Professor Castillo

Econ 490

Presented by : Ross Shaw and Abraham Velasco

Greek Debt Crisis Greek Debt Crisis 2009-20102009-2010 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.

Source : IMF Database, Greece, Downloaded on 2/22/2010

Anything unusual about this graph?

Key Ingredients of Greece’s Key Ingredients of Greece’s Debt CrisisDebt 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 DocumentsFalsified Statistical Documents

Source : IMF Database, Statistics, 2007 Excel Evaluation

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.

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 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.

“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.html

“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. “

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 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.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.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.

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

• Pension Reform Bills

Austerity Tax Measures (Entire Country)

Source : http://online.wsj.com/article/SB10001424052748704820904575054821227195384.html?KEYWORDS=Austerity+Measures+Greek

Austerity 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 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?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=1

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.

• 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 Bailout

Source : http://www.business-standard.com/india/storypage.php?autono=385578

IMF Intervention

Requirements• Decrease Government Social Programs• Decrease Monetary Supply• Increase Interest Rate• Index Wages (Freeze wages)• Increase revenue by privatizing industries.• Devalue Currency

Limitations for Greece• Unable to Decrease Monetary Supply• Unable to Increase Interest Rate• Unable to Devalue Currency

Source : 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-122743

Image 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 state…”

Source : http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt

Image Source : http://www.efficientfrontier.com/ef/401/junk.htm

Image 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, 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.

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

Source : 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 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

1) IMF Database, Greece, Downloaded on 2/22/20102) http://www.spiegel.de/international/europe/0,1518,679415,00.html3) http://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspx4)

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

5) http://online.wsj.com/article/SB10001424052748704358004575095853830995376.html?KEYWORDS=Greek+Default+Insurance

6) http://www.ft.com/cms/s/0/d5150cc4-22e6-11df-8942-00144feab49a.html7) http://online.wsj.com/video/the-focus-will-be-on-greek-bond-yields-this-week/C5E5592E-9C44-48FB-ABA6-01

E13B29584C.html?KEYWORDS=Greek+Bond8) http://blogs.reuters.com/rolfe-winkler/tag/spain/9) http://www.theage.com.au/business/greek-bond-sale-delayed-20100302-pgid.html10) http://online.wsj.com/article/SB10001424052748704820904575054821227195384.html?KEYWORDS=Aust

erity+Measures+Greek11) http://online.wsj.com/article/SB10001424052748704820904575055531226422098.html?KEYWORDS=Gree

ce+debt+crisis\

12) http://www.ft.com/cms/s/0/33b0a48c-ff7e-11de-8f53-00144feabdc0.html?nclick_check=113) http://www.nytimes.com/2010/02/25/world/europe/25greece.html 14) http://i.telegraph.co.uk/telegraph/multimedia/archive/01585/pastries_1585130i.jpg15) http://www.business-standard.com/india/storypage.php?autono=38557816) http://www.bankofgreece.gr/Pages/en/MonetaryPolicyEurosystem/default.aspx17) http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt18) http://www.forexpros.com/news/forex-news/rpt-analysis-common-euro-zone-bond-could-bring-wide-benefits-

12274319) http://www.reuters.com/article/idUSLDE61L13020100223?type=usDollarRpt20) http://www.oanda.com/currency/historical-rates 21) http://www.businessweek.com/news/2010-02-28/euro-may-not-survive-greece-s-deficit-crisis-soros-

says.html22) http://www.guardian.co.uk/commentisfree/2010/jan/27/greece-euro-european-union23) Class Lecture Notes on IMF intervention and other styles of intervention (Orthodox and Heterodox)24) Class Lecture Notes on Dollarization

Videos1) 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-ABA6-

01E13B29584C.html?KEYWORDS=Greek+Bond3) http://www.youtube.com/watch?v=i-de7q3fbn0&NR=1http://www.youtube.com/watch?v=i-

de7q3fbn0&NR=1