2. • What is sovereign debt crisis?
• How did the Greek crisis originate ?
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3. What is sovereign debt crisis?
• Sovereign debt crisis means the sovereign
government's borrowing from domestic and
external markets is in excess of its capacity to
repay, resulting in loan defaults requiring
rescheduling of loans or bailout packages from
other countries or multilateral institutions
such as IMF.
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4. How did the Greek crisis originate ?
• The crisis in Greece surfaced in 2007-08 , when it came to
be known that Greece was not in a situation to meet its
repayment obligations to its external creditors. The budget
deficit of Greece was in the range of 13.6% of its gross
domestic product. The stock of debt was equivalent to
115% of the gross domestic product. The debt problem was
further compounded by the fact that nearly three-fourths
of the government debt was held by foreign institutions,
particularly foreign banks. Reportedly, investment banks
misled investors into investing in government bonds of
Greece by being secretive about the actual state of affairs.
The rating agencies played accomplice and allegedly 'failed'
to assess the correct fiscal position.
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5. Euro zone
• 27 members
• Freely transferring capital , goods etc
• Encourage financial activities after world war II
• NO political intervention
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6. ECB
• 1998 – Main aim is to control inflation and
have encouraging financial policies
• Common currency from Jan 1 , 1999
• Admin this currency
• Member like UK decided to go with own
currency and monitory policy
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8. Greece
• From 2000 to 2007 growth rate about 4.2%
• Deficit increased very high from 1993
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
€ billion 122.3 141 151.9 159.2 168 183.2 195.4 224.2 239.4 262.3 298.7 328.6
% GDP 94 103.4 103.7 101.7 97.4 98.6 100 106.1 105.4 110.7 127.1 142.8
GDP
3.4 4.5 4.2 3.4 5.9 4.4 2.3 5.2 4.3 1.0 –2.0 –4.5
growth
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9. Key Terms
• Bailout – Act of loaning or giving capital to an
entity that is in danger of failing , in attempt to
save it from bankruptcy
• Austerity – Policy of deficit cutting , lower
spending & reduction in public benefits or
services. While reducing spending , coupled
with increase in taxes to pay back creditors to
reduce debt.
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10. A high-yield bond (non-investment-grade
bond, speculative-grade bond, or junk bond)
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11. Important happenings
9 May , 2010
27 April ,2010 27 members of Euro
Rating decreased Zone come together
and formed EFSF
Investors may have
fear to loose 30 to 40
23 April , 2010 % of investment European Financial
Stability Facility
EU- IMF bail out World Market crashed
package
5 March,2010 Immediate €45 billions
ECONOMIC
PROTECTION BILL
Total €115 Billion
Save €4.8 Billion
5% interest rate
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12. What if Greece defaults debt ?
• Governments rarely default on the entire
value of their debt. Instead, they often enter
into negotiations with their bondholders to
agree on a delay or partial reduction of their
debt payments, which are often called a debt
restructuring or 'haircut'.
• Investor will loose money , market may
collapses
• Value of € may fall down
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13. Social & Political problem
• Social – Against Austerity
• Political willingness to help needed
• If totally bailout Greece other from PIIGS
expect the same
• Unique problem – Central monitory policy but
individuals need to run on own
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14. EURO
• We can’t predict that its end of EURO
• But certainly it raises doubts over currency
• Question over its trust of creating option of
currency reserves to £ Pounds ,¥ Yen , $ Dollar
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