THE GREEK CRISIS Gikas A. Hardouvelis *. GREEK IMBALANCES BECOME VISIBLE COMMENCEMENT TIME IN GREECE & EMU SUMMARY. Professor, Dept. of Banking & Financial Management, UNIPI Economic Adviser & Director of Research, Eurobank EFG. UNIVERSITY OF PIRAEUS DEPARTMENT OF BANKING
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
THE GREEK CRISIS
Gikas A. Hardouvelis *
UNIVERSITY OF PIRAEUS
DEPARTMENT OF BANKING
AND FINANCIAL MANAGEMENT
I.GREEK IMBALANCESBECOME VISIBLE
The international crisis was imported in Greece
… and uncovered its imbalances
I.1 Greece: Collapse ofTrade in Q4-2008
Exports & Imports of goods & services
I.2Leading markets to question Greece
to around pre-Lehman levels
Greek spreads tell a different story
(10-yr $ bonds over US bonds)
Spread over 10YBund
Source: JP Morgan EMBIG, Bloomberg
Source: Bank of Greece
Source: European Commission
Ι.2 The most indebted country in EU-27
% GDP, 2009
General Government Debt
Source: European Commission
ΙI.COMMENCEMENT TIMEIN GREECE & EMU
ΙΙ. EU/IMF/ECB adjustment program: Key characteristics
ΙI. The EU/IMF/ECB adjustment program
ΙI. The EU/IMF/ECB program: Detailed forecasts
II. EFG baseline scenario on Govnt Debt Dynamics
* Elasticity excluding the effects of IMF program measures
A nervous market
5-yr CDS – Greece & Ireland
The argument goes that if the EU/ECB/IMF Program succeeds and in 2012 Greece begins generating the first primary surpluses, then it will be tempteddefault or restructure its huge debt. This cannot happen because:
The stakeholders of GGBs are primarily Greeks and other EMU members, who have an incentive against the default solution
Greek banks own approximately €45 bn, pension and other funds another €25bn, individuals around €15bn. Thus, a haircut would force the government to bail out its banking sector and its pension system.
EMU banks hold a major chunk of GGBs. EMU members would object to a default. It may create FI bankruptcies in the Euro Area. Thus, a Greek default would be an EMU decision, not a Greek decision.
The ECB holds GGBs as collateral. Greece cannot go against its own lender of last resort.
EMU countries have given €80 bn in loans, on which Greece cannot default
Haircuts provide only a short run solution. Debt-to-GDP ratio will soon shoot up if the underlying causes are not cured.
Huge adjustment costs during the default/restructuring process and inability to tap the markets for a long time.
Contagion cannot be ignored in the European financial sector with a possible spread of fear for EMU sustainability
Yet, easy to pass legislature early on, easy to cut many expenses, evidence of good execution thus far
Yet, program is front-loaded
Yet, Greece is a relatively closed economy and over half of its exports are channeled outside the Euro Area
Yet, if program is successful risk premia will decline, while a lengthening of the maturity of the EMU €110 bn loan is likely (IMF suggested 5 years)
Greece would default only if Euro Area collapses