Financial ManagementI

TABLE OF CONTENT

INTRODUCTION

MAIN BODY

CONCLUSION

REFERENCE

INTRODUCTION

It has been quite evident by the economic situations of most of the Euro countries that the Euro experiment has failed. It was not an accident but the main reason for its failure was the result of imposing a single currency on a very heterogeneous group of countries or in simple terms due to bureaucratic mismanagement. The conditions of the European countries include very high sovereign debt crises with very weak or fragile conditions of major European banks. There are also high unemployment rate in almost entire Eurozone with high trade deficits. At the same time, it has also failed to create the political stability in the Eurozone area. For instance, several austerity measures in Greece and Italy due to financial gains has negative impact over France and Germany. EU officials had very clearly showed the economic recession in the European countries. Even if they reduced the government debts by reducing their expenditures and increased the taxation in the countries, it was not enough to bring the good economic situation in the For more than three years now, EU officials have addressed the economic downturn with remarkable single-mindedness. It motivated the investors to borrow high amount for more investment particularly in the real estate sector in the economy. Increase in money supply in the economy helped in easing out the credit access which encourages people to take loans particularly home loans. This leads to rise in the demand for homes and the prices of real estate had shoot up. Particularly the mortgage lenders offered too much “creative financing” to lot of risky borrowers who did not had good credit background as well. money supply in the economy because central bank had reduced the interest rate. They allowed for adjustable rate mortgages which took the loans on unpaid interest on the principal amount of home loans. They were speculating that the price of the real estate sector will increase a lot giving them benefit in long run. But in the long run, people were not able to pay back their loan which made the banking sector bankrupt.

MAIN BODY

For months, European leader have been trying to find a way out of the Greek debt crisis. But austerity is merely driving the country deeper into economic despair. Cuts in salaries and social spending have resulted in a dramatic drop in demand, which has in turn accelerated the economy’s contraction. Tax revenues have plunged, leading to the need for even more spending cuts. If European leaders continue pushing for similar solutions, Greece will not manage to emerge from the crisis. It was one of the main repercussion effects of subprime mortgage recession in U.S. The whole U.S shook down and there was drastic fall in the money supply in the country which resulted into the recessionary situation. The main blame went onto the mortgage brokers and investment firms which were offering high loans to even high risk people. Another repercussion which led to the fall in the aggregate demand was the rise in the interest rate due to non-payment of debts. Critics also targeted mortgage giants Fannie Mae and Freddie Mac, which encouraged loose lending standards by buying or guaranteeing hundreds of billions of risky loans.  (Bianco, 2008)

They’ve imposed severe austerity (reducing government debts through drastic cuts in spending along with tax increases) — particularly in those countries with the largest debts, the so-called “periphery.” . It’s clear that people in Spain, Ireland, Italy, Portugal, Greece and millions of unemployed elsewhere in the region are worse off today than they were four years ago.

Due to debt crisis in any economy, it cannot print as much money as it wants because money needs to be backed by the equivalent amount of Gold with that of IMF. Also, too much printing of money leads to rise in inflation in the economy as it increases the aggregate demand by too high amount and price level increases.

The International Monetary Fund and World Bank lent money to dozens of countries which would otherwise have defaulted, in order to keep the debt repayments flowing back to the banks of the rich world who had created the crisis by their own reckless strategies. Then, those countries, which benefited not at all from these ‘bail-out’ funds, were told to implement structural adjustment policies which saw industry privatised, money freed from government control and markets ripped open to competition with well-subsidised companies from the US and Europe. The same logic lies barely concealed behind the Greece ’bail-out’ being agreed by European finance minister. It is recognised that what Greek unions call the ‘barbaric’ additional austerity measures Greece has to implement in order to receive these funds will lead to stagnation and unemployment detrimental to repaying debt. By 2020 Greece’s debts will still represent an unsustainable 120 per cent of the country’s GDP – and that’s if things go very well.

Recently, Merkel has been invited by a foundation to join in a discussion on the future of Europe. A young woman stands up and identifies herself as a foreign student studying in Germany and a "despairing representative of a younger Greek generation." She says that, of course, she would like to return to her home country after completing her studies. "But whenever I make inquiries about work in Athens," she says, "I'm only offered jobs in Germany."

“The situation in Greece is extremely difficult, cannot imagine a currency union without the highly indebted nation. I want Greece to keep the euro. I would not participate in pushing Greece out of the euro .That would have unforeseeable consequences." says Merkel. Europe's leaders had been hoping to finally present to their sceptical citizens a convincing and viable plan for rehabilitating Greece and fortifying the will to preserve the currency union in its current form at any price. Europe is now paying the price for the inability of its leaders -- together with the International Monetary Fund (IMF) and its managing director Christine Lagarde -- have still not been able to agree on effective therapy for improving Greece's economic health. They share the belief that, given the unforeseeable consequences, a Greek exit from the euro zone should be avoided at all costs. But it remains unclear how the highly indebted country can be nursed. The plan to save Greece is based on assumptions that have proven to be hopelessly optimistic. Europe's leaders had assumed that Greece would quickly return to economic growth. But the severity of the austerity measures demanded makes that doubtful. The International Institute of Finance (IFF), which is representing private holders of Greek sovereign bonds, reached an agreement on voluntary debt relief resulted in a dramatic drop in demand, which has accelerated the economy's contraction. In exchange, they will receive new bonds with longer maturity periods and significantly lower yields. The new bonds will be guaranteed by the euro backstop fund, which provides added incentive for creditors to participate in the swap.

There has indeed been practically no progress in opening the labor market, and the revenues generated by privatizing state-owned assets are lagging well behind projected targets.

Many took a turn speaking, with the general drift being that pure austerity policies such as those being carried out in Greece amount to economic nonsense.

When the Depression struck, banks and local businesses faced unplayable loans and declining asset values.  Exchange rate. Bond yields blew out. Borrowing costs shot up. 

Greece would have been better off, had it not suffered a rapid series of downgrades and been pulverized by subsequent hot-money flight and pressure. Despite a clear warning from the Central Bank of Greece in late 2009 (when Greece was critical, but breathing) that it could sustain its costs if they did not rise .

It is no surprise that the conventional economic philosophy behind austerity is being seriously challenged way beyond Greece, in the United States, Britain and in Brussels itself. It is essential that the shortcomings of this philosophy are addressed quickly and effectively. If not, the problems will only get worse. There is a growing risk that the ideological obsession with austerity will endanger the entire European project.

CONCLUSION

The problem in Greece, though, says Daskalopoulos, are not the salaries and wages. Rather, it is the structures that make the country a problem case. The troika has failed, he says, to convince Greek politicians to accept the reforms.

Instead of insisting on reforms in the places where they're needed, international creditors and their austerity measures risk suffocating the last functioning bits of Greece's private sector, "If we continue the way we're going, we'll be left with no foundation at all for economic

"If those responsible for implementing reforms were able to hold out hope that they would nonetheless receive additional payments, we would never reach a stable euro zone,".

They see opinion turning against a New Greek bailout, but they're aware at the same time that the alternative carries considerable risks: If Greece goes bankrupt; the German government stands to lose dozens of billions of euros in the worst case scenario.

But though that move would help Greece, it would have unpredictable consequences for the rest of the euro zone.

As in any country, Greece's banks are big buyers of its government bonds. They also use those bonds as collateral for other borrowing and trades - with each other – and with international banks.

So what is the point of the bailout? To keep the money flowing into the European financial system. Indeed the likely creation of an escrow account will mean that Greece’s people are by-passed entirely – money will be lent from European institutions, ultimately tax payer’s money – and flow out into the coffers of European banks. It is a bank bail-out on a gigantic scale.

If, on the other hand, they force Athens out of the euro zone, the entire monetary union is at risk. There should be a calls for a radical rethink and proposes a Plan B that until now, no politician has dared to consider: Allow Greece to go bankrupt within the Eurozone. 

 If Greece went bankrupt, the entire country would descend into chaos. Civil servants would no longer receive their salaries and retirees would have no pension. Greek banks, even now barely making ends meet, would be in danger of immediate bankruptcy, as would many companies. The collapse of Greece's economy would affect the European banking sector as well. German or French banks would have to permanently write off not only Greek government bonds, but also many loans made to the country's private sector. The costs of Greek bankruptcy, in other words, would be immense. Still, the calls to finally put an end to the Greek tragedy are growing ever louder. That leaves just one viable but expensive strategy: Allow Greece to go bankrupt, but within the euro zone. This would make it possible to reduce the country's mountain of debt to a manageable level, providing the necessary leeway for a new start both economically and politically, through tough structural reforms and a growth strategy for industry and services.

In fact, it is better to sell treasuries bonds so that money supply can be reduced and people do not hold too much leading to fall in aggregate demand. It would help in paying back the debt off so that nation’s burden can be reduced.

But what happens if Greece then leaves the euro zone? In the interest of economic recovery, drawing a clear and final line under the entire euro adventure would be the logical next step.If the Greek government were to reintroduce the drachma, greatly devalued, it would make the country's goods and services cheaper. The tourism industry, for example, would then have a considerable advantage over competitors such as Spain. This is the most well-proven and feasible way to overcome crises such as the one in Greece. If concerns escalated that Greece would become just the first of many countries to leave the monetary union, it could trigger a dangerous chain reaction. Banks, insurance companies and funds would try to divest their government bonds from crisis-ridden countries as quickly as possible. Meanwhile, residents from Lisbon to Madrid to Rome might start raiding their bank accounts and moving the cash to northern Europe. European leaders find themselves in a nearly irresolvable dilemma.

If they go on as they have been, the country won't emerge from the crisis. If they force Athens out of the euro zone, they endanger the entire monetary union.

During the Great Depression of the 1930s, Greece was able to float its currency (Drachma), declare a moratorium on public debt, spend to support its economy and ultimately renegotiate repayment terms with its creditors.

Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around Credit constricted immediately, choking internal economic activity.  In 1928, the Greek Drachma was tied to the gold standard, but pegged to the British pound. When Britain devalued its pound in 1931, the Greek government responded by raising public investments and pegging the Drachma to the US dollar.

As Greek banks weakened and borrowing costs soared, their ability to buy Greek bonds from their own government diminished, which weakened the value of government debt.

Further, the more bailout measures forced on Greece, the more its economy will be ravaged to repay them.  After four rounds of austerity, nationwide protests, $110 billion Euros in IMF and ECB bailouts, escalating interest rates driving borrowing costs higher and choking credit, a downgrade to junk, a Prime Minister replacement, and now another big bailout, Greece’s tragedy is just beginning.

By floating the Drachma (the equivalent of leaving the Euro), negotiating individually with creditors (telling banks to back off), and increasing internal public focus (the opposite of what's going on now) Greece was able to stabilize more quickly than larger European countries.: but it requires the currently unimaginable: a political will that is population – rather than bank – oriented.

Greece continues to emphasize the need for a fundamental change in the European Union’s economic philosophy. In contrast, a hegemonic Germany insists on maintaining the current economic philosophy, not because it is good for Europe but because it considers it beneficial for its own interests. This is despite the recession now knocking on Germany’s door.

Change will require Germany to adapt its philosophy and perspective, but unfortunately, German thinking continues to confuse household economic management with macroeconomics. In the short term, the most likely scenario is more friction and demands for austerity measures aimed at strict fiscal discipline. It is doubtful whether this can be sustained over time.

As things stand, it is impossible for Greece to pay off its debts and meet its broader economic policy obligations. The private and public debts cannot be repaid under conditions of a deep and sustained recession. These conditions risk leading Athens to financial collapse and exit from the eurozone, despite declarations by officials on all sides on the importance of Greece staying in the currency bloc. Even default within the eurozone would create serious complications well beyond Greece.

The Greek government is emphasising the necessity of stepping up measures against fraud, corruption and tax evasion. The implementation of these measures will be very effective, if accompanied by a policy of substantial tax cuts at all levels and severe penalties for non-compliance. Otherwise, it will be very difficult for the government to raise the necessary public revenues.

If the EU does not understand the broader implications of the Greek crisis and the need for a deep reflection on its future course, the Union will miss a golden opportunity to restore its reputation, both domestically and on the international stage.

REFERENCES