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2015

Economy Updates – Aug-2015

Greece Sovereign Debt Crisis

What is sovereign debt crisis?

  • A sovereign debt crisis is generally defined as economic and financial problems caused by the inability of a country to pay its public debt. This usually happens when a country reaches critical high debt levels and suffers from low economic growth.
  • On 30th June 2015 Greece missed its deadline to repay the International Monetary Fund 1.6 billion euros ($1.7 billion) and hence triggered sovereign debt crisis.

About Greece

  • Greece is a developed country with a high standard of living and very high Human Development Index, i.e. good standard of living. Greece adopted euro as its currency in 2001.Greece’s main industries are Shipping &Tourism.

What went wrong?

  1. Year 2004: Greece hosted Olympic Games. Heavy expenses were made towards building the infrastructure which leads to a high budget deficit in the next year.
  2. Year 2004: Greece admitted that they forged their accounts to become part of European Union. At the time of formation of European Union, it was decided member country will not borrow beyond 3% of its GDP per year. But Government of Greece manipulated its accounts to appear as if they were staying within the 3% limit, but actually they had been borrowing much above such limit – almost 13% of their GDP.
  3. Greece borrowed heavily from international capital markets to fund its Government budget and current account deficit. They got money easily as capital markets were liquid. These lead to accumulation of high level of debt over the period of time.
  4. Year 2008: Global recession. The recession caused slowdown in shipping and tourism industries which are very vital to Greece’s economy. Further, Capital market also become illiquid and hence, it becomes difficult obtain money.
  5. Greece Government employs 27% of the Greece’s working population. The Government servants are inefficient. More than 80% of the public expenditure goes the wages, salaries and pensions of the government servants.
  6. Aging Greek population. Greece has Europe’s most generous pension system and aging Greek population increases the financial burden on the exchequer.
  7. EURO currency: Euro has proven to be major problem for Greece as it cannot devalue its currency. Had Greece would have not been part of the European Union; they could have easily devalued their currency “drachma” to boost exports and hence bringing the economy back on track.

Bailout measures

European Union, European Central Bank (ECB) and International Monetary Fund set up a tripartite committee named Troika to help Greece.

  1. Under the first round of crisis response in May 2010, 3 year package of 110 billion euro was given to Greece.
  2. Olive branch was also extended by ECB to Greece’s private banks.
  3. From May 10 to June 2011 – ECB purchased 45 billion euro bonds from Greece. ECB also started buying government bonds from secondary market to increase confidence of investors.

Impact on Indian Economy

It is perceived that Indian government is better prepared to deal with any situation emerging from the Greece crisis. However, in the era of globalization, one cannot isolate its’ economy from such crisis. Following impacts can be felt by our economy.

  1. Sharp volatility in stock markets
  2. Greece crisis will turmoil the economic conditions in Europe and hence India’s engineering exports may take a hit as European Union is the largest destination for such shipments.
  3. India’s software export to EU may also witness slowdown.
  4. The uncertainty may lead investors to buy Gold and Dollar to be on the safer side. This, in turn would make dollar stronger as compared to Indian rupees.
  5. European Union may raise interest rates and hence it may trigger outflows from India.
Financial Management