-o0o - International Finance Topic: Greece’s debt crisis and the negative impact to European currency community Class: Banking 56 Group Member: Cung Quynh Anh Nguyen Ngoc Kieu Anh Nguyen My Linh Pham Hong Tu Linh Vu Ha Linh Vu Trinh My Linh La Thu Phuong Hoang Phuong Quynh Hanoi, April 17th , 2017 CONTENTS: I II III Overview: Greece before crisis The reasons of Greece’s debt crisis Timeline of Greece’s debt crisis: Greece’s action, Bailout of Eurozone and IV V VI other organizations Negative impacts on Greece’s economy, Eurozone Greece’s current situation Conclusion I Overview: Greece before crisis: II Greece is classified as an advanced,high-incomeeconomy, and was a founding member of the Organisation for Economic Co-operation and Development (OECD) and of the Organization of the Black Sea Economic Cooperation (BSEC) The country joined what is now the European Union in 1981 In 2001 Greece adopted the euro as its currency, replacing the Greek drachma at an exchange rate of 340.75 drachmae per euro Greece is a member of the International Monetary Fund and of the World Trade Organization, and ranked 34th on Ernst & Young's Globalization Index2011 III World War II (1939-1945) devastated the country's economy, but the high levels of economic growth that followed from 1950 to 1980 have been called the Greek economic miracle From 2000 Greece saw high levels of GDP growth above the Eurozone average, peaking at 5.8% in 2003 and 5.7% in 2006 IV V The reasons of Greece’s debt crisis VI Greece's debt crisis is due to the poor financial management of public finances coupled with government spending that is too great to surpass As a result, Greece's budget deficit exceeded 13% of GDP and total public debt accounted for nearly 130% of GDP (2010) Possible causes of Greek public debt are: Firstly, low domestic savings led to external borrowing for public spending: In the 1990s, the average saving rate for Greece was only 11%, much lower than the 20% Countries such as Portugal, Italy, and Spain tend to plummet Therefore, domestic investment is heavily dependent on external capital inflows; Bond yields continued to fall as a result of joining the European Union (1981) and the wave of sell-offs of bonds showed that Greece had managed to slip away from an already-mobilized channel of government Greece strengthens its debt financing for public expenditure VII Second, high public spending leads to budget deficits: Greece's GDP growth is still acclaimed with an average annual growth rate of 4.3% (2001-2007) compared to the regional average The eurozone area is 3.1% However, at this stage, government spending increased by 87% while government revenue increased by only 31%, resulting in a budget deficit that exceeded the EU's 3% GDP According to economists, the cumbersome and ineffective public sector of Greece is a major factor behind the country's deficit VIII IX According to the Organization for Economic Co-operation and Development (OECD), public expenditure on public administration in total public expenditure in Greece in 2004 was much higher than in other OECD countries while the quality and quantity Service is not much improved In 2008, the global financial crisis erupted into Greece's key industries The tourism and shipping industry, revenue declined by more than 15% in 2009 Greek economy is also in a difficult situation, the revenue source to finance the state budget is narrowed dramatically Meanwhile Greece must increase public spending to stimulate the economy Post-crisis stimulus spending in 2008 also exacerbated public debt As of January 2010, Greek public debt was estimated at 216 billion euros and the debt level reached 130% of GDP X Aging and pension systems in the most generous European region of Greece are also considered as one of the burdens for public expenditure It is predicted that the proportion of people over 64 years of age in Greece will increase from 19% in 2007 to 32% in 2060 Retirees receive an amount equal to 70-80% of the official salary before retirement The benefits from other supportive mechanisms with full 35 years of service compared to 40 years in other European countries Estimated total payment for public sector pensions in Greece will increase from 11.5% of GDP (2005) to 24% (2050) XI Third, declining revenues are also a factor leading to budget deficits and increasing public debt Tax evasion and underground economic activity in Greece are factors that reduce budget revenues According to the World Bank, the informal economy in Greece accounts for 25-30% of GDP (compared to 15.6% of Vietnam's GDP, 13.1% of GDP in China and Singapore 11.3% of Japan's GDP) The high tax rate and complex laws, together with the excess and ineffective regulation of regulators, are responsible for tax evasion and underground development in Greece According to Transparency International, Greece is one of the countries with the highest levels of corruption in the EU Not only workers not pay taxes, but the bribe is quite popular from central to local In 2008, more than 13% of the Greeks spent up to 750 million euros in envelopes for public and private sector leaders, including doctors who demanded more money for the surgery; City planners are the ones who decide the time when building permits are granted and local officials are also involved in bribery cases Greek Prime Minister George Papandreou acknowledged that "systematic corruption" was the most fundamental problem that led to Greece's public debt The damage that corruption causes to Greece is estimated at about 8% of GDP Corruption not only caused tax evasion, it also increased government spending, aimed at maintaining high salaries for civil servants and executing large investment projects rather than targeting projects that created many jobs Make and improve labor productivity High salaries not only create a XII budget burden but also make the competitiveness of the Greek economy weak High salaries, the euro appreciated from euro to 0.8 US dollars to euro to 1.6 euros during the period 2000-2008 makes the competitiveness of Greek goods weak and consequent Inevitably a constant trade deficit Fourth, easy access to foreign capital and ineffective use of capital: In addition, joining the Eurozone in 2001 was a great opportunity for Greece to gain access to capital markets Internationalization with the use of a currency guaranteed by the major economies of Germany and France, together with the monetary policy management of the European Central Bank (ECB) Thanks to joining the Eurozone, Greece has a steady and stable image in the eyes of investors, easily attracting foreign investment at low interest rates For nearly a decade, the Greek government has been selling bonds for hundreds of billions of dollars This amount could have helped Greece's economy move a long way if the government planned to spend reasonably However, the Greek government has spent too much (mostly for infrastructure) spending hardly paying attention to repayment plans leading to increasing debt levels XIII Fifth, the lack of transparency and confidence of investors: The lack of transparency in Greek statistics has lost the confidence of the investors it has created as a A member of the Eurozone and rapidly emerging the wave of capital withdrawal massively from the banks of Greece, pushing the country into difficulties in raising capital in the international capital markets Dependence on foreign finance has made Greece very vulnerable to changes in investor confidence In the era of international economic integration, transparency is always a big demand of investors The public debt crisis in Greece is due to the government's lack of transparency of data, trying to draw a rosy picture of the budget status of forthcoming policies to overcome budgetary constraints or problems As a result of macroeconomics, the effect of such policies will be severely curtailed XIV XV Timeline of Greece’s debt crisis: Greece’s action, Bailout of Eurozone and other organizations From 2001 to 2014: XVI XVII 2001: Calm before the storm: Greece joins eurozone XVIII January 1, 2001 XIX Formerly invited in June 2000, Greece becomes the twelfth country to adopt the single euro currency, ditching its former drachma XX To qualify, Greece had to demonstrate signs of a healthy economy, including meeting targets for price stability and public finances The country had not qualified to join bloc when it was established in 1999 XXI 2004: Greece confesses to exaggerating figures XXII November 15, 2004 To enter the euro zone, certain economic conditions must be met In late 2004, however, Greece's government admits that it has under-reported the country's budget deficit figures between 2000 and 2003 XXIII A deficit of under percent was required to enter the single currency— however, after a review by the EU's statistics agency Eurostat, Greece's finance minister said it had not fallen below this level since 1999 XXIV XXV 2009: Downgrades: Greece is taken down a peg XXVI December 8, 2009 Fitch downgrades Greece's credit rating to "BBB+" from "A-" marking the first time in a decade that the country has fallen below "A" status XXVII It comes after the then-finance minister, George Papaconstantinou, warned that Greece's deficit could climb to 12.5 percent of gross domestic product (GDP) during 2009—much higher than expected XXVIII Over the following weeks, a number of other agencies also lower their credit ratings for Greece, fearing its economic recovery is losing its footing Greece unveils stability programme on January 14, saying it will aim to cut its budget gap to 2.8 percent of GDP in 2012 from 12.7 percent in 2009 XXIX XXX 2010: XXXI Greece approves harsh austerity package, anger ensues XXXII March 3, 2010 Greece must refinance 54 billion euros ($66.6 billion) in debt in 2010, with a crunch in the second quarter as more than 20 billion euros becomes due and market yields for Greek debt soar The Greek government approves a tough austerity package, including public sector pay cuts, pension freezes, and tax rises on cigarettes, alcohol and fuel XXXIII Trade unions in Greece react with anger, setting the stage for violent protests in Athens as the cuts take hold XXXIV XXXV Greece: The economic rescue begins XXXVI May 2, 2010 The International Monetary Fund and euro zone members agree on a financial aid package for Greece worth 110 billion euros ($146 billion), amid fears that the country's fragile economy could put the whole region in jeopardy XXXVII Greece accepts more cuts as part of the deal, but violent demonstrations erupt as protesters demand an end to austerity XXXVIII Euro zone leaders agree to create joint financial safety net, with IMF, to help Greece and to try to restore confidence in euro XXXIX XL Since 2010, Greece has received two bailouts worth 240 billion euros XLI May 10 - Global policymakers install an emergency financial safety net worth about $1 trillion to bolster financial markets and prevent the Greek crisis from danaging the euro XLII XLIII 2011: XLIV Greece gets a major debt haircut XLV October 26–27, 2011 After negotiations lasting a whole night, Europe's leaders agree to slash Greek debt as the country's financial problems continue XLVI Private investors will take a 50 percent "haircut"—or writedown—on their Greek bonds, which will be converted into new loans XLVII XLVIII Greek PM Papandreou resigns XLIX November 6–11, 2011 L After assuming office in October 2009, George Papandreou's time as Prime Minister of Greece is marked by (often unpopular) efforts to deal with the country's financial crisis LI After weathering the storm for two years, he resigned following a coalition agreement between his PASOK party and conservative rivals LII 2014: LIII Resurrection: Greece returns to bond markets LIV April 10, 2014 LV Investors celebrate as Greece makes its official return to the bond markets, after a four-year break LVI High demand for its five-year bonds led some to dub this the "beginning of the end" for Greece's bailout—although this now looks a little premature LVII Prime Minister loses key vote LVIII December 29, 2014 LIX Greece's government, led by the New Democracy Party, is thrown into turmoil after parliament refuses to endorse then-Prime Minister Antonis Samaras' presidential candidate LX A snap election is called for January, and the popularity of radical left-wing party Syriza raises some concerns about the future of its bailout program LXI LXII EXPLANTION The debt crisis started in 2009 when Greece announced its actual budget deficit was 12.9% of Gross Domestic Product (GDP), more than quadruple the 3% limit mandated by the European Union (EU) Credit rating agencies lowered Greece's credit ratings, driving up interest rates LXIII Usually, a country would just print more money to pay its debt However, in 2001 Greece had adopted the euro as its currency For several years, Greece benefited from its euro membership with lower interest rates and foreign direct investment, particularly from German banks Unfortunately, Greece asked the EU for the funds to pay its loans LXIV In return, the EU imposed austerity measures Worried investors (mainly German banks) demanded that Greece cut spending to protect their investments Greece government agree with this deal and received aid package LXV However, these measures lowered economic growth and tax revenues As interest rates continued to rise, Greece warned in 2010 that it might be forced to default on its debt payments The EU and the IMF agreed to bail out Greece but demanded further budget cuts in return That created a downward spiral LXVI By 2012, Greece's debt-to-GDP ratio was 175%, one of the highest in the world It was after bondholders, concerned about losing all their investment, accepted 25 cents on the dollar Greece is now in a depression-style recession, with a 25% unemployment rate, political chaos, and a barely functioning banking system LXVII That mean people cant affort to buy more and led to the decrease of GDP even much worse Moreover, gorverment cut down salary and pension for citizens, which made the anger in all country This made the decision of citizens to Prime Minister loses key vote and the austerity package stopped immediately LXVIII 2015: LXIX Syriza elected LXX January 25, 2015 Led by Alexis Tsipras, anti-bailout party Syriza sweeps to victory and forms an unexpected coalition with right-wing Independent Greeks party LXXI Electing a party that aims to abolish austerity may have lifted Greek spirits, but investors across the world were worried amid growing fears of a possible "Grexit"—or Greece exiting the euro zone LXXII LXXIII Euro zone approves bailout extension LXXIV February 24, 2015 Euro zone finance ministers approve a four-month bailout extension for Greece, after the country's new government submitted reform proposals just ahead of the deadline LXXV The measures include controlling public spending and cracking down on corruption and tax avoidance LXXVI LXXVII Greece is given a schedule of repayments to different creditors between April and June 2015, however not all of these dates have been met LXXVIII Misses IMF payment LXXIX June 30, 2015 Investors and politicians watch Brussels and Athens with baited breath, as Greek prime minister, Alexis Tsipras, and creditors went back and forth over reform proposals However, midnight on June 30 comes and goes without a deal and Greece's international bailout expired LXXX The country also effectively defaults on a 1.5-billion-euro ($1.7 billion) debt repayment to the International Monetary Fund (IMF) This makes Greece the first country to miss a payment to the IMF since Zimbabwe in 2001 LXXXI LXXXII Referendum goes Tsipras' way LXXXIII July 5, 2015 LXXXIV In a shock move, Greek Prime Minister Alexis Tsipras holds a public vote on whether to accept the austerity-heavy creditor proposed bailout deal LXXXV Tsipras advises Greek to vote "no," which they duly do—61 percent come out against accepting a deal LXXXVI The referendum is viewed by the Syriza party as strengthening Tsipras' hand against accepting further austerity However, it also increases the risk that creditors will give up hope of any deal, potentially pushing Greece towards a "Grexit" from the euro zone LXXXVII Final, final deadline? LXXXVIII July 12, 2015 LXXXIX Members from all 28 countries in the European Union will meet on Sunday to discuss Greece's latest deal proposals, which are due to arrive on Thursday The Sunday summit will follow a meeting of euro zone finance ministers on Saturday and is widely seen as the last chance for Greece to strike a deal and avoid a forced exit from the single currency zone XC On Tuesday, European Council President Donald Tusk said that this week was the last chance for a Greece agreement XCI "I have to say it loud and clear that the final deadline ends this week All of us are responsible for the crisis, and all of us have a responsibility to resolve it," he told reporters at a press conference XCII  The poverty rate of Greece had risen from 2.2% in 2009 to 15% in 2015, equivalent to 1.6 million people  Obviously, the economic crisis had spread not only from the national scale, but also from small localities in the country  In January 2015, the leftist government of Prime Minister Alexis Tsipras won      the general election with a commitment to say no to “austerity” But after months of tense negotiations with European creditors, Tsipras is still forced to accept a third rescue package, despite strong opposition from Greece and willingness to leave the Eurozone Common Europe (Eurozone) In addition, creditors are also forced to reach a budget surplus of 3.5% by 2018, and the same amount will be used Estimatedly, Greece's debt / GDP ratio is currently at 180% of GDP, which means that the country remains one of the world's most indebted economies Meanwhile, the latest figures show that Greece's unemployment rate remained high at 23.3% in April this year (the highest in the EU) In many small cities, it is only possible to meet citizens over the age of 60 or under 20 This shows that many working-age people have left the country and are looking for opportunities in the background Other European economy Anyway, Greece still has a bit of hope to hold on to The country unexpectedly reported GDP growth of 0.3% in the second quarter, well ahead of the 0.2% decline expected by analysts Greece also revised its first quarter economic data, with a decline of just 0.1% from the previous 0.5% However, the Greek economy is still down 0.7% in the second quarter compared to the same period last year In the capital, Athens, where hundreds of thousands of people took to the streets protesting last year's harsh policies, the atmosphere was more peaceful Despite the high unemployment rate, tourism has shown positive signs Hotels and guest houses in popular tourist destinations still attract international visitors Workers in the travel industry feel more secure when their jobs are guaranteed Perhaps, this is one of the few areas where the economic crisis has not yet reached XCIII Negative impacts on Greece’s economy, Eurozone XCV Greece’s debt crisis was really the first public crack in the European Union’s armor and one that has yet to be repaired XCVI The Greek experience with austerity-linked financial support from the EU has been painful and—making matters worse—rather ineffective While Greece is on the periphery, its problems are hardwired into the entire EU, and those problems are spreading Impacts on Greece’s Economy XCIV 2009: The Greek crisis officially began in December 2009 when it discovered a huge budget deficit of 12.7% of GDP, not 3.7% as the government XCVII predecessor Father before that => This has raised fears among the creditors and leaders of the Eurozone By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis XCVIII 2010: When the Greek debt crisis broke, Athens turned to the EU for help Assistance to Greece to this day has been contingent on Athens making domestically unpopular reforms XCIX C CI 2015: After two bailouts have been released, the Greek economy is still very bleak Recently the meeting of creditors with Greece was not unified The government has no financial resources to pay back the debt Banks must close By June 27, 500 of the country's 7,000 ATMs had no money left People are really pressing in this difficult situation because each person can only withdraw 60 euros per day The Greek travel industry has also encountered a number of issues, such as the implications, for visitors to Greece who have no money to spend due to credit cards being withdrawn by the Greek banking system CII 2016: Nearly seven years, 13 austerity packages, and three bailouts (worth a running total of $366 billion) later, the Greek economy is still struggling CIII The debt burden now registers at about 177 percent of GDP Nonperforming loans total $119 billion, accounting for 45 percent of the country’s loans Unemployment is still around 23 percent, and about three-fourths of unemployed people have been jobless for at least a year CIV CV CVI  Current situation CVII Greek GDP has started to grow, expanding by an estimated 0.4 per cent last year, but it is on a very weak path IMF economists expect the country to grow at less than per cent per year over the long-term, which is too low for it to pay down its debts CVIII That means Greece’s “public debt remains highly unsustainable, despite generous official relief already provided by its European partners,” the IMF believes CIX CX CXI At the moment, Greece's stay in or out of the Eurozone is a big question, and it has a lot to with it But it can be clearly seen if Greece leaves the Eurozone Greek currency will depreciate seriously and there is no guarantee that the Greek economy will prosper again Greek creditors will also face significant losses CXII Impacts on EU’s Economy CXIII Greece is a small economic base that can annually contribute about 2% to the GDP of Europe However, if Greece loses its ability to pay, the consequences will spread throughout Europe and could trigger a large-scale debt crisis CXIV The EU faces a looming crisis which could threaten the sustainability of the eurozone as the International Monetary Fund has warned Greece’s debts are on an “explosive” path, despite years of attempted austerity and economic reforms The crisis started in 2009, when the world first realized Greece could default on its debt In three years, it escalated into the potential for sovereign debt defaults from Portugal, Italy, Ireland, and Spain The European Union, led by Germany and France, struggled to support these members CXV CXVI CXVII In the recent panic, major European countries such as Germany, Britain and France were severely affected by the economy and modest recovery Therefore, these countries also have difficulty in saving Greece If Greece does not reach agreement on assistance, it may be forced to report the loss of some debt Therefore, it may be bound to the EU, which means that loans will no longer be guaranteed by the European Central Bank (ECB) CXVIII CXIX CXX What worries most European Union officials is that if Greece leaves the block, this will create a domino effect In fact, the EU has taken steps to separate troubled financial institutions from other institutions CXXI CXXII If Greece had to leave the EU, it might be time for Europe to recover more or less But congestion in the financial system in Europe is still possible, and countries that have used emergency financial aid packages, such as Ireland and Portugal, are likely to be dragged back into crisis CXXIII In addition, Greece's exit from the EU could further aggravate the immigration crisis in Europe, as it is no longer working with other EU countries to address the problem Currently Greece together with Italy are two European countries must receive many immigrants from the Middle East and North Africa most CXXIV CXXV CXXVI Greece’s current situation Expectations of the Greek Following a defiant stance in early 2015, which resulted in closed banks, capital controls, reversal of growth and exclusion from money markets, the present radical left Greek government signed an onerous agreement The agreement provided Greece a new loan of €87 billion, yet required that Greece achieve a 3.5% of GDP surplus (through more austerity) for a number of years This target was clearly not feasible, and the Bank of Greece proposed a surplus of 1.5% to 2% of GDP The IMF agreed with this target, and has asked the EU to restructure Greek debt obligations consistent with this target as well as for implementation of structural reforms that would make the Greek economy competitive However, the EU has insisted on the 3.5% surplus target and painted an unrealistically rosy picture of the Greek economy to make this target appear feasible, while not pressing Greece on reforms CXXVII The solution to the Greek crisis is obvious and has been obvious for some time: make reforms, cut state expenditure, cut taxes, simplify investment procedures, open markets to competition, and proceed with privatizations The present Greek government has failed in all of these dimensions CXXVIII CXXIX The current situation of the Greek The euro area pressured Greece to resolve outstanding pension and labormarket issues with its bailout creditors, as the country missed yet another deadline for unlocking funds this week CXXX The currency bloc’s finance ministers meeting in Brussels on Monday said that the government of Alexis Tsipras has yet to comply with the terms attached to the emergency loans that have kept the country afloat since 2010 The ministers’ Greek counterpart, Euclid Tsakalotos, will stay in Brussels through the week to continue negotiations with representatives of creditor institutions, in a sign of increasing urgency after months of talks failed to break the deadlock CXXXI “All the stakeholders emphasized today that we have to avoid delays,” EU Economic Affairs Commissioner Pierre Moscovici told a news conference after the meeting “That would be very harmful That would impair the confidence of investors and consumers That would be detrimental to economic recovery.” CXXXII Greece is edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted state to the edge of economic collapse A Greek government official in Brussels declined Monday to say whether the country can meet debt payments due this July CXXXIII The Greek government, which has more than billion euros ($7.5 billion) in bond payments due in July, has balked at implementing mandated reforms to its energy and labor markets while also resisting calls for additional pension cuts A meeting between Finance Minister Tsakalotos and representatives of creditor institutions before the Brussels meeting didn’t yield sufficient progress for bailout auditors to agree to return to Athens and complete the review, according to an official, who asked not to be named as negotiations aren’t public CXXXIV Greece’s creditors “must conclude in its review that the conditions are met and they’re laid down precisely in the agreement,” German Finance Minister Wolfgang Schaeuble told reporters before the meeting “Apparently it’s still difficult between the institutions and the Greek government to put the general agreement in concrete terms.” CXXXV Stalled bailout reviews and acrimony between successive governments and auditors representing creditor institutions are all too familiar themes in the sevenyear crisis that has reduced the Greek economy by a quarter And while discussions continue on how to overhaul the labor market, a finance ministry official said in an email to reporters on Friday that the issue can’t be solved in talks with technocrats CXXXVI Even as Greek bonds have performed better than most of their euro-area peers this year on expectations that the government will capitulate, uncertainty has weighed on economic activity, raising the risk that an additional bailout may be needed Unemployment rose in the last quarter of 2016, the economy unexpectedly contracted, and a bleeding of deposits from the nation’s battered lenders resumed CXXXVII “The Greek recovery is once more significantly delayed by politics,” said Nicholas Economides, a professor of economics at New York University’s Stern School of Business “Tsipras will blink at some point in time, the question is when.” CXXXVIII CXXXIX CXL Conclusion: CXLI The Greek government-debt crisis (also known as the Greek Depression) is the sovereign debt crisis faced by Greece in the aftermath of the financial crisis of 2007–08 The Greek crisis started in late 2009, triggered by the turmoil of the Great Recession, structural weaknesses in the Greek economy, and revelations that previous data on government debt levels and deficits had been undercounted by the Greek government CXLII This led to a crisis of confidence, indicated by a widening of bond yield spreads and rising cost of risk insurance on credit default swaps compared to the other Eurozone countries, particularly Germany The government enacted 12 rounds of tax increases, spending cuts, and reforms from 2010 to 2016, which at times triggered local riots and nationwide protests Despite these efforts, the country required bailout loans in 2010, 2012, and 2015 from the International Monetary Fund, Eurogroup, and European Central Bank, and negotiated a 50% "haircut" on debt owed to private banks in 2011 After a popular referendum which rejected further austerity measures required for the third bailout, and after closure of banks across the country (which lasted for several weeks), on June 30, 2015, Greece became the first developed country to fail to make an IMF loan repayment.[10] At that time, debt levels had reached €323bn or some €30,000 per capita CXLIII  ... -o0o - International Finance Topic: Greece’s debt crisis and the negative impact to European currency community Class: Banking 56 Group Member: Cung Quynh... Greece before crisis The reasons of Greece’s debt crisis Timeline of Greece’s debt crisis: Greece’s action, Bailout of Eurozone and IV V VI other organizations Negative impacts on Greece’s economy,... crisis has not yet reached XCIII Negative impacts on Greece’s economy, Eurozone XCV Greece’s debt crisis was really the first public crack in the European Union’s armor and one that has yet to