Emperical Study Greece Crisis
-
Upload
dillip-khuntia -
Category
Documents
-
view
216 -
download
0
Transcript of Emperical Study Greece Crisis
-
8/9/2019 Emperical Study Greece Crisis
1/7
Stimulus Package: An Empirical Analysis of
Greece
Dillip Khuntia
Prafulla Kumar Sahu
Master of Finance & Control
Utkal University
Reviving Greece; Is the Greek crisis the beginning of a deeper sovereign debt crisis that
could destabilise the Euro zone?
This article argues the Euro zone is no closer to a debt crisis than the US, but some
members are getting close. EU governments could bailout Greece and, to avoid having
to do so, they should clarify their stance on the matter.
The Greek crisis has led to fears that this is only the beginning of a deeper
sovereign debt crisis that could ultimately destabilise the Euro zone. Are these fears
exaggerated? How to deal with these problems?
Financial markets now ask the question of whether the addition of government
debt is sustainable. Clearly the rate of increase of the last two years is unsustainable. But
with Euro-zone government debt standing at 85% of GDP at the end of 2009, the Euro-
zone is miles away from a possible debt crisis.
-
8/9/2019 Emperical Study Greece Crisis
2/7
Things are different in some individual countries, in Greece in particular, a
country with a weak political system that has been adding government debt at a much
higher rate than the rest of the Euro-zone and that in addition has a debt level exceeding
100% of GDP. So, while the Euro-zone as a whole is no closer to a debt crisis than is the
US, some of its member states have been moving closer to such a crisis.
Is it conceivable that a debt crisis in one member country of the Euro-zone
triggers a more general crisis involving other Euro-zone countries? My answer is that
yes, it is conceivable, but that it can easily be avoided. The main concern lays at the
point that bailout can be done when the banks fail and the euro countries can follow UK
model to lend rentlessly to markets and to resort to fiscal and monetary measures to the
scope of a potential second global financial crisis so soon after the credit crisis of 2008-
09 goes far beyond the euro zone, the 16 nations sharing a common currency, the euro.
Last week's dramatics could have been far worse. And they may yet manifest
themselves in an ugly fashion in weeks to come if the euro-zone countries don't rescue
what Greek Prime Minister George Papandreou described last week as "the weakest link
in the euro zone."
Greece accounts for just 3 per cent of the euro-zone economy. The crisis in the
cradle of Western civilization serves merely as proxy for government over-indebtedness
everywhere.
-
8/9/2019 Emperical Study Greece Crisis
3/7
Only a few months ago, a Dubai on the edge of default had to be bailed out by oil-
rich neighbour Abu Dhabi. A debt-strapped Argentina recently tried and failed to pay
debts by raiding its central-bank treasury.
Greece's debt-to-GDP ratio is an eye-popping 95 per cent. But then, the U.S. isn't
far behind at 84 per cent. (The Canadian ratio is estimated at 35.5 per cent in the
current fiscal year.) Greece's deficit-to-GDP ratio is an alarming 13 per cent. But then,
Britain isn't far behind at 12.6 per cent.
A debt crisis is conceivable
-
8/9/2019 Emperical Study Greece Crisis
4/7
Lets start with the first part of the answer: It is conceivable. Financial markets
are nervous and the most nervous actors in the financial markets are the rating agencies.
One thing one can say about these institutions is that they systematically fail to see
crises come. And after the crisis erupts, they systematically overreact thereby
intensifying it.
This was the case two years ago when the rating agencies were completely caught
off guard by the credit crisis. It was again the case during the last few weeks. Only after
Dubai postponed the repayment of its bonds and we had all read about it in the FT, did
the rating agencies realise there was a crisis and did they downgrade Dubais bonds.
The Greek crisis represents a crucial test for the European Union since a default,
or a bailout that prevents one, would be a serious blow to the credibility of the euro.
Membership in the shared currency demands that governments keep their budgets
under control.
Financial markets, it is feared, would respond to a default by selling off the bonds
of other struggling euro governments. That would make it more costly for them to
borrow money, deepening their predicament.
The world is awash in potentially unsustainable debt.
-
8/9/2019 Emperical Study Greece Crisis
5/7
The U.S. looms largest. President Barack Obama just tabled a budget that
projects a doubling in America's national debt, to $28 trillion (U.S.), by decade's end.
That's twice the size of the U.S. economy.
Few nations emulated Canada's example of 11 consecutive budget surpluses
heading into the Great Recession. And so the necessary stimulus spending to inject life
into paralyzed economies worldwide has inflated already burdensome debt loads
accumulated by less prudent jurisdictions than Canada, Australasia and a handful of
others.
To cover their stimulus-related and other debt obligations, national governments
are expected to borrow a staggering $4.5 trillion (U.S.) this year. That's almost triple the
average for advanced economies over the previous five years.
Any hint that certain issuers of those government bonds and other borrowings
are flirting with deadbeat status will jack up the interest rates bond-buyers will demand.
That could easily lift the general level of interest rates worldwide. Which in turn would
raise the cost of capital for businesses and individuals. And that would be a major
impediment to economic recovery at a time when central banks are trying to keep their
key lending rates at or near zero to encourage investment and job creation.
In order not to set off this "global debt bomb," as Forbesdescribes the plight on
its latest cover, the EU and the better-off EU nations haven't much choice but to rescue
-
8/9/2019 Emperical Study Greece Crisis
6/7
Greece. Recalling how the failure of just one New York brokerage, in September 2008,
turned a local banking problem into a full-blown global crisis, EU officials now regard
Greece as "Europe's Lehman Brothers."
A coordinated EU bailout of Greece, spearheaded by Germany, would defend the
value of the euro. It would bolster an EU whose reputation would otherwise suffer from
having abandoned one of its members. And it could stave off a currency and debt crisis
that would likely be a worldwide spectre.
In Athens last week for a conference, Nobel laureate Joseph Stiglitz, a liberal
economist, counselled against the austerity measures the Greek government has just
imposed including wage freezes, pension cutbacks and budget slashing across
government departments. He cavilled against the "deficit fetish" for which the
International Monetary Fund and the World Bank are notorious.
The compelling counter-argument is that global markets aren't as rational as
Nobel laureates. They need assurance now that Greece will not become an insolvent
Iceland. And that the EU will backstop Spain, Portugal, Ireland and any other EU
member that has obligations outstanding to world banks, already undermined by losses
on U.S. subprime, or junk, mortgages and other "toxic assets."
Even Stiglitz's fellow liberals on the Continent are insisting Greece "be helped with all
the fiscal brutality" of which the EU is capable, as Germany's centre-left Suddeutsche
-
8/9/2019 Emperical Study Greece Crisis
7/7
Zeitung editorialized late last week. The EU "has taken the first step to putting the
country under its control, and virtually deprives it of its sovereignty. This is the worst
imaginable punishment for a nation."
Reference
The Analyst RBI Publications Icfai Business Review www.yahoofinance.com www.moneyvidya.com www.google.com