Greece joined the euro in 2001, leaving behind its domestic currency ‘drachma’. Greece became a member of European Union and started sharing its monetary policy with the rest of Europe. Slowly the confidence in Greek economy grew and a big economic boom took place. But my dear friends, nothing can go well in this world for long. With the onset of 2008, financial crisis engulfed the entire Greek economy. Greece became one of the poorest countries of European Union and unemployment rate reached as high as 28% in 2013, even worse than what U.S.A suffered during great depression. If Greece had its own currency’ drachma’ it could well have boosted its economy by printing its currency. This would have made drachma relatively cheaper in international market, making its exports more competitive. This could have lowered its domestic interest rate and encouraged domestic investments. But sharing of a tight monetary policy with EU pushed Greek economy into depression. Its debt burden grew to an escalating figure of 177% of GDP.
For the last 5 years, Greece has been in continuous negotiation with European commission, ECB and IMF ( the Troika) for financial assistance. Since then they have been providing loans in exchange for some policy changes (contractionary fiscal policy- high tax rates, low government spending etc.) Now the Greek economy completely became dependent on troika for its monetary policy (as part of euro) and fiscal policy (as parts of loan assistance). Days passed by and Greece never came in a position to repay its debts and is finally facing a hard choice of accepting troika’s demand for more austerity or make a default on Greek debt and take an exit from the euro. The government is conducting a referendum on 5th July to let voters decide the destiny of Greece (both the options seems bad for them).
After Greece defaulted on its debt repayment to IMF( 1.87 billion euros), fears have been raised about its domino effect on the Europe. IMF in its report said that Greece’s debt have gone beyond the sustainable limits and it would need around 50 billion euros now , a 20 years holiday from its debt repayments and substantial write offs.
IMF in its report said that Greece’s debt have gone beyond the sustainable limits and it would need around 50 billion euros now , a 20 years holiday from its debt repayments and substantial write offs
Coming to its likely effect on India-There would be some initial volatility in the market but a prolonged impact is unlikely. The RBI governor said that its likely effect on India would be indirect through exchange rate and there would be no direct effect to be seen. This is because India does not have a larger trade share with Greece. But there would be risk of low exports if EU is affected. Indian rupee has remained stable in the days of panic. This is mainly because of better macroeconomic position of India (foreign exchange reserves reached 355.7 billion dollars and CAD and inflation is at its lowest). Indian financial markets have also shown a strong resilience to the Greek crisis as compared to a bigger sell offs in other markets. The recent sell off in Chinese stock market could trigger some safe haven buying in Indian equities as India is less exposed to Greece crisis as compared to other Asian economies. Monsoon so far has been above normal and if trend continues then we can expect food inflation to go down soon. After reviewing state of economy, RBI governor said that our economy is recovering and there are signs of capital investment picking up. Because the likely impact of Greece on India is very limited so after initial panic, investors will start differentiating and will realize the real wealth of India as a safe-haven nation for investing.
To sum up, I would say that it is now the time to see that how people of Greece decide in the referendum about its destiny. A ‘ no’ vote could increase the probability of Greece exiting from euro and coming back again to the drachma. When the entire world is waiting for 5th of July, India seems relatively stable and its economy is showing the signs of recovery. Above normal monsoon coupled with buffer of highest ever foreign exchange and lowest CAD shows that the prospect of India’s growth is good and India will pick up growth and can go beyond the levels reached in 2003-2007.