Dr Kapil K Sharma
Greece one of the oldest civilization and a trendsetter for rest of world is in such a bad shape is really a matter of concern. A country who hosted Olympics in 2004 and was having one of the highest growth before 2008 economic depression certainly reached a situation of bankruptcy is worth a topic of discussion. I have not seen the fall of a developed nation like this in recent history. Various reasons responsible for fall of Greece includes.
Loss of credibility-In April 2010, adding to news of the adverse deficit and debt data for 2008 and 2009, the national account data revealed that the Greek economy Had also been hit by three distinct recessions (Q3-Q4 2007, Q2-2008 until Q1-2009, and a third starting in Q3-2009), which equaled an outlook for a further rise in The debt-to-GDP ratio from 109% in 2008 to 146% in 2010. Credit rating agencies responded by downgrading the Greek Government debt to junk bond status (below Investment grade), as they found indicators of a growing risk of a sovereign default, and the Government bond yields responded by rising into unsustainable territory – Making the private capital lending market inaccessible as a funding source fords Greece.
TAX EVASION- unlike other European Union countries tax evasion was quite rampant in Greece. During happy days country was able to live with this but at the time of Financial crisis economy was unable to bear this burden. Current account deficit crossed the critical limit. This lead to financial breakdown. Another persistent problem Greece has suffered in recent decades is the Government’s tax income. Each year it has been below the expected level. In 2010, the estimated tax evasion costs for the Greek Government amounted to well over $20 billion.The latest figures from 2013, also show that the State only collected less than half of the revenues due 2012, With the remaining tax Owings being accepted to be paid by a delayed payment schedule. As of 2012, tax evasion was widespread, and according to Transparency International’s Corruption Perception Index, Greece, with a score of 36/100, ranked as the most Corrupt country in the EU. Non compliance with bailing out institutions-
2 May 2010, the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF), later nicknamed the Troika, responded by launching a €110 Billion bailout loan to rescue Greece from sovereign default and cover its financial needs throughout May 2010 until June 2013, conditional on implementation of Austerity measures, structural reforms, and privatization of Government assets. A year later, a worsened recession along with a delayed implementation by the Greek Government of the agreed conditions in the bailout programmer revealed the need for Greece to receive a second bailout worth €130 billion (including a bank Recapitalization package worth €48bn), while all private creditors holding Greek Government bonds were required at the same time to sign a deal accepting extended Maturities, lower interest rates, and a 53.5% face value loss.
The second bailout programmer was finally ratified by all parties in February 2012, and by effect extended the first programmer, meaning a total of €240 billion was to Be transferred at regular tranches throughout the period of May 2010 to December 2014. Due to a worsened recession and continued delay of implementation of the Conditions in the bailout programmer, in December 2012 the Troika agreed to provide Greece with a last round of significant debt relief measures, while the IMF extended Its support with an extra €8.2bn of loans to be transferred during the period of January 2015 to March 2016.
The fourth review of the bailout programmer revealed development of some unexpected upcoming financing gaps. Due to an improved outlook for the Greek economy, With achievement of a Government structural surplus both in 2013 and 2014 – along with a decline of the unemployment rate and return of positive economic growth in 2014, it was possible for the Greek Government to regain access to the private lending market for the first time since eruption of its debt crisis – to the Extent that its entire financing gap for 2014 was patched through a sale of bonds to private creditors. The improved economic outlook was replaced by a new fourth recession starting in Q4-2014, related to the premature snap parliamentary election called by the Greek Parliament in December 2014 and the following formation of a Syria-led Government refusing to respect the terms of its current bailout agreement. The rising political uncertainty of what would follow, caused the Troika to suspend all scheduled remaining aid to Greece under its current programmer – until such time when the Greek Government either accepted the previously negotiated conditional payment terms or alternately could reach a mutually accepted agreement of some new updated terms With its public creditors. This rift caused a renewed and increasingly growing liquidity crisis (both for the Greek Government and Greek financial system), Resulting in plummeting stock prices at the Athens Stock Exchange, while interest rates for the Greek Government at the private lending market spiked, making it once assegai inaccessible as an alternative funding sources
Effect on India
It is important to gauge the effect of this crisis on India. Various commentators have referred to this issue. Finance secretary Ashok Chawla recently stated that he expected the crisis to have a minimal impact on India, while one of the deputy governors at Reserve Bank of India SoberGairn said, there may not be any impact in the long term.
It is important to study this a bit closely with a focus on three aspects, mainly the internal markets, external trade and the currency effect.
Markets
If one looks at market sentiments, the euro insecurity managed to wreck havoc on global markets, including India, and the euro instability has become a larger issue than expected. Particular areas of worry are not countries such as France or Germany, but the mid-tier euro regimes such as Portugal, Spain, Ireland and Italy. For example, exposure by European banks to Spanish debt (at approximately $800 billion) is considerably higher than their $200 billion exposure in Greece.If the Eurozone is adversely affected, global economic growth would take a hit resulting in deflationary pressures, eroding wealth and falling prices. With stock markets at a crisis due to the combined debt and currency effect, there is a worry that the crisis will spill over to India. Traditionally, India has prided itself on the fundamentals of its domestic economy. During the global financial meltdown, the Indian Government intervened through short term corrections in the money market. Such intervention and control helped contain the effects of a much larger crisis. A prolonged and widespread debt crisis in Europe could have a substantial negative impact on the Indian economy. Market sentiments affect India in two ways. In the short run, the impact is likely to be direct. If the debt crisis spreads to other nations in Europe and their banking systems, a possibility is that European entities could start withdrawing funds from Indian stock markets. This will negatively impact the Indian stock market and lead to lower reserves as well as depreciation of the Indian rupee denting the growth prospects in the export sector. This situation may take some time to correct borrowing norms and implementing a robust monitoring mechanism. However, exchange control and rigid taxes (eg withholding on interest payments) remain an area of concern.
While investors exit stocks in Europe, India may just look logically as the next favourable destination. It is however on India to take advantage of this.
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