What is Greece Crisis Meant to India?

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Greece has reached breaking point in its relations with Europe with 30 June being the last date by which Greece has to repay the €1.6 billion loan installment due to IMF.

With Alexis Tsipras, the young Prime Minister of Greece, shutting all banks for six days and freezing trading in the stock exchange, Greece has effectively closed all chances of averting the default. In fact, on 29 June itself, Greece indicated that it will not be making the due payment thereby sealing its fate as a defaulter and once again setting the European and global economy on an uncertain future.

Earlier, Alexis Tsipras tried to negotiate with the European Central Bank for an extension of the debt repayment deadline but was turned down. In a move surprising all, the Greek PM has called for a referendum on Sunday, 5 July inviting the people to vote in favour or against further austerity measures. A ‘NO’ vote could result in Greece exiting the EU, unless there is a last minute understanding between the government and lenders, India’seems very unlikely at this stage, given the statement by Christine Lagarde of the IMF that the government in Greece has had its opportunity and no further extension of the loan repayment period will be granted. Jean-Claude Juncker, the President of the European Commission, tried to broker a last minute deal between Greece and its lenders. He, however, expressed exasperation at the breakdown of negotiations, and on Greece’s decision to hold a public referendum.

Europe now braces itself for a volatile period of economic uncertainty. The big question for India is – how is the crisis going to affect India? Before we try and figure that out, we need to know how the crisis started in the first place.

Understanding the ‘How & Why’ of the crisis:

The genesis of the present crisis dates back to 2001 when Greece joined the EU. Greece is an economy that largely depends upon heritage and leisure based tourism, given its ancient culture and long history.

In order to meet the strict norms of qualification for EU membership, the government in Greece imposed austerity measures and controlled profligate spending. However, once it became an EU member, Greece once again went back to easing controls on spending, which resulted in an increasing gap between expenditure and revenue. Along with this, came the bad decision by the then government in Greece, to go ahead and organise the Athens Olympics in 2004, which was awarded to it much earlier.

Greece was in no position to fund the Olympics, much less pay off the debt, subsequently. Organising the games in 2004 cost Greece €9 billion and resulted in Greece running up a public debt € 168 billion, with the deficit climbing to 6.1% of its GDP and debt reaching 110.6% of GDP. This began to ring bells of concern amongst the European lenders of the time, as the prescribed norm in EU for containing deficit was half the prevailing figure.

By 2005, Greece became the first country to come under the fiscal watch of the EU.

US Subprime Mortgage Hit Greece Hard:

While the crisis in Greece was reaching crisis levels, another crisis was emerging in the United States, the subprime mortgage. This coincided with the US going into recession between 2007 and 2009, triggering a worldwide financial crisis. Greece, too, was impacted, which further burdened an already overburdened economy. The EU which was already facing a banking system crisis began to shift to sovereign debt crisis, led by Greece.

By 2010, Greece was staring at bankruptcy and by 2011, the country’s public-debt-to-GDP ratio had reached 165%. With the economy shrinking and unemployment at levels high, Greece had to receive a bailout to avert a total collapse. The troika of lenders that included IMF, ECB and the EU, imposed strict conditions on Greece. The resulting austerity measures led to a decline in government spending, higher inflation and increased unemployment. The problem was that Greece had to cut expenditure to pay off the loan taken, therefore most of its revenues that came from a declining economy, went back to the lenders in the form of interest and principal amount due, leaving very little for the government to invest in other sectors that could boost the economy. The resulting debt trap has now squeezed the government further where it finds itself in a corner, with no solution in sight and loan default a certainty. If people vote against austerity measures in the referendum on 5 July, Greece will find itself isolated economically and politically, with no strength to stand up on its own.

How vulnerable is the global financial system to the emerging situation in Greece?

This time around, the governments are better prepared to handle the crisis, especially since it has been emerging overtime. The ECB has taken protection measures over time by buying Eurozone government bonds and thereby insulating governments from volatile situations in the financial markets.

The ECB is watching the situation carefully and is ready to infuse more capital by way of bond and other purchases, to ensure the impact on other member states remains contained. Fortunately, other EU members such as Ireland, Spain and Portugal have progressively adopted austerity measuresand are less likely to be vulnerable to the emerging crisis in Greece. In the aftermath of 2010, most international investors including banks had reduced their exposure to Greece, selling off their bonds to mostly private investors who were willing to hedge their bets on a turn around in the economy.

That hasn’t happened and therefore, it’s these private investors who will end up taking a major hit in the merging crisis. Geopolitical impact of GREXITA Greece exit or GREXIT, will lead to not just financial turmoil in the global economy but also to its political isolation. Greece is a member of NATO and by exiting EU, it may be forced to move closer to Russia seeking a bailout.

Russia, however, is itself facing isolation in Europe and therefore, as an existing member of NATO, Greece may place itself in a peculiar situation, with no clarity for either Greece, EU or NATO, on what political scenario will emerge from this situation.

Finally, is India vulnerable to the impending crisis?

Yes and no.

India has been preparing for this day and RBI Governor Raghuram Rajan has assured that the government is well prepared with adequate forex buffer to withstand the impending volatility in the international financial system.

The markets in India, however, saw volatility yesterday in reaction to Greece’s announcement that it would not pay the loan installment to IMF. As a result, on 29 June Sensex dropped 600 points before closing the day down 167 points, while Nifty dropped 62 points, to close the day at Rs 8,318.

The Rupee lost 0.29 paise to the dollar closing at Rs 63.73. Gold traded at Rs 26,950 per 10 grams, Rs 240 higher, while silver gained Rs 300 to touch Rs 36,700 per kg. Global markets, were heading South on 29 June, with the Dow Industrial Average 1.97% lower, S&P 500 2.09% lower, and the Nasdaq Composite ending 2.4% down.

India, with its $355 billion in forex reserves, CAD at less than 1.5% and inflation remaining in control, is better placed to handle any emerging situation. The resilience was showing on 30 June morning with the markets showing a recovery as on 1100 hrs IST, with Sensex up 37 points around 27,679 region and the Nifty in the region of 8,333, up 14 points. India’s well placed to ride out the crisis India may see a slowdown in the global economy which will impact its projected growth, however, with the economy growing mainly on account of domestic demand, India is better placed to ride out the impending international slowdown. The extent of the impact remains to be seen.


…shabab khan
Author is an Export Entrepreneur.
khansworld@rediffmail.com

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Five Point Entreprenuer!

Entreprenuer

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Five Point Entreprenuer

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sharmeeli khan nov 21st, 2014
MY Bedroom Adventures
Relation between those two units who spend average 7.5 hours a day behind the closed doors of bedroom, may be good, may be average ok, not good, bad or worst. But, whatever happens behind the doors and heavily dark curtains is kept secret. The secret may be in regard to Hyper Sexual Activities or Sex Deprivation… Frequent Arguements, Domestic Voilence, Forced Sex (Natural Unnatural) which is technically a ‘rape’, and lot more. Issues born there and die there.

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…shabab khan blog
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All Rights Reserved.

Ranking Does Matter

Khansworld

BUSINESS


Indian business is sure to get a big boost if the plans of the department of industrial policy and promotion (DIPP) to improve India’s ranking in the World Bank’s ease of doing business index to among the top 50 countries comes anywhere close to the target.

Though it might not apparently seem an easy task, given that India rank has remained below 130 in recent years, the target is still achievable with a little bit of grit and hardwork.

This is because many developing countries with much lower capabilities than India have gone up the rungs to the top 50 nations. And they include countries as disparate as Manutius, Lithuania, Thailand, Estonia, UAE, Saudi Arabia, Rwanda, Slovenia, Chile, Israel, Armenia, Cyprus, Puerto Rico, South Africa, Peru, Bahrain, Poland, Oman, Qatar and the Slovak Republic.

The list makes it amply clear that improving India’s ease of doing business ranking in not an insurmountable task as it is often made out to be. However, things cannot be taken for granted either given that a global economic power like China has been stuck at the 96 position in the most recent ease of doing business ranking.

Another reason for optimism on why the DIPP’s efforts are sure to make a substantial difference is that many of the factors that pull down India’s ranking fall well within the purview of the central government. These include important segments like that of enforcing contracts, starting a business, paying taxes, trading across borders and resolving insolvency.

However, it might sometimes need new legislation or large allocation of additional funds to ensure that India’s standing in some of these crucial areas is improved immediately. Though the ease of enforcing contracts may be improved by changes in rules and regulations, which need only executive action, that of resolving insolvency, which has to go though quasi judicial processes may require a change in laws.

However, it will be much easier for the central government to push through measures easing procedures in other crucial areas like paying taxes and trading across borders.

Concerted action by the ministries of finance and that of commerce and industry can ensure remarkable improvements on both these fronts. Similarly the central government can also easily tweak the rules and regulations that deal with protecting investors where India is already ranked at a fairly high level. However, the central government would have to secure active cooperation of the states if it is secure any progress in reducing hurdles to business in other equally crucial areas like dealing with construction permits, getting electricity connections and registering property. All these subjects come mostly under the jurisdiction of the states. Any major progress son these fronts will require the central government to dole out new incentive to motivate the states to roll out the needed changes.

So it is certainly the right time now for the central government to strike a good deal with the states and improve India’s global ranking in the ease of doing business.