Insight to Greek Debt Crisis

May 2010

Whats the problem in Greece?

Debt levels and deficits in excess of limits set by the Eurozone
No monitoring mechanism by ECB
Statistics Size of Debt: 2010 Estimated: 300 billion 120% of GDP

Due to years of unrestrained spending, cheap lending and failure to implement financial reforms
Could borrow at low interest rates when it took the Euro as its currency

Countrys deficit: 12.7% Debt maturing in 2010: 54 billion

Credit rating downgraded to junk status

Struggle to pay as interest rates on existing debts rise Refinance an average 40 billion each year

What is Greece doing?

Greece has to find extra savings to pay higher interest costs Budget cuts worth almost 14% of GDP Slashed spending and implemented austerity measure to reduce deficit by > 10 billion
Hiked taxes on fuel, tobacco and alcohol Raised retirement age by 2 years Imposed public sector pay cuts Applied tough new tax evasion regulations

Led to: Nationwide strikes

What is the impact on Europe?

High risk of contagion
High debt levels and poor public finances in Portugal, Ireland, Italy and Spain Now on Euro, unable to devalue their own currency

High exposure to Greek debt for France and Germany

What is the impact on Europe?

Highest Risk Portugal
Debt: 77% of GDP, Deficit: 9.3% Smaller economy than Greece, low competitiveness Largely dependent on foreign capital High net international debt

Others:
Spain: Large budget deficits, high unemployment, rising interest rates Italy: Hopes to rely on domestic savers to buy Govt bonds Ireland: Foreigners hold factories, offices rather than bonds and loans Germany: People unhappy that they have to shoulder Greeces debt burden

What is the impact on Europe?

Troubled budget and diminished growth prospects have led to devaluation of the Euro
However, this is good for European export markets EUR/USD

What is Europe doing?

Eurozone finance ministers approved a 30 billion aid mechanism EU/IMF bailout of 110 billion over 3 years
In exchange for extra budget cuts of 30 billion over 3 yrs

What is Europe doing?

Rescue loans from other vulnerable countries?

Will the rescue package work?

3 ways out of a debt crisis
1. Quantitative easing to ensure liquidity to finance new debt and refinance maturing debt 2. Bailout by creditors Greek Rescue Package 3. Restructure debt

Ultimately requires stabilisation and reversal of public debt accumulation and regeneration of economic growth

Latest Developments
May 2010 Global policymakers install emergency financial safety net worth about $1 trillion to bolster financial markets and prevent Greek crisis from destroying the euro
440 billion guarantees from euro zone states (Germany: 123 billion) 60 billion European debt instrument 250 billion from IMF

Greece taps emergency loans to repay 8.5 billion of 10-year bonds Germany announces ban on naked short selling of shares in top 10 German financial institutions, Euro government bonds and CDS
Speculations that Germanys banks are more threatened by the Greek debt crisis than first thought

What is the impact on Asia?

Less impact due to generally strong trend in domestic and external demand Potential stress may come from:
1. Exposure to European sovereign debt 2. General weakening of sentiment and risk of generalised sell-off in sovereign debt 3. Drop in import demand from Europe

THANK YOU