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Professor Castillo
Econ 490
Presented by : Ross Shaw and Abraham Velasco
Greek Debt Crisis 2009-2010

This presentation will review some key points. Each one critical to the evaluation of the present situation in Greece and it also evaluates for
possible long term effects of the current debt crisis depending on the option selected by the country to resolve the issues.
PART I : Origin and Short Term
Effects
Origin
PART II : Resolution and Long
Term Effects
Bank of Greece (CBM)Issues
Options
Bonds
Exchange Rate Concerns
Labor and Stiglitz
Affects to European Union
Anything unusual about this graph?
Greece GDP
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source : IMF Database, Greece, Downloaded on 2/22/2010
Key Ingredients of Greece’s Debt Crisis
• Falsified Statistical Documents
• 25% of All Employment is Federal
• Corruption and Bribery
• Tax Evasion
Source : http://www.spiegel.de/international/europe/0,1518,679415,00.html
Interview with Greek Prime Minister Georgios Papandreou
Falsified Statistical Documents
Greece GDP
Germany GDP
200
2,300.00
y = 6.5466x + 128.9
R² = 0.9977
180
y = 25.948x + 2011
R² = 0.8533
2,250.00
160
2,200.00
140
2,150.00
120
100
2,100.00
80
2,050.00
60
2,000.00
40
1,950.00
20
0
1,900.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2000
2001
2002
2003
2004
2005
2006
2007
2008
One of the countries with similar business cycles is Germany as they are part of the 16-block
European Monetary Union.
Note the 99% R2 Correlation which implies that the GDP in Greece is linear. Germany isn’t even
close.
Source : IMF Database, Statistics, 2007 Excel Evaluation
Explanation of Bank of Greece
• Eurosystem is similar to the Federal Reserve System in United States
• Fiscal and Monetary control is in the hands of the Eurosystem
• Money supply and interest rate control are not in hands of central banks.
• Standard response OMO and Monetary Policy as United States.
Source : http://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspx
Greek Current Acct vs. Foreign Reserves
Current account balance
Total Securities
15.088
12.577
7.251
5.269
2000
-7.695
5.291
2001
-7.168
2002
-6.478
8.468
8.955
9.777
6.560
2003
-6.605
2004
-5.832
2005
2006
2007
2008
-7.259
-11.097
-14.196
-14.424
Areas of Concern
•Foreign Reserves rapidly increasing.
•At one point (during 2001 to 2003) current account moves in same direction
•The points of each year never match up for current account vs. Foreign Reserves
•When Greece entered the EMU they may have already had out of balance books.
Source : IMF Database, Greece, As of 2009 vs. Greek Central Bank (Rest of World Securities (ie foreign assets)
Goldman Sachs and Greece
“Of particular interest will be the sale
by Goldman of $15bn (£9.8bn) of
Greek bonds following a complex
loan-turned-currency swap which
allowed the government of the day to
mask the true extent of its budget
deficit. “
“At the time, the derivative did not have to be
disclosed under European rules, helping Greece to
stay within deficit limits related to its membership
of the Euro. “
Source :http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7318877/Goldman-Sachs-faces-Fed-inquiry-over-Greek-debt.html
“Greek bond yields, which have an inverse
relationship with prices, have subsequently
been under pressure. At the end of last month,
yields on the country’s benchmark 10-year
bonds rose above 7 per cent, the highest for a
decade.”
Source : http://www.ft.com/cms/s/0/d5150cc4-22e6-11df-8942-00144feab49a.html
Image Source :
http://online.wsj.com/article/SB10001424052748704358004575095853830995376.h
tml?KEYWORDS=Greek+Default+Insurance
Greek Bonds Wall Street Journal
Source : Wall Street Journal, Video : 2/22/10 , Length : 1 min
“Investors are still likely to demand rates of
interest of as much as 8 per cent to
compensate
for any risks.”
Source : http://www.theage.com.au/business/greek-bond-sale-delayed-20100302-pgid.html
Source : blogs.reuters.com/rolfe-winkler/tag/spain/
Austerity Labor Measures (25% of the country)
• Freezing public-sector salaries.
• Cutting supplemental incomes to civil servants by 10%.
• Freeze or reduction in salaries and bonuses for high level govt officials.
• Includes Prime Minister.
Austerity Tax Measures (Entire Country)
• Reformed taxes with increased rates for upper income earners > €40,000/yr
• Closing dozens of tax loopholes and special rebates.
Austerity Reform Measures (Entire Country)
• Pension Reform Bills
Source : http://online.wsj.com/article/SB10001424052748704820904575054821227195384.html?KEYWORDS=Austerity+Measures+Greek
"If anyone looks at the (debt) program they
have put forward, it's actually a very
thoughtful program and a comprehensive
program that doesn't try to overpromise…it’s
not actually clear to me that there is any
fundamental problem other than a speculative
attack…{on a plan}…that aims to reduce the
budget deficit to 3% of GDP…”
Source :
http://online.wsj.com/article/SB10001424052748704820904575055531226422098.html?KEYWORD
S=Greece+debt+crisis\ from an interview with Nobel Laurete Stiglitz on his recent assistance with
the Greek government crisis.
The socialist government is promising to slash its deficit to 3 per cent or
less by 2012, but financial markets question whether it can introduce the
drastic austerity measures implied by such a target without sparking
labour unrest and social disorder.
Source : http://www.ft.com/cms/s/0/33b0a48c-ff7e-11de-8f53-00144feabdc0.html?nclick_check=1
• Total Measures meant to save about 6.7 Billion
• A series of riots and strikes have occurred over last 3o days as laws introduced.
• News on 3/2/10 indicates the the Eurosystem Central Bank expects more austerity measures.
Sources (in order) : http://www.nytimes.com/2010/02/25/world/europe/25greece.html (3), http://i.telegraph.co.uk/telegraph/multimedia/archive/01585/pastries_1585130i.jpg
IMF Intervention
• Severe political/social implications for the European Union.
Common Eurozone Bond Bailout
• Placing this at disposal of Greece, however Germany is adamantly opposed as it
affects their good credit as well.
Bilateral Financial Aid Bailout
• Other countries in Eurosystem that are well off help pay off Greek debt with
lower rate bonds from their countries lower risk bonds.
Source : http://www.business-standard.com/india/storypage.php?autono=385578
Requirements
• Decrease Government Social Programs
• Decrease Monetary Supply
• Increase Interest Rate
• Index Wages (Freeze wages)
• Increase revenue by privatizing industries.
• Devalue Currency
Source : Class Lecture Notes on IMF intervention and other styles of intervention (Orthodox and Heterodox)
Limitations for Greece
• Unable to Decrease Monetary Supply
• Unable to Increase Interest Rate
• Unable to Devalue Currency
Source : Source : http://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspx
Positive Qualities
• Single euro zone bonds would have a huge
market.
• High Liquidity for eurozone countries.
Negative Qualities
• Bundled Risk across countries similar to
Collateralized Debt Obligations which have
been implicated as primary start of US
recession.
• Increased risk of moral hazard for member
countries.
Source : http://www.forexpros.com/news/forex-news/rpt-analysis-common-euro-zone-bond-couldbring-wide-benefits-122743
Image Source :http://www.javno.com/en-economy/europe-stocks-gain-oneuro-zone-pmi-data-pharmas_215240
Positive Qualities
• Individual Countries (especially Germany)
have more ability to monitor use of the funds.
• High liquidity for countries with less risk.
• Less risk of moral hazard as countries
loaning have incentive to monitor.
Image Source : http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt
Negative Qualities
• “But if you bail out Greece from within, the
markets will never take seriously a risk
premium for a debt-ridden member state…”
Source : http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt
Image Source : http://www.efficientfrontier.com/ef/401/junk.htm
Total
1.8
Concerns
• Euro exchange rates have been
decreasing at an increasing rate
compared to US$ in last 5 months.
• No monetary supply control
• No interest rate controls
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Implies
• Euro has people moving their
currency to the safety of the dollar.
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2
2008
2009
Source : Excel extrapolation of Historical data from http://www.oanda.com/currency/historical-rates databases
2010
Internal Eurosystem Exchange Rates
• “The exchange rate is fixed. If a country gets into
difficulty, it’s can’t depreciate its currency, which would
be the normal way,” Soros said. “And it’s not getting
the kind of transfer payments that American states get
if they happen to be doing worse than other states.”
Source : http://www.businessweek.com/news/2010-02-28/euro-may-not-survive-greece-s-deficit-crisis-soros-says.html
Dollarization vs “Euro”lization
• Eurosystem transition to single currency system is similar to dollarization and the
benefits and weaknesses are the same.
Dollarization Benefits
• Currency risk decreases.
• Price of imports dropped
• Inflation Dropped
• Foreign Direct Investment increased
• Administrative costs decreased.
Source : In-Class Lecture on Dollarization
Dollarization Weaknesses
• Seigniorage– No leverage printed money
• Discretionary Monetary Policy Eliminated
• Exports go down.
• Some loss of national identity
• Unable to use inflationary monetary policy
Affects on Stronger Union Countries
• Disincentive to be involved with Union.
• Decreased strength of currency when
weaker countries are involved.
• Incentive to develop stricter accounting
rules and monitoring.
• Disincentive to stay due to increase in
externalities and more in depth auditing
requirements.
Source : http://www.guardian.co.uk/commentisfree/2010/jan/27/greece-euro-european-union
Affects onWeaker Union Countries
•Moral Hazards
• Staying within budget.
• Not falsifying data.
• Developed countries with IMF Issues.
• Increasingly uncompetitive countries
who depend on more productive countries.
• Implication leading to a Euro Currency
Crisis from a debt crisis in a single member
country.
• Increase in likelyhood that Union will
impose regulations on its member
countries.
Source : http://www.guardian.co.uk/commentisfree/2010/jan/27/greece-euro-european-union
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IMF Database, Greece, Downloaded on 2/22/2010
http://www.spiegel.de/international/europe/0,1518,679415,00.html
http://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspx
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7318877/Goldman-Sachs-faces-Fed-inquiry-over-Greekdebt.html
http://online.wsj.com/article/SB10001424052748704358004575095853830995376.html?KEYWORDS=Greek+Default+Insurance
http://www.ft.com/cms/s/0/d5150cc4-22e6-11df-8942-00144feab49a.html
http://online.wsj.com/video/the-focus-will-be-on-greek-bond-yields-this-week/C5E5592E-9C44-48FB-ABA601E13B29584C.html?KEYWORDS=Greek+Bond
http://blogs.reuters.com/rolfe-winkler/tag/spain/
http://www.theage.com.au/business/greek-bond-sale-delayed-20100302-pgid.html
http://online.wsj.com/article/SB10001424052748704820904575054821227195384.html?KEYWORDS=Austerity+Measures+Greek
http://online.wsj.com/article/SB10001424052748704820904575055531226422098.html?KEYWORDS=Greece+debt+crisis\
http://www.ft.com/cms/s/0/33b0a48c-ff7e-11de-8f53-00144feabdc0.html?nclick_check=1
http://www.nytimes.com/2010/02/25/world/europe/25greece.html
http://i.telegraph.co.uk/telegraph/multimedia/archive/01585/pastries_1585130i.jpg
http://www.business-standard.com/india/storypage.php?autono=385578
http://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspx
http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt
http://www.forexpros.com/news/forex-news/rpt-analysis-common-euro-zone-bond-could-bring-wide-benefits-122743
http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt
http://www.oanda.com/currency/historical-rates
http://www.businessweek.com/news/2010-02-28/euro-may-not-survive-greece-s-deficit-crisis-soros-says.html
http://www.guardian.co.uk/commentisfree/2010/jan/27/greece-euro-european-union
Class Lecture Notes on IMF intervention and other styles of intervention (Orthodox and Heterodox)
Class Lecture Notes on Dollarization
Videos
1)
http://www.nytimes.com/2010/02/25/world/europe/25greece.html
2)
http://online.wsj.com/video/the-focus-will-be-on-greek-bond-yields-this-week/C5E5592E-9C44-48FB-ABA601E13B29584C.html?KEYWORDS=Greek+Bond
3)
http://www.youtube.com/watch?v=i-de7q3fbn0&NR=1http://www.youtube.com/watch?v=i-de7q3fbn0&NR=1