Greece and the Eurozone Crisis

Fears and Action

YCSIG THINK TANK 10th February 2010
Max Goer, Simone Jensen and Rohan Agarwal

Fears from Athens Fundamental Economic Weakess - I

Greece had shifted to the Euro in 2001. European integration helped an otherwise weaker economy to raise billions of dollars in capital. It further lowered its interest rates on the German model. This money was principally used to finance larger government spendings. Greece has a 12.7% deficit of its GDP. National debt has exceeded 300 billion Euros. As of today, it has US$25 billion dollar of its debt that must be immediately re-financed else it must declare a default on that debt.

Fears from Athens Fundamental Economic Weakess - II

Fitch ratings has called Greece as Eurozones weakest member Greeces debt is 113%of its GDP.

Relations with the Eurozone and PIGS

The Eurozone legally requires that national deficit be within a 3% limit if GDP. With Greeces deficit of 12.7% of the GDP, the European Central Bank is legally not allowed to engineer a typical bail-out, partly due to political aspects of the EU treaty. According to a latest Standard and Poors statement, the Greek default problem could spread to Portugal, Ireland and Spain.

Latest Developments - I

Greek unions have called for a nationwide strike and there is an overall national disruption of services. The ECB president J.C. Trichet has convened an emergency meeting tomorrow. Fears of a large-scale Euro collapse has brought in France and Germany into helping the Greek economy in terms of loans and debt guarantees.

Latest Developments - II

However, as of today, stocks across Southern Europe have rallied after Merkels indications of German support. This bailout however is prone to be a problem wit German voters. The process may not be very smooth for Germany due to lack of precedent. An alternative route that ECB is exploring, is to examine the role of the IMF in bailing out Greece

Eurozone Debt Situation

Time is running out:

Fears of an oncoming speculative attack on Greek bonds.

Biggest threat, however, remains on the Euro, and the possibility of the Euro being able to sustain itself as stronger economies like Germany are asked to help weaker ones. Any firm decision will only come out at tomorrows meeting

Repercussions on the Euro

Hard to raise extra tax as high rates of tax evasion. Cost cuts are facing too much opposition Will most probably have to rely on other EU members help Default would strongly affect the EURO Greece only small part of Eurozone

Worries of spill over Doesnt have the power to print money (o.w. would probably be very low already)

(cont)

EURO zone credit ratings could plummet Weak EURO a problem for several European nations Spill over problems as other EU nations hold much of Greeces debt Default would raise questions over the effectiveness of the Maastrich Treaty High rates of inflation could be the consequence of bailout action, further depreciating the EURO Any bailout effort would probably result in the ECB to keep rates low for a while (high interest rates are a historical strength of the Euro) As ECB targets inflation not output implementation could be tricky

Interesting Side Effects

Swiss franc under much pressure to depreciate against EURO SNB passed measures to do this Now even more problems Similar problems for non-Eurozone export-heavy (to the EU) countries (not UK)

Contagion

Debt programs in Greece and other high deficit countries such as Spain, Portugal, Ireland and even Italy may effect stronger European countries Contagion effect on US- many stronger economies Ex. Germany

Exports

Euro zone countries are key US trading partners Obamas goal of doubling exports in five years Other major economies count on digging out of crisis by increasing exports

Stronger Dollar

Expectations of a weaker Euro, dollar becomes stronger relative the Euro US goods more expensive in overseas markets, dealing another potential blow to struggling US manufacturers and exporters

Behavioral

Declines in Stock Market

Fears of possible sovereign defaults in Europe have focused new attention on US deficit Greek deficit 12.7% GDP US deficit 10.6%, not that much lower Current record deficit $1.6 trill Huge budget deficits in Europe could lead to lower credit ratings in these countries US not immune to this, fear that US will lose sterling credit rating