Saturday, 18 July 2015

Greek Crisis and its Solution

Greek Crisis - My understanding

History behind Greek Crisis

2010 - May

Euro 110 Billion was injected by the Troika of European Commission, European Central Bank and IMF(Troika). An agreement of austerity was reached and for the Structural reforms and Privatisation of Goverment assets between Greece and the Troika.

A year later the recession worsened.And the Greek government (with the EU) agreed to the extension of the Loan repayment period from 7 years to 15 years.
A new aid of 109 billion euros and a 50% write off of Greek debt was agreed with the Troika of Euro leaders and IMF

Austerity measures brought down the deficit from 7.5% to 2.4% in 2011. But unemployment grew from 7.5% to 19.9% in Nov 2011

In 2013 the Hellenic Financial stability fund (HFSF) injected 48.2 billion euros in Greek banks for recapitalization efforts.This efforts increased the Debt GDP ratio by 24.8 points.In return the Greek government got shares of these banks which is now trading much lesser than the original value in the Market and hence it is a failure.

May 2014

Another round of Bank recapitalization was done with 8.3 billion euros by private share holders. HFSF is going to receive Euro 27.3 billions for the 48.2 billion it invested in 2013.

Solutions for this problem as suggested by many economists

1) Return to Drachma and devalue it for the exports to climb.The current national debt for Greece is around 300 Billion dollars.

2) Circulate a digital currency card (as Bank deposits far exceeds paper Euros in Greece).

3) Negotiate another Bailout ( agree for sale of government assets)

4) Convene an european debt conference and negotiate the debt for all European nations ( not Just Greece)

Current Debt to GDP ratio of Greece is 180% and will rise to 200% as forecast by IMF.

What could be a possible solution to the above crisis. My proposed solution is as follows

As we know Greece is dominating the headlines in the International scene. Greece itself came out with a sensible suggestion - they proposed a GDP linked bonds.

On the look of it it was a sensible suggestion. And it would work thus -

When the economy grows debt would grow and Greece would pay it easily. When the Economy shrinks it would keep the debt GDP ratio to be the same.

Why was it not acceptable to the Politicians.

There is a lingering disbelief that Tsipras( or the Greek Govt) would not allow the Greek economy to grow as it would mean Greece would have to pay more than they are indebted. On the other hand it would mean there is an incentive for the Greek economy to be in permanent recession. Meaning you repay much less than what you owe to your debtors.

A via media would be to have a cap and a floor on the GDP bonds. The cap would be for the Greeks to grow without having to repay more than what they owe the European union. The floor is for the lenders to recover a minimum of what they lent.

The EU and Greece need to agree to this if there is a solution which is feasible else it is gloomy days for all involved.

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