Inquiry into Greece’s Financial Crisis

A study of Greece's financial crisis to understand formation, legality, and operation in business models
Fundamentals of Accounting, Faculty of Management - Instructor: Rajnikant Trivedi
21 February 2016

Brief:
This exercise was intended to study current topics on the financial sector and obtain relevant information. In groups students ascertained relevant information about the financial crisis from the sources available on the internet, analysed the crisis as per their own understanding and then presented it as a narrative.

Students:
Hemang Barot, Yash Mevada, Anand Mistry, Aayushi Panchal, Raj Parikh, Parth Vaidya, Zuheen Mansuri, Tanushree Charan, Sneha Mohan, Srinath Venkat, Vidhya Raghavan, Ziona Bharathi, Anushnath R, Malneni Sai Siri, Nilesh Prajapati, Nivedha P, Nupur Bhakri, Alok Sarmukadam, Alokita Sharma, Dhruvik Talaviya, Mayank, Saravagi, Mayank Somani, Parishi Parikh, Sanjana Bagrecha, Siddhant Garg, Sowkhya Badatala, Abhinandan GR,Suraj, Karan, Mohil, Deep, Rahil, Monika, Gunjan Paradva, Sarthak Patel, Shubam Vegda, Arpan Parikh, Dhruvi Kothari, and Govind Somani.

 

Brief Profile of Greece
LOCATION:

Greece is the southernmost country in the Balkan Peninsula, with a total area of 131,940 sq.km (50,942 sq.m). The capital city of Greece: Athens is located along the country’s southern coast.

POPULATION:

As of 1 January 2015, the population of Greece was estimated to be 11 120 415 people.

  • The sex ratio is 0.980 (980 males per 1000)
  • Population density : 87.8 / km2
CLIMATE:

The climate in southern Greece and on the islands is Mediterranean.

Average annual rainfall

  • 50 to 121 cm (20-48 in) in the Northern regions
  • 38 to 81 cm (15-32 in) in the southern regions

The mean temperature of Athens is 17°C.

Greece’s Strengths
Greece’s Weaknesses
Primary Sector

In 2010, Greece was the European Union’s largest producer of cotton and pistachios and also have good production of tobacco, olives, figs, almonds and watermelon. Sea, ranked third and ranked first in the number of fishing vessels in the Mediterranean between European Union members

Secondary Sector

Between 2005 and 2011, Greece has had the highest percentage increase in industrial output compared to 2005 levels out of all European Union members. Greece is ranked third in the European Union in the production of marble (over 920,000 tons), after Italy and Spain

Maritime Industry

Greek merchant navy was made up of 615 ships. Greece has the largest merchant navy in the world, accounting for more than 15% of the world’s total deadweight tonnage (dwt) according to the United Nations Conference on Trade and Development

 

  • Greece enjoys a high standard of living and very high Human Development Index, ranking 29th in the world in 2013.
  • The recession of recent years has seen GDP per capita fall from 94% of the EU average in 2009 to 72% in 2014.
  • the Greek economy also faces significant problems,     including rapidly   rising unemployment levels, an inefficient public sector bureaucracy, tax evasion, corruption and low global competitiveness
  • Greece is ranked 69th in the world on the Corruption Perceptions Index

MAASTRICHT TREATY

It was signed on 7th of February 1992 to integrate European Countries. Representatives from 12 nations were present in Maastricht, Netherlands to sign the treaty. The treaty necessitated the member countries to follow the convergence criteria for their acceptance into the EU.


Greece Financial Crisis, Reasons:
  • High unemployment is leading to political backlash. 
  • The latest round of the Greek crisis began when Greece rejected its two main political parties in favor of the far-left Syria
  • Speaking of tax revenues, there’s no real need to belabor this, but Greece is unusually bad at collecting taxes. 
  • These numbers come from the Organization for Economic Cooperation and Development, and they show what an outlier Greece is when it comes to tax collection. This isn’t the cause of Greece’s crisis, but it’s definitely not helping them get out of it
  • ”European countries lent to Greece through two newly created institutions — C53 billion through the Bilateral Loan Facility and 0142 billion through the European Financial Stability Facility. These are in addition to each country’s contribution to the I.M.F.

 

 


GREECE CRISIS- How did it multiply?

Early 1990s onward, the gap between public sector and private sector pay widened dramatically. By 2011, public sector salaries were 130 per cent higher than those of private employees, while average difference across the Eurozone was 30 per cent. This partly accounts for the increase in Greece public debt. There was no governing party to manage the reforms for corrective measures before the crisis happened. Following are the responsible factors for the same:

Electoral repercussions:

The economic crisis has changed the terms of the Greek political system, from left-wing and right-wing political parties to pro and anti the 2010 Memorandum and austerity measures that followed. In May 2012, ND won a general election which was marked as an end to the traditional two-party system.

Unemployment: 

Eurostat indicates that the greatest rise in unemployment in the EU, between January 2012 and January 2013, was in Greece, from 21.5 per cent to 27.2 per cent.

 

Poverty & In-equality    

In 2011, Greece had the highest rate of those at risk of poverty or social exclusion in the Eurozone. More than one in three Greeks fell below the poverty line in 2012. 

Tax evasion

In 2010, the estimated tax evasion costs for the Greek government amounted to well over $20 billion. Data for 2012 places the Greek “black economy” at 24.3% of GDP, compared with 28.6% for Estonia, 26.5% for Latvia, 21.6% for Italy, 17.1% for Belgium and 13.5% for Germany. 

Rescue Measures

The PASOK government, re-elected in June 2009 agreed to enact on the economics plan imposed by the European Union as the rescue measures.

1. The Troika                                                                 2. Bailouts                                                           3.Austerity Measures
First Bailout

In May 2010, the Troika lent 110 Billion Euro as the 1st Bailout. It was provided for preventing sovereign default i.e to meet the financial needs of the Greek Government from May 2010 to June 2013. 

Sources of Funds :
  • Total amount of €110 billion
  • €80 billion bilateral loan commitments provided by the Eurogroup and pooled by the European Commission in the Greek Loan Facility (GLF). 
  • €30 billion to be provided under a Stand-By Arrangement (SBA) by the IMF
Utilisation of funds:
  • The €20bn loan will allow Greece to repay €8.5bn of government bonds which mature soon
  • It is meant to give Greece protection while it brings in unpopular austerity measures in an attempt to cut its deficit. The country has a total national debt of around €300bn, and its deficit in the last year is estimated at 13.6% of GDP.
Second Bailout

In Feb 2012, EU came up with 130 Billion Euros along with 48 Billion Euros to recapitalize banks. It included debt write-off of 53.5% for private creditors holding Greek Government Bonds. The austerity measures included 22% cut in minimum wages. Even after the 48 Billion Euros for recapitalisation of banks, Greek Banks are not able to provide much needed credit to businesses. 

Sources:
  • EFSF (European Financial Stability Fund – a fund mainly from euro zones’s AAA countries, including Germany and Netherlands) will provide 109.1 Billion Euros. The IMF will contribute to the bailout with 28 Billion euros.
  • The Euro Zone provided additional 30 Billion euros and 5.5 Billion Euros from other collective Sources.
Usage:
  • For Investors in Recent Debt Restructuring
  • For repayment of Greek accrued interest
  • For Recapitalization of Greek Banks
  • For Investments/further generation of wealth
Third Bailout

EU Finance ministers have agreed on a new bailout deal for Greece after Athens backed the plan. European Commission President Jean-Claude Juncker said that Greece will stay in the EU. The deal means new loans of up to 86 Billion Euros which will be made available over the next three years and the first instalment of 13 Billion Euros will be made by 20th of August, when Greece must repay about 3.2 Billion Euros to the ECB

Sources:
  • EFSF will provide upto 65.5 Billion Euros (Germany 27% , France 20% and other EU members)
  • IMF will provide 16.4 Billion Euros
Usage:
  • Debt Repayent of 29.7 Billion Euros (14.3 Billion Euros to Euro system; 9.9 Billion Euros to IMF and 5.5 Billion Euros to other privately held Debt)
  •  25 Billion Euros for Bank recapitalization
  • 17.2 Billion Euros for Interest Payments • 7.0 Billion Euros to Private Arears
  • 7.7 Billion Euros as Cash Buffers to maintain Liquidity in Banking systems.
Current Scenario of Greece : 

Greece can’t pay, won’t pay!

 

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