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Greek Debt Crisis (Important For CGL Interview)

Worried that the Greek crisis may trigger capital outflows, Finance Secretary Rajiv Mehrishi on Monday said the government is in touch with the Reserve Bank which will take necessary steps to deal with the issue.
“Obviously we are in touch with the RBI but they will do what they have to do,” he said as uncertainty over Greece pulled down the BSE index, Sensex, by over 500 points in early trade though it recovered in the afternoon.
The situation in Greece has no direct impact on India, he said but added that there may be some indirect effect via Europe on capital inflows and outflows.
“Greece crisis does not have any effect directly on India. (But) interest rate may firm up in Europe. In case of firming up of interest rate in Europe, there can be outflow of capital from India,” he said.
Terming the situation as dynamic and evolving, he said, the crisis may have an indirect impact on India by way of its outcome on the European currency euro.
“To the extent it affects the euro, there might be some indirect impact on India. If yields on euro bonds go up, then it might impact inflows and outflows from India,” he said.
Mehrishi said nobody can predict how the situation will evolve.
Asked if any Indian company has an exposure in Greece, he said, “I don’t know.”
“If yields on G-Sec go on in the US, then it might impact inflows and outflows in India. We really don’t know how they (foreign investors) will relocate their portfolio,” he added.
There have been fears of the cash-strapped European nation missing its debt repayment deadline of June 30. The situation may prompt Greece-European partners to shut the door on extending a credit lifeline after the country’s surprise move to hold a referendum on bailout terms.
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  1. saurav bhardwaj

    To make long story short (but not that short), this is what happened:
    Greece has been a poorly managed country for decades. The Economy of Greece relies mostly on tourism and agriculture with very little industrial production.
    In addition, it is a corrupt country with an estimated “black” economy of between 25%-35% of the GDP, i.e. billions of taxable Euros do not show on the Greek-equivalent IRS radar, thus not collected.
    It could have been OK, if they didn’t have a huge public sector which gets paid from the taxes collected from the private sector, but they do. As mentioned in the previous bullets, the private sector does not produce enough money to pay all the salaries, benefits and pensions of the public sector.
    So how did they manage to get along all these years? By borrowing and recycling debts in the international bonds market, even before they joined the Eurozone.
    Then came the offer to join the Eurozone and replace the Greek Drachma with the Euro (currency); However, one of requirements for joining (I’m trying not to get into too much details and figures) was that Greece will not pass a certain threshold of public debt in proportion to its GDP. In other words: Greece had to prove its Government Debt is much lower than what it actually was.
    So they cooked the books, with help from Goldman Sachs. It worked and they got into the Eurozone.
    The prize for making it into the Eurozone was that now they could borrow money for much lower interest. A normal nation would take this opportunity and borrow the low-interest money in order to get rid of their old high-interest debts. Instead, Greece borrowed the money to expand its useless and lazy public sector.
    It worked until 2008. Then 2 things happened:
    The 2008 sub-prime market meltdown which caused massive liquidity problems in Europe (in simple words: for some time they couldn’t borrow new money to pay their existing debts)
    A financial corruption story involving very high public officials forced the government to step down, resulting in elections where the opposition party won.
    When the accountants of the new government (that were not into the original ‘cooking-the-books’ plot mentioned above) actually opened the books, they figured out that Greece’s debt ratio was not what was reported to the EU banks: it was 5 times higher than that.
    Now, imagine that you have a $200,000 loan on a $250,000 business and one morning you get up to figure that your partner took more loans and you actually have a $1,000,000 debt on the same $250,000 business and your revenue is not expected to change in the coming years. What will you do?
    More important: what will your bank (which gave your partner the $1,000,000 loan based on false financials) do when they will discover just that?
    I guess both you and the bank will be panicked.
    This is exactly what happened in Europe since 2008 between Greece and the EU. The EU is financially led by Germany, which is the exact opposite of Greece: they have a big, solid private sector which can support a lean and efficient public sector, and there is still much left to spend on investments out of the country. Unfortunately, much of these investments were loans given to Greece.
    Now Germany is pissed – who wouldn’t be? If there was an option to Foreclose on Greece they would have done it by now 🙂
    But they can’t, therefore they are focused in trying to save as much as they can from their loans given to Greece and there is much of a debate between German and European economists: those siding in the approach of:”give them money to put them back on their feet, they will restart their economy and will pay us their debt”, while others side the approach saying: “these Greeks are useless and taking our money to pay social benefits even the Germans don’t have, rather than use it to produce growth. Let’s cut our loses and get out. Let them fall and see what happens”

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