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[Economy]WhatIfGreeceExitsfromEurozone?Implications
onIndianandWorldEconomy
PostedByMrunalOn06/06/2012@3:00pmInZMiscellaneous|106Comments
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HowdoesGovernmentfinanceitsoperations?
WhatisSovereignDebt?
WhatisSovereignDebtCrisis?
WhyGreecehashighSovereignDebt?
TimeLineofEvents
January2010
February2012:AuserityBill
May2012:ElectionsinGreece
WhatstheEUExitRumor?
consequencesIFGreeceExitsEurozone?
ImpactonIndia?
Foodforthought

HowdoesaGovernmentfinanceitsoperations?
Obviouslybyputtingdirectandindirecttaxesonyourandme.Butevenafter
taxingus,thereisnotenoughmoneytorunanybogusGovernmentschemes,then
whatcantheydo?Thatllgivetheanswerfor
WhatisSovereignDebt?
Sovereigndebtisthemoneyagovernmentborrowsfromitsowncitizensorfrom
investorsaroundtheworld.
ThenwhatisSovereignDebtCrisis?
WhenGovernmentdoesnthavecapacitytopaybacktheSovereignDebt,itcalled
SovereignDebtCrisis.
Whatisagovernmentbond?
Governmentsborrowmoneybysellingbondstoinvestors.
Inreturnfortheinvestorscash,thegovernmentpromisestopayafixedrateof
interestoveraspecificperiodsay4%everyyearfor10years.
Attheendoftheperiod,theinvestorisrepaidthecashtheyoriginallypaid,
cancellingthatparticularbitofgovernmentdebt.
Governmentbondshavetraditionallybeenseenasultrasafelongterm
investments(akaGiltEdgedSecurities)andareheldbyinsurancecompanies
andbanks,aswellasprivateinvestors.Theyareavitalwayforcountriestoraise
funds.

Whatisabondmarket?

Onceabondhasbeenissuedandthegovernmenthasthecashtheinvestor
canholdthebondandcollecttheinteresteveryyearuntilitisrepaid.But
investorscanalsobuyandsellbondsthathavealreadybeenissuedonthe
financialmarketsjustlikebuyingandsellingsharesonthestockmarket.
Thepriceofthebondwillriseandfallaccordingtospeculationandanalysisby
experts.
Forexample,youboughtaGovernmentofIndiabond.ItsaysRs.100/4%/2014.
Thatis,youpaidtheMRPRs.100toIndianGovernment,andeveryyeartheyllpay
you4%oftheRs.100until2014.Andon2014,theyllalsorepayyoutheentire
PrincipalofRs.100
Supposethingsgoniceandsmoothuntil2012.ButThen
a. Thereisheavyinflation,youcantbuyevenpeppermintforRs.4andor
b. ThereisarumorthatGovernmentwilldefaultanditspaymentandwontrepay
youanymoney.
Ineithercase,youwanttoExitfromgamebeforeitstoolate.Youwanttosellthe
bondtoanotherpersonandrecoverwhatevermoneypossibleandreinvestthatmoney
insomethingevensaferandmoreprofitable,forexamplestartingyourownSaasbahu
serial.Itdoesntrequirelotofbrainormoney(*ifyouasktheactressestobringtheir
ownmakeup,expensivesareesandjewellary),andstillyougettoearnplentyofad
revenuefromantiagingandskinwhiteningcreams.
So,youcometosellthisbondtome.ButIalsoreadthenewspapers(exceptThe
Hindu),soIknowthingsarenotgoodwithIndianGovernmentoreconomy,soIwont
payyouRs.100butonlyRs.90foryourbond.Yourenotinapositiontonegotiate,
yourepanicked,youjustwanttoexitfromthisgameandyoufearthatifyoucontinue
toholdthisbond,15daysfromnow,peoplewontevenpayyouRs.50forit.
ThusIbuytheBondworthOringallyMRPofRs.100,forRs.90fromyou.
Question:whywouldIdothat?WhywouldIbuyanotsogoodlooking
bondfromyou?
Ans.
1. Myprofitismorethanyours!How?Because,YouinvestedRs.100andgetRs.4
everyyear,soyourprofit(technicallyknownasBondyield)is(4/100)x100=
4%.
2. WhileIinvestedRs.90andgetRs.4everyyear,somyprofit(Yield)is(4/90)x
100=4.44%whichisbetterthanyour4%yield.
3. Imaybespeculatingthatafteramonthortwo,thesituationwithIndianeconomy
/Inflation/GovernmentwillimproveandthenIwouldbeabletobuya
peppermintforRs.4

Whydobondmarketsmatter?
1. Becausetheydeterminewhatitcostsagovernmenttoborrow.
2. Whenagovernmentwantstoraisenewmoney,itissuesnewbonds,andhasto
payaninterestrateonthosebondsthatisacceptabletothemarket.
3. Theyield(profit)atwhichthemarketisbuyingandsellingagovernments
existingbondsgivesagoodindicationofhowmuchinterestthegovernment

wouldhavetopayifitwantedtoissuenewbonds.
4. So,forexample,Spanish10yearbondyieldshaverisenabove6%inrecentyears.
ThatmeansthatiftheSpanishgovernmentwantstoborrownewmoneyfromthe
bondmarketfor10years,itwouldhavetopayaninterestrateonthenewbondof
morethan6%toseducethebuyers.

Borrowingbeyondcapacity
GovernmentscanjustgoonprintBondsontheirHPprintersandsellittojunta,
becausemoneydoesntfallfromsky.Someonesomedaywillhavetopayforit.Ifthey
dont,thentheBondYieldwillincreaseandapointwillcomewhenyou(Government)
havetooffer36%interestrateonfreshbondstoseducenewinvestors.Therefore,
Governments,putlimitontheirownborrowing.InIndiaweveathingcalledFRBM
(FiscalresponsibilityandbudgetManagement).
ForEuropenUnion,backin1997whentheywereformingthegang,theyhaddecided
thateachgangmember(country)willnotborrowbeyond3%ofitsGDPperyear.
ButGovernmentofGreecemanipulated**itsaccountbookstoappearasiftheywere
stayingwithinthe3%limit,butactuallytheyhadbeenborrowingmuchabovetheir
Aukaatalmost13%oftheirGDP.
**(mighthavetakencoachingfromRamalingaRaju!)

WhyisGreecesuchamessedupEconomy?
IllcopypastetheanswerfromAmolAgrawalsarticle.
around1,2millionpeopleareemployedbytheGreeceGovernment
thisincludesclerks,teachers,doctors,andpriestswhichamountsto
almost27percentofthetotalworkingpopulationofthecountry
(France242010).ThusoneoutoffourworkingGreeksisemployed
whollyorpartlyinthepublicsector.Morethan80percentofpublic
expendituregoestothewages,salariesandpensionsofthecivil
servants.
GettingacivilservicejobinGreeceiswidelyperceivedasbeinggranted
asinecureandnotasacontractualobligationtowork.Theresulting
inefficiencyofthecivilservicereinforcedasystemofpromotionsbased
onseniorityandnotonmeritortalent.Onecanonlymoveupthe
laddermorequicklyifonehasgoodconnectionswithpoliticiansand
tradeunionists.
Thishugebureaucracyjustkeepsmakinglaws.From1974onwards,
100,000lawswerepassedaround2857peryear!
Thenthereareruleslimitingcompetition.Youpayafeestolawyersfor
everything.YouneedadegreelicencefordoinganythinginGreece
InGreeceonecanfindawholesetoflawsmandatingopeningand
closinghoursofvariousenterprises,ordefiningthegeographical
proximitywheretwosimilarestablishmentscanoperate,setting
minimalpricesforvariousprofessionalservices,issuinglicensesand
preventingorlimitingcompetition.
Similarrestrictionsapplytotheoperationofdrugstores.Youareonly
allowedtoownandoperateadrugstoreinGreeceifyouholdadegree

inpharmacology.Thesameappliestoopticians.Youcanonlyowna
shopsellingspectaclesifyouholdadegreeinoptics!
Ifyouhaveabusinessandyouwanttoadvertiseyourbrandor
productyouhavetopayanamountequalto20percentofthe
advertisingexpensestothepensionfundsofthejournalists.
Eachtimeyoubuyaticketonaboat,10percentgoestothepension
fundoftheharborworkers.Apartoftheticketpricethatcoversthe
insuranceofpassengersgoestothesailorssocialsecurityfund.
IfyousellsuppliestotheArmy,youwillhavetopay4percentofthe
moneytothepensionfundsofthemilitaryofficers.Whenyoubuya
ticketatasoccergame,25percentoftheamountgoestothepension
fundsofthepolice.
Itisestimatedthattherearemorethan1,000suchlevieswhosetotal
costamounts,accordingtosomecalculations,toover30percentof
thecountrysGDP
Greeceisasocietydominatedbyrentseekingratherthanwealth
producingactivities.Thefactthattwothirdsoftheelectorateisliving
partlyorwhollyongovernmenthandoutssignificantlyaffectsthe
ideologicalnarrativesthatarepopularinthecountry.
endofcopypaste
Inshort,GreeceisnotacountrybutAirIndiarunningMNREGA.Andaddinginsultto
theinjury,duetotherecessioninUSA,thetourismandexportindustryofGreecehad
tookahugesetback.

TimeLineofEvents
January2010
AnEUreportstartstalkingabouttheirregularitiesinGreekaccounting
procedures.
ConcernstartstobuildaboutalltheheavilyindebtedcountriesinEurope
Portugal,Ireland,GreeceandSpain(PIGS).
A.RajacouldgivetheloanstosavethesecountriesbutstupidIndianmediagetshim
arrested,whileMohancontinuestoloophisrepeatedtapeonevery15thAugustspeech
thatNaxalitesarethebiggestthreadtoIndia,whilePranabcontinuestoloophistape
thateverythingbadwithIndianeconomyisbecauseofGlobalSituation.AnywaysFast
forwardto
February2012:TheAusterityBill
EUToGreece:Okwellgiveyouthemoneytopayoffyourdebts,andwecallthis
moneyBailoutmoneybutyoullhavetoshutdownyourAirIndiasandMNREGAs
andwecallitAusterityMeasures.
PMofGreece:Whaatanideasirji.
GreeceGovernmentintroducestheausteritybillinparliamentwhichincluded
followingmeasures
1. 15,000publicsectorjobcuts
2. liberalisationoflabourlaws(businessmencaneasilyhireandfireemployees)

3. Loweringtheminimumwageby20%from751eurospermonthto600euros.
JuntaofGreece:Notagoodideasirji
andtheystartriotingonthestreet.ButsinceGovernmentkeptthepromiseof
introducingreforms,EUgivesthembillionsofEuroasloan.
May2012:ElectionsinGreece
ButnopartygetsclearmajorityandnocoalitionGovernmentisformed.
SotheyplantoholdelectionagainonJune2012,andajudgehasbeenappointed
toheadaninterimgovernmentinthemeantime.

WhatstheEUExitRumor?
TherearetwomajorpartiesinGreece.
1. Therightwingparty:theysaywecontinueinEurozone,agreetotheirdemand,
cutmorejobsandpublicspendingforreceivingmorebailoutmoney.
2. TheLeftWingParty:theywanttorenegotiatetheloantermswithEUandIMF
anddonotwanttoimplementanyausteritymeasures.Theydtakeahostilestand
againstEU,althoughinmediatheysayWewanttocontinueinEurozonebut
theiragendaandgesturespeaksotherwise.
SeethissamelikePakiPMcomestoIndiaandspeaksinonetonebutwhenhesbackin
anelectionrallyinLahorehedbespeakinganatotallydifferenttoneaboutKashmir.
AndtherehellsayIndiaisnotcooperatingwithusandIndiaisthebadguy.
ExpertsfearedthatpublicofGreecewillelectantibailoutpartiesthatrejectthe
spendingcuts(austeritymeasures)suggestedbyEUandIMF.Sothisnewlyelected
partywilltrytorenegotiatethebailouttermswithEU/IMFtosucharidiculouslevel,
thatnegotiationswillbreakoffandthenGreecewillexitfromEU.
Thankfullyforthetimebeing,crisishasbeenavertedastherightwingproEU/bailout
partyhasgainedthemajority.

consequencesIFGreeceExitsEurozone?
ImtakingfollowingdiagramandpointsfromBBCarticle

LinesattheBanks
OrdinaryGreeksmayqueueuptoemptytheirbankaccountsbeforetheyget
frozenandconvertedintodrachmasthatlosehalformoreoftheirvalue.
Depositorsinothereurozonecountriesseenasbeingatriskofleavingtheeuro
Spain,ItalymayalsomovetheirmoneytothesafetyofaGermanbankaccount,
sparkingabankingcrisisinsouthernEurope.

LoanDefaultbyGreece
Unabletoborrowfromanyone(notevenotherEuropeangovernments),the
Greekgovernmentsimplyrunsoutofeuros.Ithastopaysocialbenefitsandcivil
servantswagesuntilthenewdrachmacurrencycanbeintroduced.
Thegovernmentstopsallrepaymentsonitsdebts,whichinclude240bneurosof
bailoutloansithasalreadyreceivedfromtheIMFandEU.
TheGreekbankswhoarebiglenderstothegovernmentwouldgobust.
Meanwhile,theGreekcentralbankmaybeunabletorepaythe100bneurosor

moreithasborrowedfromtheEuropeanCentralBanktohelppropuptheGreek
banks.

Meltdown
Greecesbankswouldbefacingcollapse.Peoplessavingswouldbefrozen.Many
businesseswouldgobankrupt.ThecostofimportswhichinGreeceincludesa
lotofitsfoodandmedicinecoulddouble,tripleorevenquadrupleasthenew
drachmacurrencyisintroduced.
Withtheirbanksbust,Greekswouldfinditimpossibletoborrow,makingit
impossibleforawhiletofinancetheimportofsomegoodsatall.
OneofGreecesbiggestindustries,tourism,couldbedisruptedbypoliticaland
socialturmoil(andrioting).
Inthelongerrun,Greeceseconomyshouldbenefitfromhavingamuchmore
competitiveexchangerate.Butitsunderlyingproblems,includingthe
governmentschronicoverspending,maynotgoaway.

BusinesshousesgoBankrupt
Greekcompanieswhostillowebigdebtsineurostoforeignlenders,butwhose
mainsourcesofincomeareconvertedtodevalueddrachmas,willbeunableto
repaytheirdebts.Manybusinesseswillbeleftinsolventtheirdebtsworthmore
thanthevalueofeverythingtheyownandwillbefacingbankruptcy.Foreign
lendersandbusinesspartnersofGreekcompanieswillbelookingatbiglosses.
SomecontractsgovernedbyGreeklawareconvertedintodrachmas(=old
currencyofGreecebeforeEuro),whileotherforeignlawcontractsremainin
euros.Manycontractscouldendupinlitigationoverwhethertheyshouldbe
convertedornot.

SovereignDebtCrisisforWeakEurozoneNations
IfGreeceleavestheeurozone,thatwillsendnegativeimpressionamongthe
investorsallovertheworld,thatEurozonecountriesarenottrustworthy,hence
theyllnotlendtoothercountriessuchasSpainorItalyandiftheylend,theyll
chargeheavyinterestrate.
ThiscouldleavethegovernmentsofSpainandItalyshortofmoneyandinneedof
abailout.Thesetwohugecountriestogetheraccountfor28%oftheeurozones
totaleconomy,buttheEUsbailoutfundcurrentlydoesnthaveenoughmoneyto
helpthemout.
Andasexplainedearlier,they(SpainandItaly)willhavetooffermoreinterest
rateonnewbonds,becauseoftheBondYieldproblem.

GoodforUSandJapan
Nervousinvestorsandlendersaroundtheworldmaystartsellingoffrisky
investments(i.e.BondsandEquitiescomingfromGreeceandsimilarnations)
andmovetheirmoneyintosafehavens.Theyllinsteadprefertoparktheirmoney
inthegiltedgedsecurities(i.e.theGovernmenttreasurybondsofUS,Japan,

Germanyetc.)
Thusononehand,theGreece,SpainandItalywillhavetopayhighinterestrate
toborrowfrommarket,whileUS,JapanandGermanycanborrowmorecheaply.
ProblemforIndia:CredingRatingagenciesarenotveryhappywithIndias
performance,theyreunlikelytoincreaseourrating.Meaning,ifMr.Xpullsout
hismoneyfromGreeceorotherEUnation,hellmostlikelyputitinUS,Japan
andGermanybutnotinIndia.BecauseIndiaisgettingnegativerantingsfrom
StandardandPoors,Moodysetc.

PoliticalTurmoilinEurope
AseurozonegovernmentsandtheEuropeanCentralBank(ECB)faceenormous
lossesontheloanstheygavetoGreece,publicopinioninGermanymayturn
againstprovidingtheevenlargerbailoutsprobablynowneededbybigcountries
likeItalyandSpain.
TheECBsroleofquietlyprovidingrescueloanstothesecountriesinrecent
monthswouldbeexposedandcouldbecomepoliticallyexplosive,makingit
harderfortheECBtocontinuetohelpthesetroublednations.
However,thethreatofameltdownmightpushEuropesortheeurozones
governmentstoagreeacomprehensivesolutioneitherdissolutionofthesingle
currency,ormoreintegration,perhapsthroughademocraticallyelected
Europeanpresidencytaskedwithoverseeingamassiveroundofbankrescues,
governmentguaranteesandgrowth.

RecessioninEurope
Businesses,afraidfortheeurosfuture,maycutinvestment.
Facedbadnewsinthepress,ordinarypeoplemaycutbacktheirownspending.=
lessdemand=couldpushtheeurozoneintoadeeprecession.
Theeurowouldlosevalueinthecurrencymarkets,providingsomereliefforthe
eurozonebymakingitsexportsmorecompetitiveininternationaltrade.Butthe
flipsideisthattherestoftheworldwillbecomelesscompetitiveespeciallythe
US,UKandJapanunderminingtheirownweakeconomies.
EvenChina,whoseeconomyisalreadyslowingsharply,couldbepushedintoa
recession.(BecausepeopleinEuropewillcutdowntheirspending=lessdemand
forChinesegoods)
EndofBBCcopypaste

WhyGreeceExit=TroubleforIndia?
WheninvestorstakeouttheirmoneyfromGreece,theyllmostlikelyconvertit
intoDollarsandinvestitUS.MeanslesssupplyDollarintheinternationalforex
market=dollarbecomesmoreexpensive,youvetooffermorerupeestobuysame
amountofdollar.1$mightbecome57Rs.=crudeoilexpensive=everything
becomesmoreexpensive.
Someofaboveinvestorsmayalsoinvestingold,(Afterloosingfaithinbond
market).Againsamesupplydemandsituation.Goldbecomesmoreexpensive.
Investorswillbecomemoreandmorecautiousaboutcreditratings,theywont

daretoinvestinplaceswithnegativeratings.Inaway,rightnowIndiaisno
betterthanGreecewhenitcomestoinefficientbureaucracy,PSUandpolicy
paralysis.ThusIndianCompaniesandPSUswillhavetooffermoreinterestrates
underbondyieldproblem(why?BecauseRBIisnotcuttingdowntheReporate)
=soprofitmarginsfalls=lessproduction=fallinIIPIndex=jobcuts=demand
falls=fallinGDP.Finally,whenGDPgrowthisnegativefortwoconsecutive
quartersormore=theRecession.
SeeingthesituationofGreecepeople(Pensionandjobcuts),thecitizensofother
Europeannationswilltrytosavemoreandmoremoneyforthepossiblebadtimes
ahead=lessspendingonluxeryitems=lessdemandforindiantextiles,polished
dimanondsandautomobiles.
IndianbusinessmenwhoexportedgoodsandservicestoGreeceearlier,willhave
troublecollectingtheirmoney.BecauseGreekbusinessmanmightsimplygiveup
sayingeitheryouacceptmyDrachmaorfileacourtcaseonme.Idontcare.I
donthavemoney.WhenIndianbusinessmancannotcollectthepayment=job
cuts,reducedproduction=lowIIP.(ImpactoflowIIPalreadyexplainedinanold
article)

Foodforthought
YoumightwonderwhyisGreeceagainsttheausteritymeasures,whenthewhole
worldwantsthemtodoit?
Theirlogic:ifwestopwelfareprogramsandreducesalariesandpensions,then
peoplewillhavelessmoneytospend=demandsupressed=slowdown.
SoinsteadofcuttingtheGovernmentexpenditure,weshoulddothereverse,just
likewhatLordKeynessuggested,Tocombatrecession,Governmentshouldstart
spendingonpublicworks,thuscreatingjobsanddemandinthemarket.
Whodoyouthinkisright?GreeceortheEU?
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