1:50 FRL 4531, Case #1.pdf The Greek Crisis: Tragedy or Opportunity 86% Case Objectives Greece suffered from the highest debt to GDP ratio in Europe and chronic budget deficit. A new Government was formed following a general election in October 2009, revealed that previous deficit estimates for the year had been optimistic, and announced that they were over 15% of GDP, more than twice previously claimed. The interest rate on newly issued Greek sovereign bonds increased dramatically over concerns by market participants that the country might not be able to repay its debt in full. By May of 2010, as the interest on the two year notes reached 19%. Greece had effectively lost access to the capital market and the ability to refinance its debt. With over 20 billion euro coming due within a few weeks, it faced the very real possibility of having to default by a country of the European Monetary Union since the introduction of the euro in 1999. And there were profound motives to avoid it. Suggested Questions 1. How did Greece get into this difficult situation? a. Was the fiscal crisis unequivocally Greece's fault? Was it irresponsible, dishonest? Were the cause's structural/political/cultural? b. Was Greece assuming it would be bailed out? C. Could you have seen this crisis coming from the data? Was it inevitable? d. Was the crisis fault of the euro? e. Was it wise to allow Greece to borrow at such cheap rates after joining the euro? f. Why did the German and the French banks lend so much? g. Why did it take so long on a rescue of an economy that is only 2.6% of the Eurozone? h. Was it the fault of the markets? Were they overoptimistic in marking the spreads down so much so fast? Are they over pessimistic now? 2. Exactly one year after the package was announced, the 10 year GGB could be bought for 50% of par, yielding 15.3% in euros. That is a yield to maturity of over 30% in euros> would you have invested in it knowing what you knew at that point in time? 3. Does the Greek crisis spell doom for the future of the euro and the euro area? ||| O