Financial Markets

Financial Markets Assignment

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May 4, 2016

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Question 1
Causes of Greek Financial Crisis
Government Spending
Greek showed marvelous economic growth among the Eurozone countries in the first decade of
21st century. The growth rate observed is averaged at 4.2% yearly from 2000-2007. The reason
was the high capital inflow coinciding with the deficits and the strong support from the Euro.
The spending of the Greek government is, however, large on certain activities like military
expenses, pensions, social benefits and public sector jobs. The benefits for the government
employees were best in the interest of the employees. For example, if a father of an unmarried
girl is a governmental worker, she is entitled to the pension fund after the death of the father.
Similarly, generous benefits were paid to the employees without clear reasons and proper
appraisal. If a worker shows regularly on time at work, he will be entitled to a bonus (Obstfeld
and Rogoff, 2009)
Moreover, the government has been spending a lot on the defense. Greece is the second-biggest
spender on the defense in NATO. The highest percentage of the GDP goes to the defense
industry. These expenses contributed to the high budget deficits. The budget deficits were
increasing before the commissioning of European Union. However, the global crisis worsened
the economic turmoil and the debt to GDP ratio of Greece struck 120% in 2010. This ratio was
expected to hit a high of 198% in 2012 (Reinhart and Rogoff, 2010).
Greece has been devaluating the currency before the introduction of EU. However, after
the integration into the EU, the tool of devaluating disappeared and so does the international
borrowing. Such events backed by the financial crisis led to the worst conditions. The shipping
and the tourism industry of the country faced a hard blow due to the global crisis leaving a
negative impact on the GDP growth.

Trade Balance
The balance of payment contributed to the financial crisis of the Greece. After the
creation of the EU, the capital flew to the Southern Europe leading to the problems of balance of

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payment due to the overvaluation in South. The balance of payments started to manifest in the
budget deficit. The trade deficit of Greece was an average of 9.1% of GDP from 2000-2011. The
budget deficit due to the trade deficit requires an inflow of the foreign capital. The government
has been borrowing to cover up the deficit. The foreign capital surplus stopped during the global
financial crisis. The government had to look for other ways to reduce the deficits substantially.
One way for the reversal of the surplus capital is to devalue the currency. However, devaluing the
Euro was out of control of Greece. The government relied on the reduced income and huge
budget deficits (Buiter and Rahbari, 2010).

Tax Evasion
Greece has faced the menace of corruption and tax evasion in the past. The similar trend
is continuing in the present as well. The tax income from the government has been below the
anticipated mark each year. In 2010, the costs of the tax evasion reached $20 billion. The
government has failed to collect more than half of the tax income, and the payments have been
delayed or scheduled. The political corruption has soared the matters further. The country has
been ranked as the most corrupt in EU. The Transparency International has given a score of 36
on a scale of 100 to Greece on Corruption Perception Index. The evaded money has been
laundered through the Swiss banks amounting to a total of 80 billion Euros. The government is
trying to negotiate a treaty with the Swiss government to address the burgeoning issue (Sinn,
2011).

Key Steps Taken by Government

The government has taken bold steps in improving the taxation system in the country.
The tax reforms had been implemented in 2010 to ensure that the state capital is collected and
used in lowering the fiscal deficits. In 2011, the Finance Minister called upon all the individuals
owing more than 150,000 Euros to the state in tax and asked to clear their accounts immediately.
Moreover, the government has regulated the black market transactions to include the 25% output
into the tax net. The state has taken measures to ensure that the income of the people gets
documented, and the taxes are paid on the income. Similarly, Government and the legislative
bodies have taken steps to improve the ease of doing business in Greece to ensure that the

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foreign capital starts to pour in again in the form of direct investments in the economy (Sinn,
2011).
Furthermore, the Parliament has negotiated and passed eleven austerity packages till now
to improve the financial mechanism in the country and to reduce the governmental spending
(Sinn, 2011). These austerity packages are aimed at reducing the governmental spending on the
bonuses, increased income taxes, fuel taxes, implementation of VAT and such financial means to
increase the governmental revenue. The purpose is to pay off the creditors and the bailouts from
the money collected through tough financial regulations. The government has cut the bonuses
and benefits of the employees including the pension funds combined with the increased tax rates.
Such measures have grave social implications causing a state of unrest among the people (Buiter
and Rahbari, 2010).

Role of Troika
The European troika represents the trio of EU, International Monetary Bank (IMF) and
the European Central Bank (ECB). This troika has been responsible for offering bailouts to the
Greece for the rehabilitation of the financial system and in fighting the economic crisis. Greece
has received two major bailouts till date amounting to 240 billion Euros. The purpose of the
bailouts was to pay the creditors and the debtors as well as to start the programs aimed at
sustainable economic growth. The bailouts were the conditions to take bold steps for the
improvement of the state policies in increasing the domestic revenue. These austerity packages
have been negotiated against the money paid through these bailouts (Buiter and Rahbari, 2010).
However, the two bailouts have failed to have a reasonable impact on the economic
growth of Greece and the GDP to debt ratio still stands at 170%. The Greek government has
requested a third bailout in July 2015, and the European Union has shown a green light provided
the conditions are fulfilled and met. The government has signed a memorandum of
understanding for the bailout of the 86 billion Euros due in three or four installments (Buiter and
Rahbari, 2010).

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Question 2
Stock Market Crisis in China
The stock market crisis in China started with the stock market bubble burst in June 2015.
The value of the shares was lost rapidly and estimated one-third of the A-value shares lost their
worth in one month. The worst blow was received by the Shanghai Stock Market. In July, more
than 50 percent of the listed companies on the Shanghai Stock market hauled trading in efforts to
prevent the losses. Despite the governmental efforts, the values of the Chinese Stock Markets
continued to depreciate. The stock market index fell again in the month of August by 8.5 percent.
It was the lowest trading volume and the highest fall since 2007.The world showed a growing
concern about the stock market crisis of the China in a speculation that the underperforming
Chinese stock market can lead to a global crisis. This agenda was dominated in the IMF annual
meeting held in Peru in October 2015 (Kim, 2016).
The stock market of China recovered from the recent downtrend by the end of 2015 and
performed well on the Standards and Poors for 2015. However, the trading volume was still
below the high trading volume of June. The Shanghai Composite Index showed a growth of
12.6 percent. However, the starting of the New Year witnessed the halts in the trading on January
4 and January 7. The halts were due to the steep sell-offs in the Shanghai Stock Market. The
reported growth statistics of China by the year-end 2015 show that despite the meltdown the
growth rate remained at 6.9 percent of GDP. The economic value remained at ten trillion US
dollar. The stock market crisis shows that the orientation of Chinese economy is shifting from
manufacturing to the service industry, and it has slowed down. However, the physical economy
is still growing by more than 5 percent (Matthews, 2016).

Chinese RMB
The Chinese currency is known as RMB, or the Yuan emerged as one of the top 5
strongest currencies in world by November 2014. The increased payments in RMB led to such
strong effect on the currency, and it overtook Canadian and Australian Dollar. The central bank
of China has devalued the RMB twice after the stock market crisis lowering its value. The value
of the exports increased and became competitive in the global market and allowed the inflow of
the foreign surplus in China. The second episode of currency devaluation speculated the growth

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of the service industry rather than the manufacturing industry. There was another orientation to
the Chinas problem that the RMB devaluation was due to the political problems.
The government tried to neutralize the effects of the stock market crisis on the currency
by taking steps to ensure the global usage of the RMB increases. The Peoples Bank of China
introduced a new clearance system to settle the cross-border payments in RMB. The purpose of
the new clearance system was to decrease the clearance charges and transaction costs ensuring
the fastest processing times. The clearance system launch was watered and delayed due to the
stock market crash and the Chinese Banks in foreign countries assumed the role of the currency
clearance.
China is declared as the largest exporter in the world at the end of December 2015 with
27 percent of its exports invoiced in RMB. The invoicing of its exports in RMB was 19 percent
before the stock market meltdown. The IMF includes the RMB in the basket of currencies with
Special Drawing Rights (RDS) in an anticipation to avoid the global financial crisis from the
devaluation of the RMB in the future. It is expected that the China will act like a globally
responsible citizen, and the exchange rates of the currency will be liberalized (Trivedi, Deng and
Magnier, 2016).

Stock Market Bubble

In the year preceding the market crash, the individual investors invested heavily in the
stock market assets through the borrowed money. The huge investments inflated the prices
causing a stock market bubble. The prices of the shares and the instruments went up by more
than 150 percent. This bubbling effect was witnessed on the Shanghai Stock Exchange,
Shenzhen ChiNext board, and the Shenzhen Stock Exchange. The pricing of the stock markets
was far beyond the perfection and the slight changes in the prices led to steep sell-offs
contributing to the stock market meltdown (Yueh, 2016).

Government Response
The intervention of the Chinese government was to ensure that the effects of the crash
remain within the bounds. The regulators were threatened to limit the short selling and if they fail
to do so will be arrested. The mutual funds and the pension funds were pledged to increase the
investment in the stocks. The initial public offerings (IPOs) were halted by the government so

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that no new stocks may devalue and make the meltdown even worse. The media encouraged the
people not to withdraw their investments from the stock market and presented it as a perfect
opportunity to purchase the stocks and decreased values. The government also provided funding
and support to the individuals for purchasing the stocks. The loans were extended by the central
bank and these loans for purchasing the stocks were backed by the real assets of the real estate.
The Chinese government turned every rock at their disposal to control the financial crisis
and to prevent their economy. The outcomes of the government intervention were fruitful in the
short run. However, it is expected that in the long run such moves may lead to the development
of a larger bubble. The government showed a tough stance on this assumption proposing that the
international forces are deliberately trying to put the Chinese economy on the rail. The state
media supported all such endeavors of the Government (Yueh, 2016)

Question 3
Comparative Analysis of Greek and Chinese Financial Crisis
The comparative analysis of the Greek and Chinese financial crisis based on the nature,
causes and effects of the meltdowns on the global economy has been discussed in this section.
The similarities and the dissimilarities have been figured out as well.

Root Causes
The root causes of both the crisis are different. The Greek crisis was the result of the poor
financial deficit management by the state. The extended government expenditures combined with
the misinterpreted financial figures and the alleviating levels of the tax evasion led to the Greek
financial crisis. Moreover, the global financial crisis played its part in the onset of the Greek
crisis. The disturbed balance of payments was another leading factor to the increasing budget
deficit.
The root causes of the Chinese financial market meltdown are entirely different from the
Greek Crisis. The major difference is the onset of the Chinese stock meltdown and its span only
limited to the financial markets before it was controlled. However, the financial crisis in Greece
was not limited to the money markets only. It spread to all the economic sectors, and its effects

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were translated into the falling economy and growing debt to GDP ratio (He, Chen, Yao and Ou,
2015).
The similarity between the root causes is the poor planning of the governmental
institutions in the both countries. The Greek government failed to control its expenses, corruption
levels, and the tax evasion. However, the Chinese government showed a failure to intervene in
the financial market structure that led to the creation of the bubble. The government never
checked the increasing trade volumes and never figured the probable causes and the expected
outcomes. Another similarity between the economic crises of the both countries is the export
orientation and dependence on the exports for the GDP growth. China is the second largest
exporter in the world, and the Greece was the largest exporter in the Eurozone before the
economic meltdown.

Nature
The nature of the both financial crisis was economical, and it gave a severe blow to the national
economies. The Chinese crisis started from the financial markets and remained in the financial
markets only. The government devalued the currency to cover up the budget deficits through the
balance of the payment. However, the Greece government failed to devaluate the currency due to
the adoption of the Euro. The balance of the payment remained so large leading to the increasing
deficit (Giotakos, Karabelas and Kafkas, 2010).
Moreover, the control of the financial meltdown in case of China was more internal, and
government led. The government took steps to control the crisis, and the strict measures were
taken by the State authorities and the local media to encourage people to withhold their
investments and to invest more. The government also provided financial support to the
individuals through the Peoples Bank China to invest more in the stocks (Hericourt and Poncet,
2015). However, none of such steps were observed in the Greece. The government tried to
control the situation through the austerity measures and the external bailouts. The IMF, EU and
the ECB provided three bailouts to the Greek government for minimizing the effects of the
financial turmoil. The austerity packages and the controls led to increased frustration and social
impacts on the general public, and they have started to demand the exit from the Eurozone. The
exit of the Greece from the Eurozone will lead to the liquidation of the country with no hopes to
survive the economic turmoil (Sinn, 2012).

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There is a clear difference in the severity of the both crisis. The Chinese financial market
crisis lived only a few months. However, the aftershocks are expected till now. The country tried
to manage the crisis and showed GDP growth similar year. However, for Greece, the scenario
was totally different. The severity was much high, and the crisis is developing for more than six
years now. Each passing day brings the fear of the default and the debt to GDP ratio is sitting at
180 percent.

Effects
The immediate effects of the Greek crisis were the introduction of the austerity packages and the
cut down of the expenses. The bonuses and the benefits of the employees were shortened
substantially. However, the immediate effects of the Chinese crisis led to the increased
participation of the Government and the local media in the mobilization of the locals. The
government presented the individuals with financing to invest in the stocks so that the effect may
get neutralized (Foutoulakis et al, 2012).
Furthermore, the aftereffects of the Chinese crisis are much more far reaching as
compared to the Greece. The downfall of the Greece can have a really bad impact on the global
economy. However, the downfall of the economy like China will lead to a global financial crisis
much severe than the subprime financial crisis (Nolan, 2015).

Question 4
Lessons Learned from Greece Crisis
The lessons can be learned from the financial crisis of the Greece. The Greek crisis onset was
due to the poor financial practices and the increased tax evasion and the governmental
expenditures. Resultantly, the debt to GDP ratio begins to rise crossing the safe level prescribed
the IMF. It is important for the developed countries like Australia to keep a check on the debt
ratio. The additional growth and the development at the expense of the increasing deficit are not
real progress. It is a fake developmental bubble that bursts to lead to the worst financial crisis.
The government should put focus on the real developmental programs aimed at the real growth
of the economy (Reinhart and Rogoff, 2008).

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Moreover, the exports and the trade balance should be kept in check, and it is advised to
minimize the trade deficit. Some economists consider it a positive indicator of the economic
growth. However, the increased exports and the balance of payments is the real problem, and it
should be treated as a problem (Dewarndaru, Masih and Masih, 2015).
The financial crisis of the Greece dictates that the planning of the financial institutions
and governmental policies should coincide and should be situational based on the factors
affecting the economy. The planning process should never be based on the speculations only and
must be backed by the real facts and figures. The factual integrity of the reported debt levels in
Greece was questioned, and it is considered one of the causes of the crisis. Similar situations
should be avoided by the developing and developed countries by enhancing the transparency in
the factual data collection and filling.
Another important consideration for the developed and developing countries is the economic
development should not be dependent on a single or a few financial activities. For example, the
Greek economy was majorly dependent on the exports and the tourism. The manufacturing
industry contributes a maximum portion of the GDP. In event of the financial meltdown, the poor
performance of the major sectors will lead to the increased debt as it happened in case of Greece
(Erkens, Hung and Matos, 2012)

Lessons Learned from China

The recent financial meltdown of the Chinese stock market enforces the value of the real
growth than the growth bubbles. The trading and the stock activities should be backed by the real
assets. The rates and the prices should be checked by the regulatory authorities, and the
regulation should be perfect. Otherwise, the outcomes will be halted trading, subprime crisis of
US and the financial meltdown of uncontrolled economies. The global financial crisis started
from the US showed the similar mistakes. The excessive borrowing backed by the real estate
assets created a bubble that busted when people started to default. It was due to the inefficient
and lacking regulations and the regulatory authorities (Li, et al, 2016).
Moreover, the government intervention in the event of the financial breakdown as
showed by the Chinese government was outstanding and the growing economies should learn

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from China how to take control of the matters in the event of the crisis. The governments should
try to avoid the deficits as the Chinese government did (Dewarndaru, Masih and Masih, 2015).

Effect on Australian Economy

The possible effects of the financial crisis of the both the countries on the Australian Economy
can never be ignored. However, the financial crisis of China if goes uncontrolled it can have a
grave impact on the global economy including Australia as compared to the Greece. If Greece
defaults, the economic turmoil will spread to the Eurozone. 1% of the debt of Greece is owed to
the European Banks. The major portion of the bailouts is secured from the governmental and
global organizations like IMF. The countries affected by the financial turmoil of Greece will be
Germany, Spain, Italy or largely the Eurozone. The effects of the downfall of the global economy
or outside the Eurozone will not be much realized. If Greece leaves Eurozone, it is still between
the Eurozone and Greece. The rest of the world will realize minimal effects (Karanikolos et al,
2013).
On the other hand, if the financial turmoil of the China gets worse it will have a grave
impact on the global economy including Australia. China is a strong player in the global
economy with the second largest exporter of the world. Australia has a considerable volume of
trade with China. In the case of the currency devaluation of China or the trade deficits, every
country will suffer from China. The financial crisis in China can have a worse impact than the
subprime crisis of US on the global economy. That is why the IMF has shown increased
involvement to protect the interest of Chinese RMB (Van Hoa, Harvie and Van Hoa, 2016)

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