[Economy] What If Greece Exits from Eurozone? Implications on Indian and World Economy

Greece sovereign debt crisis

[Economy] What If Greece Exits from Eurozone? Implications on Indian and World Economy

  1. How does Government finance its operations?
  2. What is Sovereign Debt?
  3. What is Sovereign Debt Crisis?
  4. Why Greece has high Sovereign Debt?
  5. TimeLine of Events
    • January 2010
    • February 2012: Auserity Bill
    • May 2012: Elections in Greece
  6. What’s the EU Exit Rumor?
  7. consequences IF Greece Exits Eurozone?
  8. Impact on India?
  9. Food for thought

How does a Government finance its operations?

  • Obviously by putting direct and indirect taxes on your and me. But even after taxing us, there is not enough money to run any bogus Government schemes, then what can they do? That’ll give the answer for…

What is Sovereign Debt?

  • Sovereign debt is the money a government borrows from its own citizens or from investors around the world.

Then what is Sovereign Debt Crisis?

  • When Government doesn’t have capacity to pay back the Sovereign Debt, it called “Sovereign Debt Crisis”.

What is a government bond?

  • Governments borrow money by selling bonds to investors.
  • In return for the investor’s cash, the government promises to pay a fixed rate of interest over a specific period – say 4% every year for 10 years.
  • At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt.
  • Government bonds have traditionally been seen as ultra-safe long-term investments (aka “Gilt Edged Securities”) and are held by insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.

What is a bond market?

  • Once a bond has been issued – and the government has the cash – the investor can hold the bond and collect the interest every year until it is repaid. But investors can also buy and sell bonds that have already been issued on the financial markets – just like buying and selling shares on the stock market.
  • The price of the bond will rise and fall according to speculation and analysis by experts.

For example, you bought a Government of India bond. It says Rs.100 / 4% / 2014.
That is, you paid the “MRP” Rs.100 to Indian Government, and every year they’ll pay you 4% of the Rs.100 until 2014. And on 2014, they’ll also repay you the entire Principal of Rs.100
Suppose things go nice and smooth until 2012. But Then

  1. There is heavy inflation, you can’t buy even peppermint for Rs.4 and or
  2. There is a rumor that Government will default and its payment and won’t repay you any money.

In either case, you want to “Exit” from game before its too late. You want to sell the bond to another person and recover whatever money possible and reinvest that money in something even safer and more profitable, for example starting your own Saas-bahu serial. It doesn’t require lot of brain or money (*if you ask the actresses to bring their own makeup, expensive sarees and jewellary), and still you get to earn plenty of ad-revenue from anti-aging and skin whitening creams.
So, you come to sell this bond to me. But I also read the newspapers (except The Hindu), so I know things are not good with Indian Government or economy, so I won’t pay you Rs.100 but only Rs.90 for your bond. You’re not in a position to negotiate, you’re panicked, you just want to exit from this game and you fear that if you continue to hold this bond, 15 days from now, people won’t even pay you Rs.50 for it.
Thus I buy the Bond worth Oringally “MRP” of Rs.100, for Rs.90 from you.
Question: why would I do that? Why would I buy a “not so good-looking” bond from you?

  1. My profit is more than yours! How? Because, You invested Rs.100 and get Rs.4 every year, so your profit (technically known as Bond-yield) is (4/100) x 100 = 4%.
  2. While I invested Rs.90 and get Rs.4 every year, so my profit (Yield) is (4/90) x 100 =4.44…% which is better than your 4% yield.
  3. I may be speculating that after a month or two, the situation with Indian economy / Inflation / Government will improve and then I would be able to buy a peppermint for Rs.4

Why do bond markets matter?

  1. Because they determine what it costs a government to borrow.
  2. When a government wants to raise new money, it issues new bonds, and has to pay an interest rate on those bonds that is acceptable to the market.
  3. The yield (profit) at which the market is buying and selling a government’s existing bonds gives a good indication of how much interest the government would have to pay if it wanted to issue new bonds.
  4. So, for example, Spanish 10-year bond yields have risen above 6% in recent years. That means that if the Spanish government wants to borrow new money from the bond market for 10 years, it would have to pay an interest rate on the new bond of more than 6% to seduce the buyers.

Borrowing beyond capacity

Governments can just go on print “Bonds” on their HP printers and sell it to junta, because money doesn’t fall from sky. Someone someday will have to pay for it. If they don’t, then the Bond Yield will increase and a point will come when you (Government) have to offer 36% interest rate on fresh bonds to seduce new investors. Therefore, Governments, put limit on their own borrowing. In India we’ve a thing called FRBM (Fiscal responsibility and budget Management).
For Europen Union, back in 1997 when they were forming the gang, they had decided that each gang-member (country) will not borrow beyond 3% of its GDP per year.
But Government of Greece manipulated** its account-books to appear as if they were staying within the 3% limit, but actually they had been borrowing much above their “Aukaat” – almost 13% of their GDP.
**(might have taken coaching from Ramalinga Raju!)

Why is Greece such a messed up Economy?

I’ll copy paste the answer from Amol Agrawal’s article.

  • around 1,2 million people are employed by the Greece Government —this includes clerks, teachers, doctors, and priests—which amounts to almost 27 percent of the total working population of the country (France24 2010). Thus one out of four working Greeks is employed wholly or partly in the public sector. More than 80 percent of public expenditure goes to the wages, salaries and pensions of the civil servants.
  • Getting a civil service job in Greece is widely perceived as being granted a sinecure and not as a contractual obligation to work. The resulting inefficiency of the civil service reinforced a system of promotions based on seniority and not on merit or talent. One can only move up the ladder more quickly if one has good connections with politicians and trade unionists.
  • This huge bureaucracy just keeps making laws. From 1974 onwards, 100,000 laws were passed around 2857 per year!
  • Then there are rules limiting competition. You pay a fees to lawyers for everything. You need a degree licence for doing anything in Greece
  • In Greece one can find a whole set of laws mandating opening and closing hours of various enterprises, or defining the geographical proximity where two similar establishments can operate, setting minimal prices for various professional services, issuing licenses and preventing or limiting competition.
  • Similar restrictions apply to the operation of drugstores. You are only allowed to own and operate a drugstore in Greece if you hold a degree in pharmacology. The same applies to opticians. You can only own a shop selling spectacles if you hold a degree in optics!
  • If you have a business and you want to advertise your brand or product you have to pay an amount equal to 20 percent of the advertising expenses to the pension funds of the journalists.
  • Each time you buy a ticket on a boat, 10 percent goes to the pension fund of the harbor workers. A part of the ticket price that covers the insurance of passengers goes to the sailors’ social security fund.
  • If you sell supplies to the Army, you will have to pay 4 percent of the money to the pension funds of the military officers. When you buy a ticket at a soccer game, 25 percent of the amount goes to the pension funds of the police.
  • It is estimated that there are more than 1,000 such levies whose total cost amounts, according to some calculations, to over 30 percent of the country’s GDP
  • Greece is a society dominated by rent seeking rather than wealth producing activities. The fact that two thirds of the electorate is living partly or wholly on government hand-outs significantly affects the ideological narratives that are popular in the country.

–end of copy paste–
In short, Greece is not a country but Air India running MNREGA. And adding insult to the injury, due to the recession in USA, the tourism and export industry of Greece had took a huge setback.

TimeLine of Events

January 2010

  • An EU report starts talking about the irregularities in Greek accounting procedures.
  • Concern starts to build about all the heavily indebted countries in Europe – Portugal, Ireland, Greece and Spain (PIGS).

A.Raja could give the loans to save these countries but stupid Indian media gets him arrested, while Mohan continues to loop his repeated tape on every 15th August speech that Naxalites are the biggest thread to India, while Pranab continues to loop his tape that everything bad with Indian economy is because of “Global Situation”.Anyways Fast forward to
February 2012: The Austerity Bill
EU To Greece: Ok we’ll give you the money to pay off your debts, and we call this money “Bailout money” but you’ll have to shut down your Air Indias and MNREGAs and we call it “Austerity Measures”.
PM of Greece: “Whaat an idea sir-ji.”
Greece Government introduces the austerity bill in parliament which included following measures

  1. 15,000 public-sector job cuts
  2. liberalisation of labour laws (businessmen can easily hire and fire employees)
  3. Lowering the minimum wage by 20% from 751 euros per month to 600 euros.

Junta of Greece: “Not a good idea sir-ji”
and they start rioting on the street. But since Government kept the promise of introducing reforms, EU gives them billions of Euro as loan.
May 2012: Elections in Greece

  • But no party gets clear majority and no coalition Government is formed.
  • So they plan to hold election again on June 2012, and a judge has been appointed to head an interim government in the mean time.

What’s the EU Exit Rumor?

There are two major parties in Greece.

  1. The right wing party: they say we continue in Eurozone, agree to their demand, cut more jobs and public spending for receiving more bailout money.
  2. The Left Wing Party: they want to renegotiate the loan-terms with EU and IMF and donot want to implement any austerity measures. They’d take a hostile stand against EU, although in media they say “We want to continue in Eurozone” but their agenda and gesture speaks otherwise.

See this same like Paki PM comes to India and speaks in one tone but when he’s back in an election rally in Lahore he’d be speaking an a totally different tone about Kashmir. And there he’ll say India is not cooperating with us and India is the bad guy.

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