Professor Castillo Econ 490Presented by : Ross Shaw and Abraham Velasco

Greek Debt Crisis 2009-2010This 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.

Source : IMF Database, Greece, Downloaded on 2/22/2010Anything unusual about this graph?

Key Ingredients of Greeces Debt Crisis Falsified Statistical Documents

25% of All Employment is Federal

Corruption and Bribery

Tax EvasionSource : http://www.spiegel.de/international/europe/0,1518,679415,00.htmlInterview with Greek Prime Minister Georgios Papandreou

Falsified Statistical DocumentsSource : IMF Database, Statistics, 2007 Excel EvaluationOne 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 isnt even close.

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

Source : IMF Database, Greece, As of 2009 vs. Greek Central Bank (Rest of World Securities (ie foreign assets)Areas of ConcernForeign Reserves rapidly increasing.At one point (during 2001 to 2003) current account moves in same directionThe points of each year never match up for current account vs. Foreign ReservesWhen Greece entered the EMU they may have already had out of balance books.

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. Source :http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7318877/Goldman-Sachs-faces-Fed-inquiry-over-Greek-debt.htmlAt 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. Goldman Sachs and Greece

Greek bond yields, which have an inverse relationship with prices, have subsequently been under pressure. At the end of last month, yields on the countrys 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.htmlImage Source : http://online.wsj.com/article/SB10001424052748704358004575095853830995376.html?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.htmlSource : 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.

Reformed taxes with increased rates for upper income earners > 40,000/yr Closing dozens of tax loopholes and special rebates.

Pension Reform BillsAusterity Tax Measures (Entire Country)Source : http://online.wsj.com/article/SB10001424052748704820904575054821227195384.html?KEYWORDS=Austerity+Measures+GreekAusterity Reform Measures (Entire Country)

"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 overpromiseits 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 GDPSource : http://online.wsj.com/article/SB10001424052748704820904575055531226422098.html?KEYWORDS=Greece+debt+crisis\ from an interview with Nobel Laurete Stiglitz on his recent assistance with the Greek government crisis.Source : http://www.ft.com/cms/s/0/33b0a48c-ff7e-11de-8f53-00144feabdc0.html?nclick_check=1The 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.

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

Common Eurozone Bond Bailout Severe political/social implications for the European Union.

Placing this at disposal of Greece, however Germany is adamantly opposed as it affects their good credit as well.

Other countries in Eurosystem that are well off help pay off Greek debt with lower rate bonds from their countries lower risk bonds.Bilateral Financial Aid BailoutSource : http://www.business-standard.com/india/storypage.php?autono=385578IMF Intervention

Requirements Decrease Government Social Programs Decrease Monetary Supply Increase Interest Rate Index Wages (Freeze wages) Increase revenue by privatizing industries. Devalue CurrencyLimitations for Greece Unable to Decrease Monetary Supply Unable to Increase Interest Rate Unable to Devalue CurrencySource : Class Lecture Notes on IMF intervention and other styles of intervention (Orthodox and Heterodox)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-could-bring-wide-benefits-122743Image Source :http://www.javno.com/en-economy/europe-stocks-gain-on-euro-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.

Negative Qualities But if you bail out Greece from within, the markets will never take seriously a risk premium for a debt-ridden member stateSource : http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRptImage Source : http://www.efficientfrontier.com/ef/401/junk.htmImage Source : http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt

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

Implies Euro has people moving their currency to the safety of the dollar.Source : Excel extrapolation of Historical data from http://www.oanda.com/currency/historical-rates databases

Internal Eurosystem Exchange Rates The exchange rate is fixed. If a country gets into difficulty, its cant depreciate its currency, which would be the normal way, Soros said. And its 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 Eurolization 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.Dollarization Weaknesses Seigniorage No leverage printed money Discretionary Monetary Policy Eliminated Exports go down. Some loss of national identity Unable to use inflationary monetary policySource : In-Class Lecture on Dollarization

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 CountriesMoral 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

IMF Database, Greece, Downloaded on 2/22/2010http://www.spiegel.de/international/europe/0,1518,679415,00.htmlhttp://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspx http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7318877/Goldman-Sachs-faces-Fed-inquiry-over-Greek-debt.htmlhttp://online.wsj.com/article/SB10001424052748704358004575095853830995376.html?KEYWORDS=Greek+Default+Insurancehttp://www.ft.com/cms/s/0/d5150cc4-22e6-11df-8942-00144feab49a.htmlhttp://online.wsj.com/video/the-focus-will-be-on-greek-bond-yields-this-week/C5E5592E-9C44-48FB-ABA6-01E13B29584C.html?KEYWORDS=Greek+Bondhttp://blogs.reuters.com/rolfe-winkler/tag/spain/http://www.theage.com.au/business/greek-bond-sale-delayed-20100302-pgid.htmlhttp://online.wsj.com/article/SB10001424052748704820904575054821227195384.html?KEYWORDS=Austerity+Measures+Greekhttp://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=1http://www.nytimes.com/2010/02/25/world/europe/25greece.html http://i.telegraph.co.uk/telegraph/multimedia/archive/01585/pastries_1585130i.jpghttp://www.business-standard.com/india/storypage.php?autono=385578http://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspxhttp://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpthttp://www.forexpros.com/news/forex-news/rpt-analysis-common-euro-zone-bond-could-bring-wide-benefits-122743http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpthttp://www.oanda.com/currency/historical-rates http://www.businessweek.com/news/2010-02-28/euro-may-not-survive-greece-s-deficit-crisis-soros-says.htmlhttp://www.guardian.co.uk/commentisfree/2010/jan/27/greece-euro-european-unionClass Lecture Notes on IMF intervention and other styles of intervention (Orthodox and Heterodox)Class Lecture Notes on Dollarization

Videoshttp://www.nytimes.com/2010/02/25/world/europe/25greece.html http://online.wsj.com/video/the-focus-will-be-on-greek-bond-yields-this-week/C5E5592E-9C44-48FB-ABA6-01E13B29584C.html?KEYWORDS=Greek+Bondhttp://www.youtube.com/watch?v=i-de7q3fbn0&NR=1http://www.youtube.com/watch?v=i-de7q3fbn0&NR=1

****This comparison is meant to get us involved in what we can see while just looking at the graph. Possible responses are likely a straight line, its increasing and other items. Once everyone is away from this we will move into what caused this debt Crisis.*Debt Crisis was originally created by falsified statistical documents, large amounts of federal employment and to a lesser extent corruption, bribery and tax evasion. All of these are moral hazards that are generated from the desirability that was attached to becoming part of the Eurozone.

Many of the basic requirements to be part of an Economic union have all the requirements of a free trade agreement, a customs union and the member countries must have synchronized business cycles, common fiscal policy and common monetary policy so reactions would typically be the same across the board.

Part of those requirements, a synchronized business cycle, is a measured by GDP for these members countries. *When you evaluate the GDP of greece to the GDP of Germany you will notice an almost linear correlation for Greeces GDP and the stronger, more influential Germany is in many ways much less linear.

When you evaluate this data, there is an implication that they may havebeen lying about their GDP for at least the last 8 years (about the time they entered the Union).

There is an incentive for a member country to falsify their records, because the requirement to be part of this union requires a certain level of productivity, production, and improvement. If you arent then you cant be part of the Union. *Bank of Greece is part of the Greek Central Banking Model. If you would like to make an easy comparison, the Greek Central Bank is almost the same as a Federal Reserve Bank in the United States. *Here is a basic explanation of the Banks involved in this eurosystem. The similarities to the US Monetary policy are actually huge.

If you look a relatively large amount of banks are involved. Central to this discussion later is 4 specific countries which are Portugal, Italy, Greece and Spain. These 4 countries have the least amount of strength in the union and have separate financial issues.*When evaluating the Current Account for Greece and comparing it the Foreign Reserves held by the Bank of Greek we do notice a disturbing trend. The implications of the ncreasing Current Account, without an increase in foreign reserves is that Greek may have been on its way to a debt crisis starting in early 2000-2002. It was easily hidden and adjusted by something called a currency-swap of which a well known financial company was involved in backing these currency swaps.*These currency swaps were not required (at the time) under European rules to be disclosed and therefore they were actually a loan that showed itself as currency swap. The well known company that was involved in these negotiations and provided them with the ability to keep their GDP issues under wraps was Goldman Sachs.**Greece government bonds (ie the ability and the interest a country has to bear to borrow money) has been steadily increasing and in some cases has reached 7% on the benchmark 10 year bond. The credit-default rate is hovering steadily around 4% rate. ****************The Eurosystem needs To be competitive with United States it needs a centralized, coordinated fiscal and monetary policy. It would also need international cooperation along with international transfers to compete with the United States, state and federal format.**With all responses the EU makes, these weaker union countries will now have a moral hazard in two directions. Issues that are normally reserved for IMF support in developing countries now occur in the first Economic Union. May weigh down exchange rate and create a European Monetary Union currency crisis that was an offshoot of an unresolved debt crisis in the 4 countries to the right.

Similar to the large social programs that exist in other countries, the Weaker union countries, no matter what the response in greece will have an increased incentive to not worry about what their future financial problems might be, because other stronger countries in the union will pull in to compensate for them. *With all responses the EU makes, these weaker union countries will now have a moral hazard in two directions. Issues that are normally reserved for IMF support in developing countries now occur in the first Economic Union. May weigh down exchange rate and create a European Monetary Union currency crisis that was an offshoot of an unresolved debt crisis in the 4 countries to the right.

Similar to the large social programs that exist in other countries, the Weaker union countries, no matter what the response in greece will have an increased incentive to not worry about what their future financial problems might be, because other stronger countries in the union will pull in to compensate for them. ****