.3% in the second quarter, well ahead of the 0.2% decline expected by analysts Greece also revised its first quarter economic data, with a decline of just 0.1% from the previous 0.5% However, the Greek economy is still down 0.7% in the second quarter compared to the same period last year
In the capital, Athens, where hundreds of thousands of people took to the streets protesting last year's harsh policies, the atmosphere was more peaceful Despite the high unemployment rate, tourism has shown positive signs Hotels and guest houses in popular tourist destinations still attract international visitors Workers in the travel industry feel more secure when their jobs are guaranteed Perhaps, this is one of the few areas where the economic crisis has not yet reached