[Economy Q] Greece crisis and Sovereign Default

          [Economy Q] Greece crisis and Sovereign Default

Ankit Agarwal asked,

I want to know about Europe crisis in 2010 and its effect??

ans-

• Greece Government was giving pension benefits, social security and welfare schemes (NREGA Mid-Day meal like stuff), mega PSUs to give jobs for wooing the voters, without realizing that money doesn't flow from sky.
• Ultimately, the Expenditure became way tooooo higher than Government's income. (Deficit).
• So Greece started borrowing from market, by issuing bonds.

Adding insult to the injury, 2008's American recession had snowballing effect on Greece : fall in exports, tourists stop coming and more. So Government's tax collection falls down.
In this scenario, a seasoned player would not like to buy such Government bonds.
So Government of Greece was misreporting its official economic statistics as well as its borrowing status to make the country's economic foundation appear strong on paper.
But later that was found out, and lead to a speculation that Greece is on a verge of bankruptcy and will default on all its loans and borrowed money. (=Sovereign default)
Such speculation makes share-market collapse, foreign players pulling out their money from Greece.

This is Greece Crisis.
It is originating from the fact that Government was spending way to more than its income (=Deficit) until they came on the verge of bankruptcy.
Similarly Portugal, Spain, Ireland, Italy & UK also have huge deficits compared to their GDP.
Together it makes the Europe crisis of 2010 also known as Sovereign Debt crisis.

            European Union's response to Greece

Monetary help from EU, IMF etc. comes with riders attached, like Greece would have to stop its welfare schemes, reduce salary of Government employees, close down their inefficient PSUs etc. that again leads to more strikes and anti-Government riots in Greece = further deterioration in tourism and trade.

Looking at such a grim picture of Greece, foreign players prefer to invest their money in some other nations and the vicious cycle continues.

Effect of crisis on the world (From Indian Point of view)

1. Big players start pulling out their money from these troubled nations, and look for opportunities to invest that money somewhere else with better returns. Since American market is also still recovering, they narrow down their investment-choice to emerging economies such as India.
2. European Union Is India's largest trading partner, accounting for 20% of India trade. So Downturn in EU means Indian exporters dealing in chemicals, textiles etc. get low orders from those EU nations [Portugal,Spain,Greece etc.] + Non-EU nations of Europe (UK). Means European crisis is not good for Indian export industry.