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512. Is Greece heading for default?
- Publication Date:
- 02-2010
- Content Type:
- Working Paper
- Institution:
- Oxford Economics
- Abstract:
- Greece has slid into a serious fiscal crisis over the last few months. A ballooning budget deficit and high levels of government debt have raised questions in the minds of investors about the sustainability of the country's public finances. The level of concern among investors can be seen from developments in Greek borrowing costs relative to those in Germany. At the beginning of 2008, the yield on Greek 10-year bonds was only around 0.3% higher than on equivalent German securities, but this gap has now risen to over 3%. This yield spread is at its widest for more than a decade and is by far the largest within the Eurozone. The root cause of Greece's problems is a long period of fiscal indiscipline. In 2009, after years of heavy spending, the budget deficit rose to almost 13% of GDP and the public debt to GDP ratio is set to reach 125% this year. The deteriorating fiscal position has led to a slew of ratings downgrades, and outside the Eurozone Greece's credit rating would probably be in 'junk' territory. On top of the fiscal problems, Greece also suffers from weak external competitiveness. The real exchange rate has appreciated substantially since Greece joined the Eurozone, contributing to a sharp widening in the current account deficit to around 12% of GDP last year. On some estimates, the real effective exchange rate is now around 20% overvalued. As a result Greece now faces a series of policy choices all of which look unpalatable. Within the Eurozone, the only realistic orthodox option is a combination of massive fiscal retrenchment and 'internal devaluation' – forcing down costs relative to those of Greece's competitors. But fiscal cutbacks and cost deflation on the scale required could plunge the country into a deep and prolonged recession and might prove politically and socially unsustainable. The Greek economy is already showing signs of serious stress, with GDP down 2.6% on the year in 2009Q4. The extreme alternatives are default and/or leaving the Eurozone and enacting devaluation. But the political barriers to such moves are immense, and while default and devaluation could ease budgetary and external imbalance problems, they would also cause massive economic and financial disruption and probably a deeper recession in the near-term. Default and devaluation would also risk huge negative contagion effects on the Eurozone and the wider global economy. With Greece's debt approaching €300 billion a default would be the largest sovereign collapse since WWII, dwarfing those in Russia and Argentina. Eurozone banks could face losses of up to €100 billion on top of the heavy writedowns already suffered, risking a renewed Europe-wide credit squeeze. There could also be collapses in demand for the debt of other weaker Eurozone members such as Spain, Portugal and Ireland. World markets for equities, corporate bonds and emerging market debt would also likely be badly affected. There could also be pressure for the major economies to accelerate their fiscal adjustment efforts, given the impact on investor confidence and the scale of their budget deficits. Our estimation results suggest that a Greek default could be a real threat to the progress of the global recovery, cutting growth in the major economies by around 1% per annum compared to our baseline forecast and world growth by 0.6%. Given the potential massive consequences of a Greek default, the pressure for a bailout has been growing. Although there are questions about the legality of such a move, we believe it is possible if the political will exists. Estimation results using the Oxford Model suggest a bailout would be likely to be less economically damaging than a default, even assuming some negative impact from higher bond yields in the core Eurozone countries. The costs of a bailout could rise rapidly, however, if it extended beyond Greece to other troubled countries. A bailout would create a big risk of moral hazard, perhaps inducing fiscal misbehaviour among other Eurozone members or being used by Greece to sidestep the necessary adjustment. To avoid this, any bailout would have to incorporate strict conditionality, perhaps raising serious questions about fiscal sovereignty within the Eurozone. Over the last two weeks, the other EU countries have taken a relatively hard line with Greece, stopping short of announcing explicit financial support and pushing for strong fiscal adjustment measures. Although a bailout remains the most likely outcome if Greece struggles to refinance its debts, there are some signs that political resistance to such a move is growing. The key risk period could be April-May, when a large volume of Greek debt matures.
- Topic:
- Economics, Markets, and Financial Crisis
- Political Geography:
- Europe, Greece, and Argentina
513. Reinventing the Media Investor
- Author:
- Don Podesta
- Publication Date:
- 03-2010
- Content Type:
- Working Paper
- Institution:
- National Endowment for Democracy
- Abstract:
- That is the message that Sasa Vucinic, managing director of the Media Development Loan Fund (MDLF), is sending to the media development community. It also neatly encapsulates the formula that Vucinic says is the key to building sustainable independent media and reflects the way his organization operates.
- Topic:
- Markets and Mass Media
- Political Geography:
- United States
514. Regulation of Executive Compensation in Financial Services
- Publication Date:
- 02-2010
- Content Type:
- Working Paper
- Institution:
- Council on Foreign Relations
- Abstract:
- Many people argue that inappropriate compensation policies in financial companies contributed to the World Financial Crisis. Some say the overall level of pay was too high. Others criticize the structure of pay, claiming that contracts for CEOs, traders, and other key professionals induced them to pursue excessively risky and short-term strategies.
- Topic:
- Economics, Markets, Financial Crisis, and Governance
515. Information Sharing and Cross-Border Entry in European Banking
- Author:
- Caterina Giannetti, Nicola Jentzsch, and Giancarlo Spagnolo
- Publication Date:
- 02-2010
- Content Type:
- Working Paper
- Institution:
- Centre for European Policy Studies
- Abstract:
- Asymmetries can severely limit the cross-border border expansion of banks, if entering banks can only obtain incomplete information about potential new clients. Such asymmetries are reduced by credit registers, which distribute financial data on bank clients. Asymmetrically distributed information and adversely selected pools of borrowers constitute severe barriers for foreign banks when they enter new markets. In many instances, these problems force banks to either form 'alliances with incumbents' or simply enter through mergers and acquisitions (M). Yet such entry modes do not automatically lead to intensified competition as they may leave the number of competitors unchanged. Thus, institutions that reduce information asymmetries in credit markets (thereby encouraging entry through branches) may be very important if the objective is strengthening competition in addition to market integration. Recently, these institutions – credit registers – have received greater attention among academics and policy-makers in Europe, although there is still a remarkable lack of understanding of their empirical impact on banking.
- Topic:
- Economics, International Trade and Finance, Markets, and Monetary Policy
- Political Geography:
- Europe
516. Crisis in the eurozone and how to deal with it
- Author:
- Paul De Grauwe
- Publication Date:
- 02-2010
- Content Type:
- Policy Brief
- Institution:
- Centre for European Policy Studies
- Abstract:
- The crisis that started in Greece culminated into a crisis of the Eurozone as a whole. How did we get into this mess? To answer this question it is useful to distinguish the three actors that have played a role in the development of the crisis: Greece, the financial markets (including the rating agencies) and the eurozone authorities. Let us analyse the role of these three actors in the drama.
- Topic:
- Economics and Markets
- Political Geography:
- Europe and Greece
517. The Impact of the Crisis on the Real Economy
- Author:
- Daniel Gros and Cinzia Alcidi
- Publication Date:
- 01-2010
- Content Type:
- Policy Brief
- Institution:
- Centre for European Policy Studies
- Abstract:
- This crisis was caused by a combination of asset price bubbles, mainly in the real estate sector, and a credit bubble that led to excessive leverage. This is wellknown. What is less well-known is that on both accounts the euro area was affected by both 'bubble' symptoms as much as the US.
- Topic:
- Economics, Markets, and Financial Crisis
- Political Geography:
- United States and Europe
518. Better Jobs in Better Supply Chains
- Publication Date:
- 03-2010
- Content Type:
- Policy Brief
- Institution:
- Oxfam Publishing
- Abstract:
- This paper is intended for senior managers in all companies that source goods from developing countries. Examples are drawn mainly from the garment and agriculture industries but the learning is transferable to other industries, including electronics, construction, and services.
- Topic:
- Development, Economics, International Trade and Finance, Markets, Poverty, and Labor Issues
519. Defining Success: The Case against Rail Transit
- Author:
- Randal O'Toole
- Publication Date:
- 03-2010
- Content Type:
- Working Paper
- Institution:
- The Cato Institute
- Abstract:
- Over the past four decades, American cities have spent close to $100 billion constructing rail transit systems, and many billions more operating those systems. The agencies that spend taxpayer dollars building these lines almost invariably call them successful even when they go an average of 40 percent over budget and, in many cases, carry an insignificant number of riders. The people who rarely or never ride these lines but still have to pay for them should ask, “How do you define success?"
- Topic:
- Government, Markets, and Infrastructure
- Political Geography:
- America
520. The Costs and Benefits of Duty-Free, Quota-Free Market Access for Poor Countries: Who and What Matters
- Author:
- Kimberly Elliott, Antoine Bouët, David Laborde Debucquet, and Elisa Dienesch
- Publication Date:
- 03-2010
- Content Type:
- Working Paper
- Institution:
- Center for Global Development
- Abstract:
- This paper examines the potential benefits and costs of providing duty-free, quota-free market access to the least developed countries (LDCs), and the effects of extending eligibility to other small and poor countries. Using the MIRAGE computable general equilibrium model, it assesses the impact of scenarios involving different levels of coverage for products, recipient countries, and preference-giving countries on participating countries, as well as competing developing countries that are excluded. The main goal of this paper is to highlight the role that rich and emerging countries could play in helping poor countries to improve their trade performance and to assess the distribution of costs and benefits for developing countries and whether the potential costs for domestic producers are in line with political feasibility in preference-giving countries.
- Topic:
- Economics, International Political Economy, International Trade and Finance, Markets, and Third World