Greece n Dubai Crisis

8/6/2019 Greece n Dubai Crisis

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From late 2009, fears of a sovereign debt crisis developed concerning some European states, with

the situation becoming particularly tense in early 2010.[1][2]

This included euro

zone members Greece,[3]

Ireland and Portugal and also some EUcountries outside the

area.[4] Iceland, the country which experienced the largest crisis in 2008 when its entire international

banking system collapsed has emerged less affected by the sovereign debt crisis as the government

was unable to bail the banks out. In the EU, especially in countries where sovereign debts haveincreased sharply due to bank bailouts, a crisis of confidence has emerged with the widening

ofbondyield spreads and risk insurance on credit default swapsbetween these countries and other

EU members, most importantly Germany.[5][6]

While the sovereign debt increases have been most pronounced in only a few euro zone countries

they have become a problem for the area as a whole.[7]

In May 2011, the crisis resurfaced,

concerning mostly the refinancing of Greek public debts.[8]

The problems have been compounded by

political instability in Greece.[9][10]

In late June 2011, the crisis situation was again brought under

control with the Greek government managing to pass a package of new austerity measures and EU

leaders pledging funds to support the country.[11]

Concern about rising government deficits and debt levels[12][13]

across the globe together with a wave

of downgrading of European government debt[14]

created alarm in financial markets. On 9 May 2010,

Europe's Finance Ministers approved a comprehensive rescue package worth almost a trillion dollars

aimed at ensuring financial stability across Europe by creating the European Financial Stability

Facility.[15]

In 2010 the debt crisis was mostly centered on events in Greece, where there was concern about the

rising cost of financing government debt. On 2 May 2010, the eurozone countries and

the International Monetary Fund agreed to a110 billion loan for Greece, conditional on the

implementation of harsh austerity measures.[16]

The Greek bail-out was followed by a 85 billion

rescue package for Ireland in November,[17]

and a 78 billion bail-out for Portugal in May 2011.[18][19]

This was the first eurozone crisis since its creation in 1999. As Samuel Brittan pointed out,[20] Jason

Manolopoulos "shows conclusively that the eurozone is far from an optimum currency area".[21]

Niall

Ferguson also wrote in 2010 that "the sovereign debt crisis that is unfolding...is a fiscal crisis of the

western world".[22]

Axel Merk argued in a 2011 article that the dollar was in graver danger than the

euro.[23]

Contents

[hide]

y 1 Greek government funding crisiso 1.1 Causeso 1.2 Downgrading of debto 1.3 Austerity and loan agreement


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o 1.4 Danger of defaulto 1.5 Objections to proposed policies

y 2 Spread beyond Greeceo 2.1 Irelando 2.2 Spaino 2.3 Portugalo 2.4 Icelando 2.5 Belgium

y 3 EU emergency measuresy 4 Long-term solutions

o 4.1 Two currencies solutiony 5 Controversies

o 5.1 Odious Debto 5.2 Controversy about National Statisticso 5.3 Credit rating agencieso 5.4 Mediao 5.5 Role of speculators

y 6 See alsoy 7 Referencesy 8 External links

[edit]Greek government funding crisis

See also: Economy of Greece 2010-2011 debt crisis

[edit]Causes


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Public debt as a pe

ce t of GDP (2007)

Public debt as a pe ce

t of GDP (2009/2010)

The Gree

economy was one of the fastest growing in theeurozoneduring the2000s; from 2000 to

2007 it grew at an annual rate of42% as foreign capital flooded thecountry

[24] A strong economy

and falling bond yields allowed the government of Greece to run largestructural deficitsAccording

to an editorial published by the Gree

newspaperKa h

n

, large public deficits are one of the

features that have marked the Greek social model since therestoration of democracy in 1974After

the removal of theright leaning militaryjunta, the government wanted to bring disenfranchised left

leaning portions of the population into theeconomic mainstream.[25] In order to do so, successive

Greek governments have, among other things, run large deficits to finance publicsectorjobs,

pensions, and other social benefits.[26]Since1993 debt to GDP has remained above100%.[27]

Initiallycurrencydevaluation helped finance the borrowing. After the introduction of theeuro in Jan

2001, Greece was initially able to borrow due to the lower interest rates government bondscould

command. Thelate-2000s financial crisis that began in 2007 had a particularly largeeffect on

Greece. Two of thecountrys largest industries are tourism and shipping, and both were badly

affected by the downturn with revenues falling 15% in 2009.[27]

To keep within themonetary union guidelines, the government of Greece has been found to have

consistently and deliberately misreported thecountrys official economicstatistics.

[28][29]In the

beginning of2010, it was discovered that Greece had paidGoldman Sachs and other banks hundreds

of millions of dollars in feessince2001 for arranging transactions that hid the actual level of

borrowing.[30]

The purpose of these deals made byseveral subsequent Greek governments was to enable them to

spend beyond their means, while hiding the actual deficit from the EU overseers.[31] Theemphasis on


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the Greek case has tended to overshadow similar serious irregularities, usage of derivatives and

"massaging" ofstatistics (to cope with monetary union guidelines) that have also been observed in

cases of other EU countries; however Greece wasseen as probably the worst case.

In 2009, the government ofGeorge Papandreou revised its deficit from an estimated 6% (8% if a

special tax for building irregularities were not to be applied) to 12.7%.[32]

In May2010, the Greek

government deficit wasestimated to be13.6%[33] which is one of the highest in the world relative to

GDP.[34]

Greek government debt wasestimated at 216 billion in January2010.[35]

Accumulated

government debt was forecast, according to someestimates, to hit 120% of GDP in 2010.[36]The

Greek government bond market is reliant on foreign investors, with someestimatessuggesting that

up to 70% of Greek government bonds are held externally.[37]

Estimated tax evasion costs the Greek government over$20 billion per year.[38]

Despite thecrisis,

Greek government bond auctions have all been over-subscribed in 2010 (as of26

January).[39]According to theFinan

ia

Times on 25 January2010, "Investors placed about 20bn

($28bn, 17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek)

government had reckoned on." In March, again according to theFinan

ia

Times, "Athenssold 5bn

(4.5bn) in 10-year bonds and received orders for three times

that amount."[40]

[edit]Downgrding of d

bt

This article sf ctu l ccur cy m y b compromis d du to out-of-d t inform tion.

Please help improve the articleby updating it. There may be additional information on

thetalk page. (June 2011)

On 27 April 2010, the Greek debt rating was decreased to the first levels of 'junk' status byStandard

& Poor's amidst fears of default by the Greek government.[41] Yields on Greek government two-year

bonds rose to 15.3% following the downgrading.[42]Some analystsquestion Greece's ability to

refinance its debt. Standard & Poor'sestimates that in theevent of default investors would lose30

50% of their money.[41]

Stock markets worldwide declined in response to this announcement.[43]

Following downgradings byFitch, Moody's and S&P,[44] Greek bond yields rose in 2010, both in

absolute terms and relative to German government bonds.[45] Yields have risen, particularly in the

wake ofsuccessive ratings downgrading. According toThe Wa

S

eetJourna

, "with only a handful

of bondschanging hands, the meaning of the bond move isn't so clear."[46]

Gr kd btcrisis

Economy of Greece

Euro (currency)

2000s financial crisis

Europ nd btcrisis

Greek financial crisis

20102011 protests

edit


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On 3 May 2010, the European Central Bank suspended its minimum threshold for Greek debt "until

further notice",[47]

meaning the bonds will remain eligible as collateral even with junk status. The

decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it

should also help increase Greek bonds' attractiveness to investors.[48] Following the introduction of

these measures the yield on Greek 10-year bonds fell to 8.5

, 550 basis points above German yields,

down from 800 basis points earlier.

[49]

As of 26 November 2010, Greek 10-year bonds were tradingat an effective yield of 11.8

.[50]

[edit]Auste!it

"

and loan a#

!ee

$ent

On 5 March 2010, the Greek parliament passed the Economy Protection Bill, expected to save

4.8 billion[51]

through a number of measures including public sector wage reductions. On 23 April

2010, the Greek government re%

uested that the EU&

IMF bailout package be activated.[52] The IMF

had said it was "prepared to move expeditiously on this re%

uest".[53] Greece needed money before

19 May, or it would face a debt roll over of$11.3bn.[54][55][56]

The European Commission, the IMF and ECB set up a tripartite committee (the Troika'

to prepare an

appropriate programme of economic policies underlying a massive loan. The Troika was led byServaas Deroose, from the European Commission, and included also Poul Thomsen (IMF

'and Klaus

Masuch (ECB'

as junior partners. On 2 May 2010, a loan agreement was reached between Greece,

the other eurozone countries, and the International Monetary Fund. The deal consisted of an

immediate 45 billion in loans to be provided in 2010, with more funds available later. A total of

110 billionhas been agreed.[57][58]

The interest for the eurozone loans is 5

, considered to be a

rather high level for any bailout loan. According to EU officials, France and Germany demanded that

their military dealings with Greece be a condition of their participation in the financial rescue. [59] The

government of Greece agreed to impose a fourth and final round of austerity measures. These

include:[60]

Public sector limit of 1,000 introduced to bi-annual bonus, abolished entirely for thoseearning over 3,000 a month.

An 8(

cut on public sector allowances and a 3(

pay cut for DEKO (public sector utilities)

employees.

Limit of 800 per month to 13th and 14th month pension installments 0 abolished forpensioners receiving over 2,500 a month.

Return of a special tax on high pensions. Changes were planned to the laws governing lay-offs and overtime pay. Extraordinary taxes imposed on company profits. Increases in VAT to 23

1, 11

1and 5.5

1.

102

rise in luxury taxes and taxes on alcohol, cigarettes, and fuel.

E3

ualization of men's and women's pension age limits.


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General pension age has not changed, but a mechanism has been introduced to scale themto life expectancy changes.

A financial stability fund has been created. Average retirement age for public sector workers has increased from 61 to 65.[61] Public-owned companies to be reduced from 6,000 to 2,000.[61]

On 5 May 2010, a nationwide general strike was held in Athens to protest to the planned spending

cuts and tax increases. Three people were killed, dozens injured, and 107 arrested.[62]

According to research published on 5 May 2010, by Citibank, the EMU loans will be paripassu and

not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis

but is respected nonetheless. The loans should cover Greece's funding needs for the next three years

(estimated at 30 billion for the rest of 2010 and 40 billion each for 2011 and 2012 4 . Citibank finds

the fiscal tightening "unexpectedly tough". It will amount to a total of 30 billion (i.e. 12.5 5 of 2009

Greek GDP4

and consist of 55

of GDP tightening in 2010 and a further 45

tightening in 2011.[63]

[edit]Dan6

e 7 of default

Further information: Sovereign default

Without a bailout agreement, there was a possibility that Greece would have been forced

to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high

chance of a default or restructuring. Analysts gave a 25 8 to 90 8 chance of a default or

restructuring.[64][65] A default would most likely have taken the form of a restructuring where Greece

would pay creditors only a portion of what they were owed, perhaps 50 or 25 percent.[66]

This would

effectively remove Greece from the euro, as it would no longer have collateral with the European

Central Bank.

[citation needed]

It could also destabilise the Euro Interbank Offered Rate, which is backed bygovernment securities.

[67]

Some experts have nonetheless argued that the only sensible option at this stage is for the EU to

engineer an orderly default on Greeces public debt which would allow Athens to withdraw

simultaneously from the eurozone and reintroduce its national currency the drachma at a debased

rate[68]

Economists who favor this approach to solve the Greek debt crisis typically argue that a delay

in organising an orderly default would wind up hurting EU lenders and neighboring European

countries even more.[69]

At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its

economy with monetary policy. For example, the U.S. Federal Reserve expanded its balance sheet by

over $1.3 trillion USD since the global financial crisis began, essentially printing new money and

injecting it into the system by purchasing outstanding debt.[70]

Greece represents only 2.58

of the eurozone economy.[71]

Despite its size, the danger is that a

default by Greece will cause investors to lose faith in other eurozone countries. This concern is

focused on Portugal and Ireland, both of whom have high debt and deficit issues.[72] Italy also has a

high debt, but its budget position is better than the European average, and it is not considered

among the countries most at risk.[73]

Recent rumours raised by speculators about a Spanish bail-out


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were dismissed by Spanish Prime Minister Jos Luis Rodrguez Zapatero as "complete insanity" and

"intolerable".[74]

Spain has a comparatively low debt among advanced economies, at only 539

of

GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less

than Italy, Ireland or Greece,[75] and it doesn't face a risk of default.[76] Spain and Italy are far larger

and more central economies than Greece@

both countries have most of their debt controlled

internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikelyunless the situation gets far more severe.

[77]

[edit]ObjeAtions to p

Boposed poli

Aies

See also May 2010 Greekprotests

The crisis is seen as a justification for imposing fiscal austerity[78]

on Greece in exchange for European

funding which would lower borrowing costs for the Greek government.[79]

The negative impact of

tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption

could have a significantly negative impact on investment and growth in the longer term. Joseph

Stiglitzhas also criticised the EU for being too slow to help Greece, insufficiently supportive of the

new government, lacking the will power to set up sufficient "solidarity and stabilisation framework"to support countries experiencing economic difficulty, and too deferential to bond rating

agencies.[80]

As an alternative to the bailout agreement, Greece could have left the eurozone. Wilhelm Hankel,

professor emeritus of economics at the University of Frankfurt am Main suggested[81] in an article

published in the FinancialCimes that the preferred solution to the Greek bond 'crisis' is a Greek exit

from the euro followed by a devaluation of the currency. Fiscal austerity or a euro exit is the

alternative to accepting differentiated government bond yields within the Euro Area. If Greece

remains in the euro while accepting higher bond yields, reflecting its high government deficit, then

high interest rates would dampen demand, raise savings and slow the economy. An improved trade

performance and less reliance on foreign capital would be the result.[citation needed]

In the documentary Debtocracy made by a group of Greek journalists, it is argued that Greece

should create an audit commission, and force bondholders to suffer from losses, like Ecuador did.

This documentary had a tremendous success in Greece, as it was watched at least by 500,000 people

in few weeks.[citation needed]

DUBAI CRISIS

2009 debt standstill

With the onset of the financial crisis of 20072010, Dubai's real estate market declined after a six-

year boom. On November 25, 2009, the Dubai government announced that the company "intends to

ask all providers of financing to Dubai World and [its subsidiary] Nakheel to 'standstill'[8] and

extend maturities until at least 30 May 2010".[9]

The company has laid off 10,500 employees

worldwide.[10]

At that time, Dubai World had debts of$59-billion, accounting for nearly three-

D uarters of the emirate's US$80-billion debt.[11]

This includes a US$3.5-billion loan which the

company was unable to repay by its December deadline.[12]


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In response to the government announced moratorium of Dubai World's debts,

both Moody's and Standard & Poor's Investors Services heavily downgraded the debt of various

Dubai government-related entities with interests in property, utilities, commercial operations and

commodities trading. In Moody's case, the downgrade meant that the affected agencies lost their

investment grade status.[13]

Concerns over the fallout from Dubai's debt problems contributed to the main European stock

indexes falling over 3E

on 26 November. This was followed by drops in Asian stocks on 27

November. However the European stock markets rebounded as investors' fears subseF

uently

subsided as they decided the estimated debt wasn't big enough to trigger a systemic failure in global

financial markets. "For now, the market is taking the view that the Dubai debt issue may be a storm

rather than a hurricane," said Jane Foley, a research director at Forex.com in London.[14][15][16][17]

The

American markets were closed on 26 November but American stocks fell on the afternoon of 27

November as similar fears rattled Wall Street in a thinly-traded half-day session. The Dow Jones

industrial average (INDUG

fell 155 points, or 1.5E

, after closing 25 November at a 13-month high. The

Dow had lost 233 points in the morning.[18] Also, concerns of the crisis led to a sharp rally in theU.S.

dollar and Japanese Yen against most other world currencies as these currencies had been perceivedas "safe haven" currencies during times of uncertainty.

[19]

An unnamed senior official told news agencies on November 28 that Abu Dhabi, the wealthy capital

of the United Arab Emirates, would "pick and choose" how to assist Dubai World. "We will look at

Dubai's commitments and approach them on a case-by-case basis," the official told

the Reuters news agency by telephone, adding: "It does not mean that Abu Dhabi will underwrite all

of their debts." Meanwhile India's central bank governor said an assessment of the impact of Dubai's

debt problems was needed before deciding on a response. "We should not react to instant news like

this. One lesson of the crisis is that we must study the developments, and I think we must measure

the extent of the problem there and how it impacts India," Duvvuri Subbarao said in Hyderabad,

India.[20]

A public statement on 30 November 2009, of the Dubai Finance Department Director-General, that

the Dubai World debts are "not guaranteed by the government"appears to correctly reflect the legal

position, as the Dubai Government were not reF

uired by the lenders, and nor did they provide, any

contractual guarantees in respect of the Dubai World debt:

Officials in the United Arab Emirates tried on December 1 to calm investors and the public over the

Dubai World debt crisis, and the company itself said it was seeking to renegotiate only the $26

billion in obligations held by its troubled real estate developer, Nakheel. It also said that it had

hired Moelis & Company, the investment boutiF

ue headed by Ken Moelis, a former UBS banker, to

be its adviser.Rothschild is also advising Dubai World. Shares in Dubai and Abu Dhabi were down fora second day, with both key indexes declining about 6 E . On November 30, shares dropped in Dubai

and Abu Dhabi by 7.3E

and 8.3E

, respectively.[21]

On December 14, 2009 the Dubai government received $10 billion in surprise aid from Abu Dhabi for

debt-laden Dubai World, which said it would use $4.1 billion of it to repay its Nakheel unit's Islamic

bond maturing on the same day.[22]


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As of24 January Dubai World's property assets haveexceeded USD 120 billion, so that it could cover

its debt of USD 57 billion.[23]

[edit]Debt Deal

On May20, 2010 Dubai World said that it had reached an agreement "in principle" with most of its

bank lenders to restructure debt worth $23.5bn (16.4bn). It would be left with debts of $14.4bnafter the restructuring. But the deal must still be approved by other banksthat were not involved in

the negotiations. The terms of the restructuring, includeconverting $8.9bn of government debt into

equity. The government ofDubai and Dubai World had tabled this offer to bank lenders in March

2010 after three months of negotiations.[24]

[edit]Managed companies

Nakheel'sman-made islandPalm Jumeirahseen from theInternational SpaceStation on 2005.

DP World, the third largest port operator in the world EconomicZones World Nakheel, known for residential estate development projectssuch as thePalm Islands,

theDubai Waterfront, The World and The Universe Islands

Dubai Drydocks Dubai Maritime City Dubai Multi Commodities Centre Istithmar World Infinity World Development part owner ofCityCenter[25] Island Global Yachting Limitless Leisurecorp InchcapeShipping Services


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Tejari TechnoPark P&O Maritime Discovery Gardens Tamweel

[edit]

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