Greek Crisis: Background, Key Dynamics and Impact on India
Greek Crisis: Background, Key Dynamics and Impact on India
Question: There has been a breakdown of talks between Greece and its creditors on extension of euro zone bailout funding beyond June 30th 2015. Examine the different dynamics underlying the crisis and the possible impact of the Greek crisis on India. Also discuss its background.
Background
- When Greece joined the Euro in 2001, confidence in its economy grew and a big boom followed
- Following the 2008 financial crisis, every country in the EU underwent recession and as Greece was most in debt and poor, it suffered the most
- Unemployment rate reached 28% in 2013 which was worse than what the US suffered during the Great Depression
- As Greece shared its monetary policy with the rest of Europe, it could not boost the economy through the printing of the drachma
- Greece is squeezed between crushing debt burden-177 percent of GDP which is around twice the level in the US
- For the past 5 years, Greece has been negotiating with the European Central Bank/ECB, European Commission and IMF (also known as the “troika”) for financial assistance with debt burden
- Since the year 2010, Troika has been providing loans for Greece in return for tax hikes and spending cuts
- In January, new left wing PM Alexis Tsipras was elected
- His government has sought a more favourable agreement than the former bailout deal
- Greek default could trigger a financial panic or even a Grexit(Greek Exit) from the EU
- Greek government is holding a referendum on July 5th to discuss if the Troika’s demands for further austerity should be taken up or the Troika could be defied leading to a default
- With the Greek economy melting, the citizens have been withdrawing money on an unprecedented scale and banks have been closed and withdrawals limited to 60 Euro per day as a result of this
Key Dynamics
- Athens may fail to make the USD 1.6 million euro debt repayment to IMF
- Government is urging the citizens to reject the offer to release 15.5 billion euros for 5 months in return for tax increases and spending cuts
- Greece may impose capital controls and it may miss its payment to IMF
- EU officials are saying Greece may be declared to owe arrears rather than being in debt
- ECB will be given the space to continue funding the Greek banks with emergency liquidity assistance yet default may change the picture
- ECB has indicated they will support Greek banks as long as there is enough collateral
- Clear default of the IMF and no financing from Euro zone will mean value of Greek collateral will fall. This will end ECB’s support line.
- ECB may also wait before withdrawing support until July 20th when Greece has to redeem maturing bonds worth 3.5 billion euros held by ECB
- If Greece fails to replay its debts, ECB may not be able to continue providing support
- IoUs and slow exit from Euro is another possibility
- Greece is likely to introduce parallel currency in the form of debt instruments like IoUs which could become the new Greek currency
- In the unlikely event that Greece votes yes for reforms, government would negotiate a third bailout programme with global leaders
Impact on India
- Greek crisis could trigger capital outflows from India
- Situation was dynamic and it could have an indirect impact on India in terms of outcome for European currency euro
- India is monitoring developments following break down of talks between Greece and its creditors
- BSE lost 500 points in early trade over the issue and later recovered 430 points from the day’s low to close at 166
Facts and Stats
- Greece owes foreign creditors about 280 billion euros
- This includes $242.8 billion to public or quasi-public entities, such as the International Monetary Fund, the European Commission and European Central Bank.
- Greece's anti-austerity Syriza party held out for a referendum, hoping voters would back its push to get creditors to back down.
- It mposed capital controls to halt the money flight out of the country and closed banks for a week.
