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GREECE DEBT CRISIS Dareen Atef Dina Wahba Safiya Galal Sarah Hani Dr. Amir Nasry Introduction • Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. The debt levels and deficits that exceeded limits set by the Eurozone were revealed & exposed. • In the first quarter of 2010, the national debt of Greece was put at €300 billion ($413.6 billion), which is bigger than the country's economy. The country's deficit (its expenditure in comparison to its revenue) is 12.7%. Background Greece during Financial Crisis • Economy of Greece • PIIGS: Greece has spread the risk to other weak and indebted Euro-area economies. The Actual Crisis • Most countries have seen estimates for their budget deficit swell over the course of 2009, but the magnitude of the Greek revisions over both 2008 and 2009 and the implications for excessive external debt financing has been shocking. The estimated 2009 deficit rose from 5.1 % for 2009 as reported to the European Commission during the spring to 12.7% • Twin Deficits Since y=C+I+G+N-X and Y= S+I+T then (S-I) (T-G) = (X-M) Impact of Crisis • Southeastern Europe Greece’s foreign policy focus on the region and growing trade volumes between the countries, neighboring Serbia, Albania, Macedonia, Romania, Bulgaria and Turkey cannot remain indifferent to the magnitude of the crisis next door. • Spill-over effect: Some spillover effects have already started to manifest themselves. As Greek 10-year bonds fall and yields continue to remain above 6%, sovereign debt issuance and the risk premium investors demand to hold securities emitted by Romania, Serbia, Bulgaria and Turkey have been adversely affected. • Greece is already in major breach of Eurozone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro. • Impact on private individuals: The most obvious way would be through tax bills, as Europe agrees to ride to the rescue and help Greece deal with its mounting public and foreign debts. Any assistance to Greece will come at a cost that will ultimately have to be borne by taxpayers in the nations that contribute. • Contagion Effect Greek crisis has made investors nervous about lending money to governments through buying government bonds. Everybody's interest rates are heading higher as governments are having to pay a greater risk premium to borrow money. • Reduced wealth: Take-home pay is likely to fall as it is eroded by rising taxes and everyone will have to work longer before they retire - by which time they are likely to find that their pensions have shrunk. • Slower recovery The crisis is also set to slow down the embryonic economic recovery. Resolution & Conclusion: • Bailout plan European governments and the International Monetary Fund (IMF) have stunned global stock markets with a 750bn-euro ($975bn; £650bn) package of standby funds designed to see off financial meltdown. The 27 countries of the European Union (EU) will contribute 500bn Euros towards the financial safety net. They have been joined by the International Monetary Fund (IMF), which is providing other 250bn Euros. The vast bulk of Europe's contribution comes from the 16nation Euro-zone bloc, which is promising 440bn in loan guarantees. The European Commission is providing 60bn Euros immediately. • Germany and the Euro rescue plan • Germany's parliament has approved the country's contribution to a 750bn euro ($938bn, £651bn) rescue deal for the Euro-zone. • The German contribution is key to the plan, and would amount to up to 148bn Euros. Chancellor Angela Merkel warned that the Euro would be "in danger" without strong action. • The role of Greece Greece has outlined plans to cut its budget deficit, or the amount its public spending exceeds taxation, to 8.7% of its GDP in 2010, and to less than 3% by 2012. • Just before the massive bail-out package was announced the Greek government pledged to make further spending cuts and tax increases totalling 30bn euros over three years - on top of austerity measures already taken. Conclusion • Greece’s Debt Crisis has put the EU under the scope, & it has shifted the attention to the efficiency & the success of the Euro-zone. It’s considered as probably the biggest test the EU (& the EMU-in particular) has gone through. How the EU & Greece are handling the crisis with the whole bail-out plan will reflect to what extent the EU is able to function on its own as a powerful economic entity. • It’s too early yet to measure the effectiveness of the bail out plan.