GREECE – A CASE STUDY

What went wrong?

Availability of capital

• Formation of Euro Zone

• Savings doubled to $70 trillion dollars in 5 yrs

• Investors looking for alternatives

Effect of excess capital

• Low cost of Borrowing- paid to borrow !!!

• Increased social security expenses

• High cost of Production

• Incompetent pricing in global market

International Trade Imbalance

Loss of Investors ConfidenceLoss of Investor Confidence• Non compliance of T & C’s

- Budget Deficit 3% of GDP

- Debt level – 60% of GDP

• “AAA+“ – was that right ?

How did this evolve?

2000 2004 2008

Availability of cheap debt Capital inflows were not used to help

the economy grow Beginning of the global financial crisis Shipping and tourism industry affected

by the changes in business cycle Debt began to pile up rapidly

Pre 2008 Era

2008 2012

Global financial crisis of 2008-09 strained public financesFear of European sovereign debt crisis started in early 2010Difficulty in raising funds Bailout package requested from EU & IMFDebt rating downgraded to “Junk” status.Worldwide impact on stock markets

Post 2008 Era

Possible spread to other Countries

What’s the way out?

• Bailout package• Rescue package• European Stability Mechanism• European Commercial Bank• Austerity Measures

Measures adopted

Greece Crater

1. Bailout Package

Bailout Package

2. Rescue Package

Rescue Package

ESM

3. ESM

ESM

4. ECB

ECB

AusterityPackage

Austerity

IncomeTax

45%

40%

VAT

23%

19%

Luxury tax increased by 10%

New duties levied on Petrol

New tax is levied on electricity charges

Duties on imported cars increased by 30%

Big cuts in public employee expenditures

Privatization by disinvestment

Reduction in number of Municipalities

Increase of retirement age from 60 to 65

Sale of Assets to Other Nations Conversion of Euro into the Earlier Currency “The Drachmas”

Other measures

SOCIAL IMPACT

Unemployment rate at 19.8%

• Highest since Greece joined Eurozone• 230 thousand people lost job in last year• @42.5% for 15-24 age group, 22.6% for 25-34

Unemployment benefit only for 1 Year

• < Euro 500 per month• 280k receive state benefits• Of the total 811k unemployed

7 out of 10 considering working abroad

• Unemployment rate to reach 20% in one year• Economy’s biggest problem• 5% long-term unemployed

65,000 Retail stores closed

• Private Sector wages cut by 10-20%, Govt. 20-30%• Consumption fell 8.6%, HH reduced spending by 1.6B euros• Consumption is Greek economy’s driving force, production lags

behind

NGO support critical

• Significant increase in the number of people relying on NGO’s

• 25% increase in homelessness• At the main canteen, 3500 people/day come

for food & clothing, compared to 100 people/day 5 years ago

• Average age of people seeking help reduced to 45 from 60 in 2 years

Debt crisis causes political turmoil

• 87% said they are unhappy with the quality of their lives

• > 100k supporters/day irrespective of the parties• Support for being part of Euro came down to 58%

from 72%

Change in Leadership

• PM George Papandreou quits in Nov 2011• Lucas Papademos to lead the new unity Govt.• No party have enough support to win• Rejection of the current political system has

added to the uncertainty

Will this impact India?

EXPORTS

INDIA’S EXPORT PROFILERegion FY 2010 (%) FY 2011 (%)

EU Countries 20.20 18.60Africa 5.80 6.50Asia 21.80 22.70WANA 22.00 22.60ASEAN 10.10 10.90North America 11.60 10.70Greece 0.25 0.14

FOREIGN DIRECT INVESTMENT

46%

17%

16%

8%

7%6%

1% 1%Mauritius

Euro Zone

Singapore

USA

UK

Japan

UAE

Switzerland

FOREIGN INSTITUTIONAL INVESTMENT

US mn $ FII Flows2003-04 10,918 2004-05 8,686 2005-06 9,926 2006-07 3,225 2007-08 20,328 2008-09 (15,017)2009-10 29,048 2010-11 29,422

FII MOVEMENT

Financial Year

FII Flows (US mn $)

2000-01 1,847

2001-02 1,505

2002-03 377

2003-04 10,918

2004-05 8,686

2005-06 9,926

2006-07 3,225

2007-08 20,328

2008-09 -15,017

2009-10 29,048

2010-11 29,422

EXCHANGE RATES

CONTROVERSIES

• Rating agencies suffer from a conflict of interest

• Role of the English language press questioned

• Hedge fund managers launch bearish bets

CONTROVERSIES

WILL GREECE SURVIVE?