Business Research Methods

Research Proposal
Group # 6

GREEK DEPRESSION

Abhishek Batra (C011)

Mohit Goyal (C025)
Priyanjali Das (C019)
Mridul Chakraborty (C018)

Title: Causes and Impact of Greek Depression

Introduction- A sovereign debt crisis is generally defined as economic and financial problems
caused by the (perceived) inability of a country to pay its public debt. This usually happens when a
country reaches critical high debt levels and suffers from (perceived) low economic growth which
results in loan defaults and rescheduling of loans or bailout packages from other countries or
international bodies.
The report tries to analyze why Greece is in such a condition and the reasons behind it.
Statement of the problem- The present study proposes to understand the causes of Greece Crisis
and the impact of it on European Union (EU)
Scope and limitations of the study- The study will be a basic study wherein the information
including the factors responsible for the current situation of Greece are studied in order to gain a
better understanding of the current scenario. It also includes the response of Greece government to
the situation and the reactionary response of the member nations of the European Union.
The role of macroeconomic variables such as GDP, Debt to GDP ratio, growth rate, resource
utilization, monetary and fiscal policies are studied in this context and how the year on year changes
led to the occurrence of crisis.
Review of literature- The origin of the Greek or Euro zone crisis can be directly or indirectly
associated with the subprime crisis in the US. What is subprime crisis? In a nut shell, the US banks
started granting loans to the poor people at variable interest rates. Apart from this, the lending
behaviour was also encouraged by securitization: the banks were not required to keep those loans in
their balance sheets but could sell them to others.
However, to reduce the rampant inflationary pressure in the economy, the Federal Reserve decided
to increase the interest rates. The increase in interest rates made it difficult for the households to
reimburse their loans. Due to this, the banks started facing multiple problems. First, they were not
able to obtain short term financing. Second, the losses increased slowly due to non repayment of
loans by the households. All these led to loss of trust among the banks present in the market. The
banks were scared to give away loans because of the fear of default which in turn resulted in fall of
liquidity in the economic system. The banks which were mainly dependent on interbank loans faced
serious problems as they had no more access to the short term finances.
As a consequence, many banks defaulted on its payment. As per Federal Deposit Insurance
Corporation, a total of 465 bank failures were reported during the period 2008 to 2012. The
numbers were in stark contrast to the previous reported figures.
Two major reasons can be given for the Financial Crisis becoming an Economic Crisis. First one can
be attributed to the reduction of credit supply by the banks. As the banks found it difficult for them
to receive the short term financing, they became more and more reluctant in giving out further
loans. The consequence turned out to be reduced investments and consumption. Also, a rising
pessimism and wait and see attitude by the households and firms played a crucial role in the
transmission of the effects. The negative news and views about the crisis further weakened the
demand in the economy.

The result of all this, turned out to be a stronger reduction of consumption and investment in the
European countries which led to higher levels of unemployment. Greece along with other countries
in Europe faced a huge economic downturn and a condition of economic recession.
Research Gap- There is limited data available about the Greek Crisis and hence the study.
Research objectives- An Exploratory research will be undertaken to get insights with regards to the
following objectives:

Study the exact reasons of the Greek Crisis

The study of the cause-effect relationship which includes the decisions taken by the government
of Greece in terms of its policies and allocation of resources
Study the Greece GDP, budget deficit and the debt status.

Methodology- An exploratory study will be undertaken. Qualitative and quantitative secondary data
will be studied and analysed. Existing questionnaires, reports, articles and online data is the basis of
this research and will give a better understanding of the situation.

RESEARCH FINDINGS
Timeline that lead to Crisis

In order to be eligible to join Euro Zone Greece evidently cooked its books to show that it had deficit
less than 3% of the GDP. This gave Greece high amount of access to cheap credit. This also led to
misalignment of the monetary policy which is set by ECB (European Central Bank) and fiscal policy
set by Greece.

Defence spending as % of GDP

Govt. Spending as % of GDP

Generally, Government debt as a percent of GDP is used by investors to measure a country ability
to make future payments on its debt, thus affecting the country borrowing costs and government
bond yields.
Due to easy availability of cheap credit, Greece was taking more and more debt in order to pay its
previous debt.
Helped by its decision to join the euro in 2001, Athens kept on spending. The new currency kept
borrowing costs down and made it easy to secure funds from commercial banks at rock-bottom
interest rates, increasing its dependence on cheap loans to fill the spending gap.
Public sector wages doubled and departmental spending soared.
Already high defence costs continued to soar, propelled by years of antagonism with its neighbour
Turkey.
Athens was poorly prepared for the 2008 crash - living off easy credit, while spending on wages
and defence soared, and taxes began to fall away

TAX COLLECTION ISSUES

1/3rd of Greek People are self employed

High Income -Debt Ratio
Income=1.92*what is reported
Potentially 10 billion - 30 Billion Tax not collected
Unemployment=55%(15-28yrs)
Ratio of Debt Payment to Income is more than 1 for many sectors(Financial Services,
Medicine, Retail, Transport)

SCENARIO
After 6 years of recession, Greeces economy expanded by 0.8% in 2014 and is projected to expand
by 1.6% in 2015.
Unemployment Rate: 26%
Youth Unemployment Rate: 51%
Debt to Equity: 174.9%
Consumer Confidence: -30%
The European Union wants to continue austerity measures and a growth pact wherein the
government debt should be less than 60% of the GDP and the max deficit of 3% or less of GDP
The Euro zone, on the other hand, is at the edge, facing a tough question whether or not to bail out
Greece-their weakest link. Certainly, the country will default on its debts.
With a week-long closure of banks and markets throughout the country, the situation went from bad
to worse. With the Euro zone members pressurizing Greece to take a decision-whether to get bailed
out or exit the communion-Greece is on tenterhooks, thinking about the economy on the whole.
The conditions that have been placed include: Increasing the retirement age, cutting down interest
rates, etc. With the growing unemployment and staggering economy, the country has been
experiencing an economic crisis since the 2008 meltdown and the journey has always been
downwards.
References1. A Thesis Presented for the Master of Arts Degree ,The University of Tennesssee , Knoxvi
http://trace.tennessee.edu/cgi/viewcontent.cgi?article=2457&context=utk_gradthes
2. The European Union: Questions and Answers
Kristin Archick, Specialist in European Affairs, July 24, 2015
https://www.fas.org/sgp/crs/row/RS21372.pdf
3. Is Greek Debt really unsustainable? by Andrew Watt , Macroeconomic Policy Institute
http://www.socialeurope.eu/wp-content/uploads/2015/01/OP6.pdf
4. The impact of government spending on economic growth by Daniel J. Mitchell , Ph.D
http://www.heritage.org/research/reports/2005/03/the-impact-of-government-spendingon-economic-growth
5. International Business, Greeces Debt crisis explained
http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisiseuro.html?_r=0