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Greece Crisis
A Tale of Misfortune

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Once upon a time

Once upon a time, before Year 2008, Greece was a prosperous country. Unlike today it was better known for its natural beauty and ancient culture more than the recession and extended crisis. The economy then enjoyed the average annual growth rate of 3.6% for 15 consecutive years. Between 2001-2007 it was the second fastest growing economy of Eurozone (after Ireland). However, Year 2008 brought along the biggest crisis since Great Depression. After around 80 years, fortunes of almost all the countries were severely tested, those that were vulnerable became the victims of the Global financial turmoil- Greece was one of them. The Year reversed the growth of 15 consecutive years.

Why Greece was one of the Victims

The growth of Greece had certain costs attached. The prosperity had a darker side, intensity of which was sensed in Year 2008. Although the effects became visible in year of crisis, the causes were rooted way before.

Accumulated Debt
Greece was operating with high level of external debt. Although during 1960s and 1970s Government was breaking even but during 1980s there was a dramatic rise in the the Government's deficit due to increased spending. Government's expenditure exceeded its revenue with an average of 8.1% per annum from 1980-1989.

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The deficit remained high during the next two decades as well. High deficit levels pushed up the levels of debts, as the deficits were funded by borrowings. With the increase in debt, deficits widened as well due to the interest costs attached. So, Greece got caught in the trap of vicious cycle of high deficit financed by debt that would further result in high deficit again financed by debt and so on. Between 2001 and 2008 its average annual budget deficit stood at 5% against the Eurozone's average of 2%,while its average annual current account deficit was reported to be 9% against Eurozone's average of 1%. In year 2009 its debt reached the all time high levels of 300 bn.

High Consumption, Low Investment

The major chunk of the borrowed funds were consumed rather than invested back to the economy. Less than 25% of the money was spent on productive investments like infrastructure etc.

Significant amount was spent on the pension bill and wage bill which meant large number of public servants and pensioners with high wages and pensions respectively. This triggered the consumption levels but the investments rested still at cold levels.

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Access to Cheap Capital

Euro was introduced in year 1999, while Greece adopted it in Year 2001. With the adoption of Euro, cheap funds became accessible for Greece, thereby making it more debt laden. In addition to this, weak compliance of EU rules for debt and deficit limits made Greece accumulate huge amount of external debt. Current account deficit and budget deficit were funded by international capital markets, pushing debt to the never before levels of 115% of GDP in Year 2009 and 143% of GDP in 2010. With the rise in consumption levels and demand that was largely fueled by the easy capital and credit, Greek economy registered the high average annual growth of 4.3% against the Eurozone's average of 3.1%, just only to breakdown at the time of crisis.

Accumulation of high level of external debt due to high Government spending and weak revenue collection had made the economy all the more feeble and badly exposed to the downturn so much so that Greece was the first Eurozone country to collapse.

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Time is the ultimate healer but not for Greece

It is said Time is the ultimate healer, even for the greatest of miseries, we just have to give time some time. However, in case of Greece the saying backfired. The impact of crisis worsened with time and the economy drowned deeper in the marsh of financial as well as political instability.

18th October 2009 Prime Minister, George Papandreous new Socialist government

revealed that the budget deficit would rise to at least 12% of GDP (double of the the previous governments estimate), because of some undisclosed debt, which actually reached to 15.6% of GDP that is more than five times the EU limit.
8th December 2009 Fitch downgraded the country's credit rating from A- to BBB+

followed by S&P and Moody's, that pushed up the borrowing cost.

4th March 2010 Greece announced a major austerity plan. It increased the sales tax

and tariffs on cigarettes and alcohol. In addition to this pensions were blocked and salaries of civil employees was curbed.

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23rd April 2010 Papandreou, asked for rescue package from Eurozone and IMF as

Athens (Capital of Greece) failed to cope up with the rising borrowing cost.
2nd May 2010 Finance Ministers of Eurozone agreed to rescue Greece with 110 bn as

loans for three years, paid in quarterly installments. A week later ministers announced a 500 bn Eurozone rescue fund.
23rd April 2011 European Commission's data revealed that the Greek Budget Deficit

for 2009 was higher than expected at 13.6% of GDP. Second Greek Crisis began triggering the need of new austerity measures.
13th June 2011 S&P downgraded the credit rating of the country by 3 notches, from B

to CCC, lowest in the World.

29th June 2011 After 2 days of violent protests, Parliament passed an austerity bill

worth 28 bn. Passage of bill that included significant spending cuts and tax increases, was the precondition set by European Union for disbursement of the next installment of the loans.
3rd July 2011 Finance Ministers of EU agreed that the country need another round of

rescue fund but the decision on second bailout was postponed.

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2nd October 2011 Greece announced its failure of meeting the deficit targets for Year

2011 and 2012 due to the deeper than anticipated recession.

31st October 2011 Papandreou called out for voting for the deal with EU leaders that

was in principle agreed few days before. According to the agreement Private creditors could see 50% cut in the face value of their bonds and fresh bailout package of 130 bn.
5th November 2011 Leaders of country's two largest political parties form

government as Group of senior Socialists demand Government of national unity under new leader even after Papandreou survived the crucial vote of confidence in Parliament.
11th November 2011 Lucas Papademos, a former central banker becomes the new

Prime Minister with the support of two parties and socialists.

8th December 2011 European Central Banks grant loans to the banks to avoid the

fear of second credit crunch and boost the confidence of investors in the European banking sector.
28th January 2012 The country reaches to a tentative deal with its bondholders to

reduce the country's debt.

9th February 2012 After the number of delays, talk and meetings, IMF, EU and

Greece agreed to have certain cuts (22% cut in minimum wages, 15% cut in pensions and 15000 public sector job cuts) in return of the new rescue loan.
21st February 2012 EU leaders agreed to release the second bailout package of 130

bn that saved the country from the disastrous default in March.

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9th March 2012 85.8% of the Private bond holders agreed to take heavy losses as

much as of 74% on their investments. Through this deal Greece had written off 105 billion of the debt, highest in the history, thereby making it eligible for the 130 bn bailout.
6th May 2012 Country held general elections in which center-right New Democracy

party wins but with 19% of the votes as the Greeks supported anti-bailout parties.
16th May 2012 With the failure of forming Government with more than 20% support

or with negotiations and coalitions, new elections were demanded. Till then a interim Government with the motive of holding new elections was sworn in.
17th June 2012 The country held new elections amidst the financial crisis and

possibility of Greece exiting the EU. However this time, center-right New Democracy party (pro bailout party) won the election with 30% of the votes, thereby easing the fears of Global economic crisis.

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Financial Plague
The crisis had spread like a disease. With the uncertainties and questionable sustainability crawling in, investors demanded high yields on bonds of the highly indebted Greece. Market started anticipating the similar outcome from other debt laden European Countries, thereby pushing up the borrowing costs of these countries as well. Below is the list of highly indebted European Countries, many of which are debt-ridden.
Country Debt as a % of GDP 1239.00% Gross External Debt $2.26 trillion $2.590 trillion $1.457 trillion $5.632 trillion $478.84 billion $847.95 billion $511.94 billion $5.674 trillion $546.92 billion $2.392 trillion $2.494 trillion External Debt per capita $478,087 $154,820 $139,613 $85,824 $90,984 $103,160 $47,483 $69,788 $50,792 $50,868 $40,724 Credit Rating (by Moody's)* Ba1 Aaa Aa1 Aaa Aaa Aaa Ba3 Aaa C A3 # A3 Outlook

Ireland

Negative Stable Rating under Review Negative Stable Negative Negative Stable Developing Negative Negative

Netherlands 367.00% Belgium France Finland Austria Portugal Germany Greece Spain Italy 353.70% 254.40% 244.80% 241.3% 207.30% 183.9% 178.9% 169.50% 136.60%

* As on 8th June 2012; # Recently Moody's has slashed Spain's rating by 3 notches to Baa3 from A3.

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What it means for India

Although Greeks have voted for the party favoring the bailouts but the problem does not ends here, its just postponed. The Global economic fears are eased but the Eurozone crisis is not addressed yet. EU itself comprises of 27 countries and is likely to add Croatia, its 28th member by July 2013. It constitutes 7% of the world's population and 20% of the Global economy, that makes it huge enough to spread the effects. The prevailing crisis for India would impact its trade, market, currency and commodity prices.

Trade
European Union is India's largest trading partner. EU contributes in around 20% of the total exports and 14% of total imports of the country.

Trade relations of India and EU have grown significantly in last some years, and India has steadily positioned itself as 8th largest trading partner of EU in 2011 from 15th rank in year 2002. For FY 2011-2012, despite slowdown, India-EU trade crossed USD 100 bn mark for the first time, registering the growth of 21.5%. However the growth was lower than the 23% rate registered in FY 2010-2011.

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While the Gems and high-end Textile business are estimated to have an adverse impact, demand in other segments tend to remain inelastic. Textile industry is one of the biggest employer in India, thus if the exports slow down, unemployment may hit the lower income group. Apart from this on a brighter front Indian exporters even have certain opportunities knocking their doors. The exporters are better positioned to trap the other growing markets like Africa and Asia, which are dominated by European countries till now. In addition to this, some inclusions in EU-India Free Trade Agreement for greater access to the retail sector are due to take place , this would give a boost to the trade relations of the two entities.

Foreign Direct Investments

EU is the largest source of FDIs for India, with the cumulative volume of 23.6 bn from Year 2000 to 2010. Most of these investments come from Germany, France, U.K. And Italy. Despite the slowdown, FY 2012 was reported to be the brightest year in terms of FDIs. The Year registered the record level of USD 500 bn, highest since investment platform was opened in Year 1996. The biggest contributor in pushing the FDI up to the never before level was British Energy incumbent BP with the investment of USD 8.9 bn that is again the highest monthly foreign investment ever. FDI for April month plunged by 41% but weak macro economic indicators with complex tax rules were enough to keep the foreign investors away. Thus in such a scenario when domestic factors are not in place segregating the impact of Eurozone crisis and lack of political will would be difficult, thereby resulting in the blame game.

Currency
Value of other South Asian Countries' (except Burma) have not plunged like Rupee. While Rupee has fallen by 13% in last 4 months, its nearest competitor Bhutan has reported the fall of 11.3% and Bangladesh that is dwarf compared to the size of India has just moved by 0.34%. Even the Pakistan's Rupee is doing better than Indian Rupee by slipping down by 3.4% only. Still, the Government is blaming Eurozone crisis for the rupee depreciation. Eurozone crisis is not the sole or major contributor in the demise of rupee.

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Market
More than the the economics of trade it would be the global market sentiments that would impact the Indian market. The adverse effect on Eurozone would impact the Global growth and would dry up the foreign capital in Indian Market. Investments in stock market may reduce from European Countries, further impacting the value of rupee in addition to the equity market. However the unattractive Eurozone would increase the investor's interest more in the emerging countries like China and India, while the tumbling stock market would increase the focus on largely untapped bond and commodity markets.

While the World is said to be in deep trouble, India is not the part of other planet. When the developed economies could not bear the shock of Global financial crisis in Year 2008, India managed to uphold its balance but the country does not have any super powers to tolerate another round of shock waves in 4 years. In addition to this, its stubborn domestic problems like inflation, negative growth, policy paralysis, growing fiscal deficit, scams, lack of co-operation in coalition, political will over an above the economic objectives have made it all the more vulnerable than in Year 2008.

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Sleeping beauty
The economic environment of Greece has polluted the society and lives of people in the country. Suicide rates have surged, especially amongst the poor and those older than 65. The first four months of the year has reported the rise of more than 33% in suicidal cases against the corresponding period last year. It is disappointing to note that its happening in the same country that had the least suicidal rate in Europe before the crisis. Unemployment rate in the country is more than 22% among the general population and 50% among the young population. Most of the suicides are committed by the pensioners and males, 'the former breadwinners of the family'. European Leaders have always shown their inability to deal with the crisis effectively, still the EU Summit due on 28th and 29th June 2012 would be eyed globally. The countries in G-20 meet have remained optimistic towards Eurozone hoping that it would find the solution to the inflated problem. Pro bailout government coming in power is one thing and dragging out the economy from the mess of debt and providing its citizens a life of respect and dignity is another. The beautiful Greece has slept for a long in the recessionary period, now it needs that magical touch of fiscal reforms to get up again and give its citizen at least a "happy yet again" ending if not the "happily ever after" end.

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