prajwal kumar - rm - roll no.46

8/19/2019 Prajwal Kumar - RM - ROll No.46

1/47

Greece’s Debt Crisis: Overview, Policy

Responses and Implications on the

Global Economy

1 | P a g e


2/47

Executive Summary

The Eurozone is facing a serious sovereign debt crisis. Several Eurozone member

countries have high, potentially unsustainable levels of public debt. Three—Greece,

Ireland, and Portugal—have borroed money from other European countries and the

International !onetary "und #I!"$ in order to avoid default. %ith the largest public

debt and one of the largest budget deficits in the Eurozone, Greece is at the center of

the crisis. The crisis is a continuing interest to &ongress due to the strong economic

and political ties beteen the 'nited States and Europe.

Build-Up of Greece’s Debt Crisis

In the ()))s, Greece had abundant access to cheap capital, fueled by flush capital

mar*ets and increased investor confidence after adopting the euro in ())+. &apital

inflos ere not used to increase the competitiveness of the economy, hoever, and

European 'nion #E'$ rules designed to limit the accumulation of public debt failed

to do so. The global financial crisis of ())-()) strained public finances, and

subse/uent revelations about falsified statistical data drove up Greece0s borroing

costs. 1y early ()+), Greece ris*ed defaulting on its public debt.

Policy Responses it! "imited Success

E', European &entral 1an*, and I!" officials agreed that an uncontrolled Gree*

default could trigger a ma2or crisis. In !ay ()+), they announced a ma2or financial

assistance pac*age for Greece, and the Gree* government committed to far-reaching

economic reforms. These measures prevented a default, but a year later, the economy

as contracting sharply and again veered toards default. European leaders

announced a second set of crisis response measures in 3uly ()++. The ne pac*age

2 | P a g e


3/47

calls for holders of Gree* bonds to accept losses, as ell as for more austerity

and financial assistance.

These responses have prevented a disorderly Gree* default, but the prospects for

Gree* recovery remain unclear. The economy is contracting more severely than

e4pected, and, as a member of the Eurozone, Greece cannot depreciate its currency to

spur e4port-led groth. 'nemployment is close to +56. 7dditionally, the policy

responses have not contained the crisis. Ireland and Portugal turned to the E' and

I!" for financial assistance. In the summer of ()++, interest rates on Spanish and

Italian bonds rose sharply.

Broader #mplications

Greece0s economy is small, but its crisis e4poses the problems of a common currency

combined ith national fiscal policies. 7dditionally, its crisis set precedents for

responding to crises in other Eurozone countries8 highlighted concerns about the

health of the European financial sector8 created ne financial liabilities for other

Eurozone countries struggling debt8 and spar*ed reforms to E' economic

governance. It has also revealed tensions among E' member states about the

desirability of closer integration.

#ssues for Con$ress

9 #mpact on t!e U%S% economy& '.S. e4ports to the E' could be

impacted if the crisis slos groth in the E' and causes the euro to

depreciate against the dollar. Through the first /uarter of ()++, groth

in the Eurozone as strong, but it may be starting to ea*en. There

3 | P a g e


4/47

has not been a clear depreciation of the euro against the dollar since

the start of the crisis. 7s the crisis continues, increased perceptions of

ris* are impacting '.S. financial mar*ets. If the crisis spreads in the

Eurozone, the impact on the '.S. economy could be much greater.

• Exposure of U%S% ban's& '.S. ban*s have little direct e4posure to

Greece #:;.


5/47

Contents

*opic Pa$e +o%

Introduction 5 - ;

The 1uild-'p to Greece0s Bebt &risis - +)

The TriggersC Global "inancial &risis

and Aevelations of !is-Aeported Bata

+) - +=

&risis Aesponses +> - (+

Evaluating the Policy Aesponse (( - (>

1roader Implications (5 - (

Implications of the Gree* Befault

#ntroduction5 | P a g e


6/47

Since early ()+), the Eurozone has been facing a ma2or debt crisis.+ The governments of

several countries in the Eurozone have accumulated hat many consider to be

unsustainable levels of government debt, and three—Greece, Ireland, and Portugal—

have turned to other European countries and the International !onetary "und #I!"$ for

loans in order to avoid defaulting on their debt.( The crisis no threatens to spread to

Italy and Spain, respectively the third and fourth largest economies in the Eurozone. <

Greece has been at the center of the Eurozone debt crisis. It has the highest levels of

public debt in the Eurozone, and one of the biggest budget deficits.= Greece as the first

Eurozone member to come under intense mar*et pressures and the first to turn to other

Eurozone member states and the I!" for financial assistance. Jver the past year, the

I!", European officials, the European &entral 1an* #E&1$, and the Gree* government

have underta*en substantial crisis response measures. 7t the behest of European leaders

in 3uly ()++, holders of Gree* bonds have also indicated that they ill accept losses on

their investments to alleviate Greece0s debt payments in the short-run. If these plans are

carried out, Greece ill be the first advanced economy to default in almost half a

century.>

The Gree* debt crisis is of continuing interest to the '.S. &ongress. The 'nited States

and the European 'nion #E'$ have the largest economic relationship in the orld, and

there are concerns about ho economic turmoil in Greece and the Eurozone more

broadly could impact the '.S. economy. There has been particular concern about the

e4posure of '.S. financial institutions to Greece. 7dditionally, the 'nited States has the

largest financial commitment to the I!" of all the I!" members. Some !embers of

6 | P a g e


7/47

&ongress have raised /uestions about hether Greece0s I!" program is an appropriate

use of I!" resources. These concerns have led to a number of congressional hearings

and legislation in the +++th and ++(th &ongresses.

This report e4plains the causes of the crisis, the policy responses to the crisis, and

assesses crisis response measures to date. It also highlights the implications of the

Gree* crisis for the broader Eurozone debt crisis and E' integration. It concludes ith

an analysis of issues of particular interest to &ongress, including the impact of the Gree*

debt crisis on the '.S. economy, the e4posure of '.S. ban*s to Greece and other distressed

Eurozone economies, and I!" involvement in the crisis.

*!e Build-Up to Greece’s Debt Crisis7 | P a g e


8/47

The Gree* government has a long history of problems ith its public debt—it has spent

more than half the years since +


9/47

Euro ,doption Capital #nflos and "ax Enforcement of EU )iscal

Rules

7s Greece prepared during the +)s to adopt the euro as its national currency, its

borroing costs dropped dramatically. Interest rates on +)-year Gree* bonds ere

dropped by +6 #from (=.>6 to 5.>6$ beteen +< and +.; Investors believed that

there ould be idespread convergence among countries in the Eurozone. This belief

as reinforced by the policy targets, called convergence criteria, that countries had to

meet in order to be eligible to 2oin the Eurozone. 7dditionally, the common monetary

policy as to be anchored by economic heavyeights, including Germany and "rance,

and managed conservatively by the E&1. E' member countries ere also to be bound

by rules in the Stability and Groth Pact that limited government deficits #6 of GBP. 7ll of these factors created ne investor confidence in Greece

and other Eurozone member states ith traditionally ea*er economic fundamentals

compared to, for e4ample, Germany.

The influ4 of capital and pursuit of meeting convergence criteria did not result in a

fundamental change in ho the Gree* economy as managed or in investments that

increased the competitiveness of the economy. The Gree* government too* advantage of

greater access to cheap credit to pay for government spending and offset lo ta4 revenue.

The government also borroed to pay for imports from abroad that ere not offset by

e4ports overseas. Government budget and trade deficits ballooned during the ()))s #see

)i$ure .$ and borroed funds ere not channeled into productive investments that

ould generate future groth, increase the competitiveness of the economy, and create

ne resources ith hich to repay the debt. Instead, the inflos of capital ere used to

fund current consumption that did not yield streams of revenue ith hich to repay the

debt.


10/47

E' policies that had been put in place to provide a chec* on the accumulation of public

debt failed to do so. Since ())


11/47

for budget deficits and trade deficits left it vulnerable to shifts in investor confidence. If

investors lost confidence in the Gree* government0s ability or illingness to repay its

debt, they ould stop lending to the government or charge interest rates that ere higher

than hat the Gree* government could afford. ?ac* of access to ne funds ould ma*e

it difficult for the government to borro to repay e4isting debt as it became due #called

rolling over its debt$, meaning that the government ould have to implement austerity

measures /uic*ly or ris* defaulting on its debt.

Starting in ()), investor confidence in Greece0s ability to service its debt dropped

significantly. The global financial crisis of ())-()) and the related economic

donturn strained the public finances of many advanced economies, including Greece,

as government spending on programs, such unemployment benefits, increased and ta4

revenues ea*ened. Greece0s reported public debt rose from +)56 of GBP in ())5 to

+(56 of GBP in ()).

7dditionally, in late ()), the ne government, led by Prime !inister George

Papandreou, revealed that previous Gree* governments had been under-reporting the

budget deficit. The ne government revised the estimate of ()) budget deficit from

5.;6 of GBP to +(.;6 of GBP. This as shortly folloed by rating dongrades of

Gree* bonds by ma2or credit rating agencies. 7llegations that Gree* governments had

attempted to obscure debt levels through comple4 financial instruments contributed

further to a drop in investor confidence.+( Greece0s ()) budget deficit as

subse/uently revised upards a number of times, finally to +>.=6 of GBP.

7s investors became increasingly nervous that the Gree* government0s debt as too

high, and that it ould default on its debt, they started demanding higher interest rates

for buying and holding Gree* bonds #see )i$ure /$. @igher interest rates compensated


12/47

investors for the higher ris* involved in holding Gree* government bonds, but they

also drove up Greece0s borroing costs, e4acerbated its debt levels, and caused Greece

to veer toards default.

Fiure 2# Greek ,ond Sreads. 1//30211?*reads on 10year Greek bonds relatie to 10year German bonds %-

Source+ Global >inancial +ata.

*!e #mpact of ,usterity

The impact of the austerity regime has been catastrophic. In a paper #+$ ritten in ()+


13/47

domestic demand. ?oer production led to dismissals and the loss of thousands of

2obs, further amplifying recession.

HH 'nemployment had already more than doubled ithin the first three years of

austerity and reached (>.= percent in 7ugust ()+(. !ore than half of the

population beteen +>H(= years old is unemployed #>; percent8 Eurostat ()+($,

hile thousands of 2obs have been lost under conditions of insufficient social

protection. Given the continuation of the crisis, the ne unemployed become the

chronic unemployed.

HH Aapid labor deterioration, as shon by the increase of precarious and

uninsured or*, insecurity, degrading payments, ea*ening of labour rights, and

deregulation of labour agreements.

HH Strangling of the loer middle class, traditionally consisting of small and

medium sized enterprises. 7 great number of such enterprises #family-oned or

not$ ere unable to survive declining consumption, lac* of li/uidity, and

emergency ta4es. !ore than 5>,))) of them closed don in ()+) alone, resulting

in a Dclearance of such enterprises and disaffecting the people dependent on

them.

HH !igration of younger, highly educated people has risen #Dbrain drain$, hile

those studying and living abroad are discouraged to return to Greece, and those

ho previously ould have stayed, are no leaving.

HH @omelessness increased by (> percent from ()) to ()++. 7long ith the pre-

crisis and Dhidden immigrant homelessness, a generation of Dneohomeless no

e4ists ho include those ith medium or higher educational bac*grounds ho

previously belonged to the social middle.

HH Suicides hit record levels, increasing by (> percent from ()) to ()+) and by

an additional =) percent from ()+) to ()++.


14/47

HH Beterioration of public health evidenced by reduced access to health care

services and an increase of >( percent in @IK infections from ()+) to ()++. Brug

prevention centers and psychiatric clinics have closed don due to budget cuts.

To this, one could also add a orrying political impact H that a country ith a

traditionally ea* far right no has one of the largest organised Leo-nazi movements in

Europe. In the ()+> legislative elections the FGolden Ban0 secured third place in the

popular vote.

Crisis Responses

European leaders, the I!", and the E&1 agreed that an uncontrolled, disorderly default

on Gree* debt ould be e4tremely ris*y and should be avoided at all costs. They feared

that such a default could spar* a ma2or sell-off of bonds of other Eurozone members ith

high debt levels and that European ban*s e4posed to Greece and other Eurozone

governments ould not be able to eather losses on those investments. "ear of contagion

and financial turmoil drove a ma2or policy response by the Europeans, the I!", the Gree*

government, and central ban*s in !ay ()+) to avoid a Gree* default. %hen Greece again

veered toards default more than a year later, a second crisis response as announced in


15/47

the summer of ()++. To date, the policy responses have succeeded in avoiding a

disorderly Gree* default. They have been less successful in putting Greece on a clear path

to recovery and containing the crisis.

(ay /0.0

The first round of crisis response measures focused on financial assistance from the

Eurozone and the I!", paired ith austerity measures and reforms implemented by the

Gree* government. &entral ban*s also played a role in providing li/uidity in the region.

)inancial ,ssistance from Euro1one and #()

In !ay ()+), Eurozone leaders and the I!" announced a three -year pac*age of M++)

billion #about :+> billion$ in loans to Greece at mar*et-based interest rates.+

billion$ and the I!" pledged to contribute M


16/47

)iscal Consolidation and Economic Reforms in Greece

7s a condition of financial support from the I!" and Eurozone countries, the Gree*

government has underta*en ambitious fiscal consolidation measures and economic

reforms. 7n austerity program outlined in !ay ()+) aimed to reduce the government0s

budget deficit by ++ percentage points through ()+


17/47

The E&1 and the '.S. "ederal Aeserve #the D"ed$ have also played a role in responding

to the crisis. The E&1 announced in !ay ()+) that, for the first time, it ould start

buying European government bonds in secondary mar*ets to increase confidence and

loer bond spreads for Eurozone bonds under mar*et pressure. 1eteen !ay ()+) and

3une ()++, the E&1 purchased government bonds totaling M; billion #about :++(

billion$, ith the bul* purchased in the summer of ()+).+; !ar*et analysts estimate that

more than half #M => billion, about :5> billion$ of the E&10s bond purchases ere Gree*

bonds.+ The E&1 has also provided substantial li/uidity support to private ban*s in

Greece and other countries in the Eurozone, and has provided more fle4ibility in doing so

than it did before the crisis.+ E&1 li/uidity support for Gree* ban*s climbed from M=;

billion #about :5 billion$ in 3anuary ()+) to M billion #about :+=+ billion$ in !ay

()++, roughly =)6 of Greece0s ()++ GBP.()

The "ed has supported the crisis response by re-establishing temporary reciprocal

currency arrangements, *non as sap lines, ith several central ban*s in order to

increase dollar li/uidity in the global economy. These sap lines had been previously

used during the global financial crisis. The sap lines ere set to e4pire but have been

subse/uently e4tended until 7ugust ()+( amid continuing concerns about the Eurozone.(+

%hile the sap lines ere used most heavily immediately after the "ed re-established

them, there has not been any amount outstanding on the sap lines beteen the inter of

()+) and summer of ()++.

2une and 2uly /0..

Starting in the spring of ()++, it became clear that the Gree* economy as contracting

more severely than e4pected and ould re/uire more assistance in order to avoid


18/47

defaulting on its debt. 7fter re/uiring Greece to adopt additional austerity measures, E'

officials, the E&1, and the I!" debated for several ee*s about hat a second pac*age

for Greece ould include. They /uic*ly reached an agreement after a Dspeculative

attac* on Italy in 3uly ()++ #a rapid sell-off of Italian bonds, resulting in rising bond

spreads on Italian bonds$. European officials decided that in addition to more austerity

measures and financial assistance, the holders of Gree* bonds ould also share in the

crisis response by accepting some losses on their investments.

(ore )iscal Consolidation and Economic Reform in Greece

7s economic conditions orsened in the spring of ()++, the Gree* parliament approved

an additional round of austerity measures and structural reforms in 3une ()++. These

reforms ere necessary to get the ne4t disbursement of funds from the original Eurozone-

I!" financial assistance pac*age, as ell as for securing a second assistance pac*age.

The cornerstone of Greece0s so-called medium-term fiscal strategy #!T"S$ is a

consolidation program through ()+> orth M( billion #about :=) billion, +(6 of GBP$,

including M5.> billion #about : billion, (.6 of GBP$ of additional spending cuts and

revenue measures to be implemented in ()++. In all, the !T"S, together ith previously

announced measures, is designed to bring the government budget deficit don to ).6 of

GBP by ()+>. The nely proposed consolidation measures aim primarily to reduce over-

staffing in the public sector, improve the financial performance of state-oned

enterprises, and streamline social transfers.

The other ma2or component of the ne fiscal strategy—and its most contentious—is an

ambitious privatization and public real estate development program designed to raise M>)

billion #about :;( billion$ by ()+>, including M +> billion #about :(( billion$ by ()+


19/47

privatization authority, hich is e4pected to include E' and I!" representatives.

(ore )inancial ,ssistance

In 3uly ()++, European leaders announced a second financial assistance pac*age for

Greece totaling M+) billion #:+>; billion$ . This second financial assistance program

ill provide loans to Greece on more favorable terms than the first pac*age #loer

interest rate and longer maturities$, as ell as e4tend the maturities on e4isting Eurozone

loans to Greece. 7t the time of the announcement, it as unclear hether the I!" ould

be contributing to the second financial assistance pac*age. The official European

communi/uN called on the I!" to Dcontinue to contribute to the financing of the ne

Gree* program but subse/uent nes reports indicated that the I!" ould refrain from

contributing to the second pac*age.((

To help contain the crisis, European leaders also announced that they ould ma*e the

E"S" more fle4ible. Instead of 2ust providing loans, they announced that the E"S" ill

be able to provide precautionary lines of credit to countries under mar*et pressures,

finance the recapitalization of

Eurozone ban*s, and buy bonds in secondary mar*ets ith the consent of the E&1. These

changes need to be ratified by national parliaments.

"osses on Gree' Bonds

In 3uly ()++, European leaders and the Institute for International "inance #II"$, an

association of private financial institutions, announced that holders of Gree* bonds ould

contribute M>) billion #about :;( billion$ through ()+= to the crisis response.

Specifically, they ould participate, on a voluntary basis, in bond e4changes and bond


20/47

rollovers #M< billion$ and debt buybac*s #M+(.5 billion, about :+

billion$ to loer Gree* debt payments over the short-term. The II" designed a menu of

options for the bond e4changes and rollovers and e4pect )6 of private creditors to

participate. Those that do participate are e4pected to ta*e a loss of (+6 in the net present

value of their bond holdings.(


21/47

Evaluatin$ t!e Policy Response

The policy responses to Greece0s debt crisis have not been ta*en lightly, and they have

been reached only after months of negotiations among the E&1, Eurozone leaders, the

I!", and the Gree* government. The policy measures aimed to prevent a disorderly

Gree* default, to restore debt sustainability in Greece, and to prevent the spread of the

crisis to other Eurozone countries and the global economy. To date, they have succeeded

in the first ob2ective, but have had limited success in the second to.

3n$oin$ Debates about Policy Responses

Providing financial assistance to Greece has been controversial. !any Eurozone

countries, including Germany, had to overcome considerable political resistance to

providing support to Greece. Jpponents of E' assistance to Greece e4pressed

e4asperation ith the idea of rescuing a country that, in their perspective, has not

e4ercised budget discipline, had failed to modernize its economy, and had allegedly

falsified financial statistics. Jpponents also raised the issue of moral hazard and ished

to avoid setting a Dbail out precedent. ?i*eise, providing I!" funds to Greece spar*ed

intense debate, because the I!" has not lent to developed countries in recent decades

and the I!" program for Greece is /uite large relative to the size of its economy.

Economic reforms have also been difficult for the Gree* government for domestic


22/47

political reasons. Papandreou0s Panhellenic Socialist !ovement #P7SJO$ came to office

in Jctober ()) on a platform of social protection, promising to boost ages, improve

support for the poor, and promote redistribution of income. The policies his government

has since pursued to cut the budget deficit have re/uired a full-scale retreat from these

campaign pledges and are proving increasingly difficult to see through. Tens of thousands

of public sector or*ers and their supporters have ta*en to the streets to protest the

reforms. 7n opinion poll in 3une ()++ indicated that close to >)6 of Gree*s anted

parliament to re2ect ne austerity measures, ith only 6 in favor of parliamentary

approval.(= 'nemployment in Greece more than doubled beteen ()) and ()++, rising

from ;.;6 to +>.6.(>

The inclusion of bondholders in the crisis response in 3uly ()++ signaled a ma2or shift in

the approach to responding to the crisis, hich previously had focused primarily on the

provision of financial assistance to Greece and economic reforms in Greece. Private

sector involvement in the crisis had long been resisted by some European officials and

the E&1 due to fears that it ould spar* broader contagion in the Eurozone. Jthers,

including German &hancellor 7ngela !er*el, felt that the costs of the crisis should be

shared ith private creditors and not borne by Gree* citizens and European ta4payers

alone.

"imited Success

The policy responses have effectively prevented a disorderly default by the Gree*

government. Greece has continued to pay its debts in full and on time. Investors are

e4pected to ta*e losses on their investments, but a plan has been laid out ith input from

the private sector, and is e4pected to proceed in a controlled manner.

To date, the policy response has not put Greece on a clear path to recovery. In 3uly ()++,

the I!" estimated that Greece0s public debt increased substantially beteen ()+) and


23/47

()++, from +=


24/47

&ale 1# EU0F -ssistance for Greece. reland. andortual

)ate -reed Euroean F Financial &otal FinancialFinancial -ssistance -ssistance-ssistance

Greece :ay !010 @"0 billion @0 billion @110 billion

about 115billion- about B billion-

about 15"billion-

3relanda

+ecember!010 @B5 billion @!!.5 billion @C7.5 billion

about C5billion- about ! billion-

about 97billion-

Portugal :ay !011 @5! billion @!C billion @7" billionabout 75billion- about 7 billion-

about 11!billion-

Source+ 3:> *ress releases.

otes+ >igures may not add due to rounding.

a. he headline number used by the 3:> and in ne$s re*orts for 3relandDs total 4nancial

assistance *ackage $as @"5 billion. his includes @17.5 billion about !5 billion- from

3relandDs cash reseres and other liuid assets. =esources used by national authorities in

the crisis res*onse are not included in the table aboe.

There are different, but not mutually e4clusive, vies on hy the policy responses to

Greece0s debt crisis failed to put a stronger Dfireall around the country and prevent

the spread of the crisis. Some fault European leaders for failing to act decisively during

the crisis. It has been argued that their slo, piecemeal approach to the crisis response,

and public disputes about appropriate crisis response measures, have e4acerbated

investor an4iety rather than reassured mar*ets. It may also be the case that the crisis

spread not because of hat as happening in Greece per se, but simply because other

Eurozone countries faced fundamental fiscal challenges that ere unsustainable. "or

e4ample, Spain suffers from a serious housing bubble8 Ireland, a bloated ban*ing

sector8 and Portugal, a decade of anemic groth.


25/47

Broader #mplications

Greece has a small economy, accounting for only (.=6 of total Eurozone GBP, but the

implications of its crisis are far-reaching. "undamentally, Greece0s crisis has e4posed

some of the fears e4pressed by economists hen the Eurozone as created. They

orried about the tensions that could be created by a group of different countries sharing

a common currency and monetary policy, hile maintaining national fiscal policies.

Greece0s debt crisis shoed that these concerns ere valid and that European leaders and

E' institutions ere not prepared to siftly respond to such a crisis. The Greece crisis

has spar*ed larger discussions about ho to resolve the tensions beteen a common

monetary policy ith national fiscal policies, hile *eeping the monetary union intact.

Greece0s crisis has also raised a number of more specific economic and political

implications, detailed beloC

• )irst t!e policy responses to Greece’s debt crisis !ave set precedents for !o

t!e debt crises in ot!er Euro1one countries !ave been !andled% The original

crisis response for Greece focused on the provision of I!" and European

financial assistance, in combination ith austerity and structural reforms. This

policy response as contentious and too* ee*s to negotiate. %hen Ireland and

Portugal needed assistance, hoever, their programs ere easier to negotiate,

because Greece served as a template for designing the crisis response. Lo that

bondholders are being as*ed to share in the response to Greece0s crisis response

by ta*ing losses on their investments, mar*ets are concerned that there ill be

losses on Irish and Portuguese bonds in the future. European officials deny this to

be the case.

• Second Greece’s crisis !as exacerbated concerns about t!e !ealt! of t!e


26/47

fra$ile European financial sector% Several large European ban*s, such as 1LP

Paribas, SociNtN GNnNrale, Beutsche 1an*, 'ni&redit, and Intesa, are believed to

be ma2or private holders of Gree* bonds.


27/47

• )ourt! t!e Gree' crisis !as !i$!li$!ted t!e policy constraints on members

of t!e Euro1one% !any analysts have suggested that Greece ould be better off

if it could e4it the Eurozone and issue a ne national currency. 7 ne national

currency, devalued against the euro, could spur Gree* e4ports and help groth

return to the economy. 7s long as Greece is a member of the Eurozone, it does

not have the e4change rate in its policy tool*it for responding to the crisis.

Jthers, including the Papandreou government, argue that leaving the Eurozone

ould be a terrible economic decision for Greece, triggering a severe ban*ing

and financial crisis. They add that because Greece0s debt burden is denominated

in euros, a ne, devalued national currency ould increase the value of its debt

in terms of national currency.

• )ift! t!e Gree' crisis !as spar'ed a broader re-examination of EU

economic $overnance in order to improve t!e lon$-term functionin$ and

stability of t!e currency union% The E' has been or*ing on ne legislation

that ould introduce significant reforms to economic governance. 7 proposed

pac*age of reform measures ould strengthen enforcement of the Stability and

Groth Pact, introduce greater surveillance of national budgets by the

European &ommission, and establish an early arning mechanism that ould

prevent or correct macroeconomic imbalances ithin and beteen member

states.

• Sixt! Greece’s debt crisis !as posed c!allen$es to and opportunities for

deeper EU inte$ration% In some ays, the crisis has highlighted limits to E'

integration, revealing fundamental disagreements beteen member states about


28/47

ho much E' integration is desirable and highlighting the poer that member

states, particularly Germany and "rance, still leverage compared to E'

institutions. Jn the other hand, the crisis has spurred tighter integration, through

increased poers of the E&1 and the creation of a permanent European lending

facility.

#mplications of t!e Gree' Default

#ssues for Con$ress

The Gree* debt crisis has been an ongoing source of concern for some !embers of

&ongress. The crisis has been referenced on the @ouse and Senate floor a number of


29/47


30/47

second /uarter of ()++, hoever, suggest that groth in the Eurozone may be starting

to slo.

Fiure 3# G) Gro'th in the Euro8one. 94 2/:91 211

Source+ &rgani'ation for (conomic )oo*eration and +eelo*ment &()+-, EuarterlyFational Accounts +ataset, accessed uly !011.

otes+ =eal G+P gro$th, com*ared to same uarter of *reious year.

There are a number of factors that affect the euro-dollar e4change rate #including '.S.

policies, such as /uantitative easing$, and there has not been a clear, sustained

depreciation in the euro against the dollar since the start of the crisis. )i$ure 5 shos

upards and donard sings in the euro-dollar e4change rate since !ay ()+), hen

Greece0s financial assistance pac*age as announced.

7s the crisis has continued, hoever, increased perceptions of ris* have affected '.S.

financial mar*ets. &oncerns focus on the interconnectedness of the '.S. and E'

financial sectors, and the threat of the crisis spreading to larger Eurozone countries, including

Spain or Italy. If the crisis does spread, the impact on the '.S. economy could be greater.

Fiure 4# US;ate. ?anuary 21:?uly 211


31/47


32/47

Gree* private sector, as :;.< billion in Becember ()+).

@oever, '.S. ban*s may be more heavily e4posed to Greece through hat the 1IS

calls Dother potential e4posures. The 1IS defines Dother potential e4posures as

derivative contracts, guarantees, and credit commitments. '.S. ban* e4posure to Greece

through these more indirect channels totaled an estimated :


33/47

captures ban* e4posure through credit default saps #&BS$. &BSs provide insurance

against default8 if Greece defaulted on its debt, the sellers of &BS on Gree* debt ould

be re/uired to ma*e payments to the buyers of &BS on Gree* debt. 7nalysts disagree

about hether the 1IS data overstates '.S. e4posure to Greece through &BSs, or

provides an accurate estimate. 1ecause the Gree* bond e4changes and rollovers

announced in 3uly ()++ are to be provided on a voluntary basis, it is not e4pected to

trigger payment on &BS contracts.

Exposure to t!e Euro1one

1roader contagion of the Gree* debt crisis to the Eurozone poses a greater ris* to '.S.

ban*s. '.S. ban*s are much more heavily e4posed to the other Eurozone countries

under mar*et pressure, particularly Italy, than they are to Greece #see )i$ure 7$. The

1IS reports that hile direct '.S. ban* e4posure to Italy as :


34/47

Source+


35/47

the 7dministration, but some !embers of &ongress have e4pressed concern about

hether Greece0s I!" program is an appropriate use of I!" resources. The I!"

program for Greece is unusual for a number of reasons. "irst, the I!" has not

generally lent to developed countries in recent decades. Second, the I!" loan to

Greece is unusually large. The I!" has general limits on the size of its programs, but

reserves the right to lend in e4cess of these limits in De4ceptional situations. The

I!" loan to Greece represents e4ceptional access to I!" resources, at about


36/47

of legislation in the +++th &ongress as part of the Bodd-"ran* %all Street Aeform and

&onsumer Protection 7ct, signed into la in 3uly ()+) #P.?. +++-())+ of

the la re/uires '.S. representatives at the I!" to oppose loans to high- and middle-

income countries ith large public debt levels #greater than +))6 of GBP$ if it is Dnot

li*ely that they ill repay the I!". Prospective I!" loans to lo-income countries are

e4empted from this re/uirement.=5 If the I!" does approve a loan to a high- or middle-

income country despite '.S. opposition, the la re/uires the Treasury Bepartment to

report regularly to &ongress about conditions in that country. These reports ould discuss

the debt status of the country, economic conditions affecting its vulnerability, and its debt

management status.

The la currently applies to a very small number of countries. 7ccording to I!" data

from 7pril ()++, only nine countries in the orld meet the conditions set out in the

legislation. Some argue that the impact of the la ill be limited, because the ability of a

country to repay the I!" is already a fundamental re/uirement for I!" approval of a

loan. Jthers argue that there could be instances in hich the I!" and Treasury

Bepartment have different vies on the li*elihood of a country repaying the I!". The

la ould have greater influence in these instances.

Jther legislation as introduced in the +++th &ongress in response to the Gree* debt

crisis, but did not become la.= "or e4ample, @.A. >( and S.


37/47

and Senate #S.7mdt. >)+8 S. +(;5$. These pieces of legislation call for rescinding the

'.S. financial commitments to the I!" approved by &ongress in ()).= The Senate

voted against the amendment on 3une (, ()++. The @ouse version of the legislation

has been referred to committee. The language to rescind '.S. commitments to the I!"

approved in ()) is also included in a draft "()+( State and "oreign Jperations

appropriations bill, posted on the @ouse 7ppropriations ebsite.

Conclusions and Su$$estions

%e can briefly say that to countries status are very different at the crisis period.

%hen Greece faced chronic deficits and a high debt, Ireland had been running surpluses.

@oever, that surplus as of course largely based on revenues from the property bubble

#Oarlsson, ()+)$. In addition, increasing indebtedness in both countries are vastly related

to higher inflation hich are e4tremely above the Euro avarage. "inally, I believe that this

sentece briefly e4plains the hole comparison8 hile Greece0s primary challenge is

mostly around huge government debt, Ireland0s challenge is 2ust to recapitalize its sic*

ban*ing system. This means that even ithout either austerity or recovery, the Irish

deficit ill drop dramatically in the coming years once the recapitalization of the troubled

ban*s are finished ith #Oarlsson, ()+)$.

This research finds that recent measures ta*en by the European 'nion to counter

the European sovereign debt crisis have begun to slightly improve the stability of the

Eurozone. @oever, further political, economic, fiscal, and national integration, as ell

as a method to implement sanctions against member nations ho do not abide by

Eurozone guidelines, are imperative in order to return the euroQs stability to pre-crisis

levels. GreeceQs admission into the Eurozone in ())+ is a decision that some fello


38/47


39/47

*imeline of t!e Gree' Debt Crisis

/00.

9 2anuary . -- Greece becomes the +(th nation to 2oin the Eurozone, dropping the

drachma

/00/

9 2anuary . -- Euro coins and ban*notes enter circulation

/005

9 ,u$ust -- Greece holds ())= Summer Jlympics at an estimated cost of :+>

billion

/006

9 (arc! -- &ost of hosting the ())= Jlympics is beginning to have a noticeable

effect on GreeceQs financial stability, as ne government tries to impose an

austerity budget to reduce Gree* debt

/008

9 (arc! -- 7usterity measures seem to be effective, as GreeceQs GBP increases by

=.+6


40/47

/008

9 )ebruary -- Subprime mortgage crisis begins to affect the financial sector, hich

in turn leads to the ()); to ()+) global financial crisis

/009

9 September -- Irish government officially announces the country has entered a

recession

/00:

9 +ovember 6 -- Gree* national debt increases from :((> billion in ())= to :)

billion in ()), hile former Prime !inister Georgios Papandreou says ())

Gree* budget deficit ill increase to +(.;6 of GBP

9 +ovember -- Greece admits the data it submitted to gain entry into the Eurozone

as falsified #its deficit has not been belo


41/47

9 (arc! 6 -- Gree* parliament passes Economic Protection 1ill8 a second

austerity pac*age in hich Gree* citizens as*ed to accept loer bonuses and

higher ta4es, ith idespread stri*es folloing

9 ,pril .. -- Eurozone finance ministers approve :=) billion aid pac*age for

Greece, but it is re2ected by Gree* parliament, ho admits the government mayneed additional help

9 ,pril /4 -- E', I!", and Gree* government approve :5).; billion Gree* bailout

9 ,pril /8 -- Gree* debt dongraded to 11R #2un*$ status by SP

9 (ay / -- Greece announces fourth round of austerity measures in e4change for

:+=.= billion rescue pac*age from the E' and I!", to be paid out over three

years

9 (ay .0 -- Global policyma*ers in the Eurozone install an emergency financial

safety net fund orth :+ trillion to try and prevent the spread of contagion from

the Gree* debt crisis

9 (ay .9 -- Greece receives its first loan of :+.< billion from the E' in order to

repay immediate debt

9 2uly 8 -- Gree* parliament passes pension reform measures, cutting benefits and

raising the national retirement age from 5) to 5>.

9 +ovember /9 -- E', I!", and Irish government agree to a Irish :++> billion

bailout in e4change for Ireland agreeing to implement austerity measures

/0..


42/47

9 2anuary -- "itch becomes the third credit rating agency to cut Gree* debt to

2un* status.

9 (ay / -- former Gree* "inance !inister George Papaconstantinou rules out a

debt restructuring plan for Greece

9 (ay /. -- Papandreou and senior E&1 officials reiterate that Greece must avoid

debt restructuring and continue ith budget cuts and privatizations to overcome

the debt crisis

9 (ay /4 -- Greece announces a plan of privatizations in order to partially fund the

:5 billion needed by ()+> to pay off some of its debt

9 2une 9 -- Greece agrees to implement additional austerity measures and increase

savings up to ()+>

9 2une .4 -- SP dongrades Gree* debt from 1 to &&&, giving it the loest

credit rating in the orld. Papandreou removes Papaconstantinou as finance

minister and reshuffles his cabinet

9 2une /: -- Papandreou ins parliamentary ma2ority in favor of the proposed five-

year austerity plan, hich increases access to ne funding

9 2uly /. -- Eurozone leaders agree that Greece is in need of a second bailout

pac*age of :+=> billion, plus a :5; billion contribution by private sector

bondholders by mid-()+=

9 September -- Greece adopts austerity measures, cutting high pensions by ()6,

and passes a ne property ta4

9 3ctober /8 -- Eurozone leaders reach a deal ith private ban*s and insurers in

hich they ill accept a >)6 loss on all Gree* government bonds held, for a total

loss of over :+


43/47

but it is postponed until 3anuary ()+(, and then ithdran altogether

9 +ovember 7 -- Papandreou solidifies a deal ith opposition leaders to approve

the second bailout before the ne4t round of elections, and notes that he ill step

don from his role as Prime !inister

9 +ovember : -- Papandreou resigns as Prime !inister, and the ne government is

sorn in

9 +ovember .7 -- Gree* government ins a vote of confidence, setting up the

foundation for a second Gree* bailout

9 December : -- 7ll E' members, ith the e4ception of the 'O, agree to strict

caps on government spending and borroing under the ne European "iscal

'nion in order to promote increased E' member nation fiscal integration, and

prevent the contagion from Greece and any debt crisis in the future

9 December .5 -- I!" announces that GreeceQs reforms are running behind

schedule in most areas, and delaying its recovery

/0./

9 2anuary /9 -- Greece reaches a tentative deal ith its private creditors to rite

off a substantial portion of its debt, hile Germany argues for more austerity cuts

before additional loans can be disbursed

9 )ebruary : -- The E', I!", and the three parliamentary Gree* coalition parties

meet to discuss ho to alleviate the orsening crisis. In e4change for ne loans

and rescue funds, Greece is re/uired to cut ((6 off the minimum age, +>6 off

pensions, and to cut +>,))) private sector 2obs. 'nemployment in Greece raises

to an all-time high of (+6

9 )ebruary /. -- Eurozone member nations agree to provide Greece ith a second

bailout pac*age of :+;) billion, hich is e4pected to bring government debt

don to +().>6 of GBP by ()(), and ill launch a bond sap ith private


44/47

investors to help reduce and restructure GreeceQs debts

9 (arc! : -- Greece secures private-sector bac*ing for the debt sap, ith >.6

of bondholders agreeing to ta*e heavy losses on their investments. The rite off

is estimated to forgive appro4imately :+


45/47

&an 7ngela !er*el @old Europe TogetherV The Economist. #+) march

()++$. )> Becember ()++. UhttpC.economist.comnode+ September ()++.

UhttpCenglish.al2azeera.netbusinessnes()++)()+++=)=


46/47

UhttpCresearch.stlouisfed.orgfred(dataE[E''S.t4tX.

Europe approves (nd Gree* bailout of :+;) billion. &1S Les. #() "ebruary

()+($. ) !arch ()+(. UhttpC.cbsnes.com))Z+5(-

>;europe-approves-(nd-gree*-bailout-of-:+;)bX.

Europe - Jrganization of the ES&1 and the Eurosystem. 1an/ue Be "rance.

#3anuary ())>$. ( Lovember ()++. #UhttpC.ban/ue-

france.frgbeurosystelechareuropeBirectoireZG1.pdfX.

European &entral 1an* - E&1. Investopedia. ( Lovember ()++.

UhttpC.investopedia.comtermseeuropeancentralban*.aspYa4zz+f72Ob!

7X.

European public debt at a glance. &LL 1usiness. #(+ 3uly ()++$. +( Becember

()++.

UhttpCedition.cnn.com()++1'SILESS)5+europe.debt.e4plainerinde4.html

X.

!ylonas, @arris. ()++. DIs Greece a "ailing Beveloped StateV &auses and Socio-

economic &onse/uences of the "inancial &risis. in The Konstantinos Karamanlis Institute for Democracy earboo! Series. Springer Publishing

&ompany Aetrieved !ay ()/(($.

Pagoulatos, George. ())


47/47

prajwal kumar - rm - roll no.46

Documents