Another scenario for recession due to Greece crisis

| Thursday, July 16, 2015 - 18:26
First Published |

Another scenario for recession due to Greece crisis

Greece: The Greek government has announced that all banks will be closed and ATM withdrawals would be limited to €60 per day. This decision was taken when European Central Bank did not extend emergency funding. Talks between Greece and the Euro zone countries over bailout terms ended without an agreement and Prime Minister Alexis Tsipras called a surprise referendum on the issue to be held on 5 July.

This situation reminds the recession of 2008 when United States had experienced a major financial crisis due to fall of Lehman Brothers on September 15, 2008. This was not limited to US but it affected many foreign nationals resulting in a global economic crisis and this was seen through plethora of events like stock market down, liquidity dried up, successful companies laid off employees by the thousands. India was also very much affected by these events.

Once again we are on the verge of acknowledging such situation when share prices slumped across Europe as Greece shuttered its banks. Root of current situation of Greece goes date back to 2008 recession, when Greece became the epicentre of Europe’s debt crisis after Wall Street imploded in 2008.

The Greek government has no option left when the European Central Bank (ECB) raised the stakes by freezing the liquidity lifeline that has kept them afloat during a six month run on deposits.

In the early hours of Monday morning, Greek Prime Minister, Alexis Tsipras published a decree in the official government gazette setting out the capital controls to be imposed on the country. The decree entitled ‘Bank Holiday break’ – was signed by Tsipras and the Greek president, Prokopis Pavlopoulos.

Even foreign transfer out of Greece is prohibited but online transactions between Greece bank accounts are normal. PM denied any rumour of stopping pensions and wages of employees. 

Chronological orders of events which led PM to reach on such decision

26th June, Friday:  Greek PM Calls referendum on terms of new bailout deal, ask for extension of existing bailout.

27th June, Saturday: Finance minister of Euro zone refused to extend existing bailout beyond Tuesday citing his own liabilities.

28th June, Sunday: European Central Bank disagreed on increasing emergency assistance to Greece.

Sunday evening, Greek PM announced the closing of banks and limited ATM withdrawal up to €60

How much debt Greece owes and who are the lenders?

At present, Greece owes a debt of €323bn from different sources which are as follow:

1.    Euro zone: 60% (Euro zone governments gave Greece€ 52.9 bn in bilateral loans under the first bailout agreed in 2010, known as the Greek Loan Facility. Under the second bailout agreed in 2012 Athens has so far received €141.8 bn from the euro zone's financial rescue fund. It had been due a further €1.8bn by June 30 if it met conditions but barring major surprises that is off the table. Interestingly, the bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.)

2.    IMF: 10% (Greece was promised €48.1bn out of which €16.3bn still to come by March 2016).
3.    Greek Loan Facility: 52.9bn.
4.    ECB: 6% (around €18bn).
5.    Greek banks: 3%.
6.    Foreign banks: 1%.
7.    Bank of Greece: 1%.
8.    Other bonds: 15%.
9.    Other loans: 3%

Repercussion which are seen early morning, Monday

Overnight in Tokyo the Nikkei index had fallen almost 3% and in Hong Kong shares slid 2.5%. 

Hong Kong's Hang Seng lost 2.7% to 25,949.30 and Sydney's S&P ASX-200 was off 2.3% at 5,418.80. Seoul's Kospi dropped 1.4% to 2,061.00 and the euro slipped to $1.101 from the previous session's $1.116. The dollar declined to 123.15 yen from 123.89 yen.

In London the FTSE 100 tumbled by 150 points - more than 2% - when trading began at 8am BST. There were even sharper falls across Europe, with the French and German markets both tumbling by 4%. European banking shares were the hardest hit, suffering losses of up to 10%.

The Shanghai Composite Index fell 3.7% to 4,035.48 points despite China's surprise weekend interest rate cut. Tokyo's Nikkei 225 index shed 2.4% to 20,218.17 points.
India’s benchmark BSE sensex plunged 535.87 points, or 1.92%, to 27,275.97 in opening trade on Monday and Asian stock markets sank as Greece looked set to default on its debt repayment.

The benchmark 10-year bond yield was up 3 basis points at 7.85%, while the rupee was trading at 63.90 compared to its 63.64/65 close on Friday.

What world leaders have to say?

Barack Obama called German Chancellor Angela Merkel, and senior US officials urged Europe and the IMF to come up with a plan to hold the single currency together and keep Greece in the euro zone. 

The German and French governments announced emergency political meetings. French Prime Minister Manuel Valls urged the Greeks to come back to the negotiating table.

German Finance Minister Wolfgang Schaeuble openly questioned the solvency of Greek banks, a key condition to qualify to receive such finance. Chancellor Angela Merkel of Germany, Europe’s paymaster, says the Euro zone must stay together but not at any cost.

This has become matter of concern for all countries and no one wants to see another recession. 6th July referendum could test whether Greek citizens want to stay in the Euro zone. New elections could also be held if Greece’s financial situation worsens. 

You may contact Shree Shubham on or on twitter @shubhamshree85


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