Demystifying the Greece crisis

Genesis of the Crisis
The financial meltdown post the Lehman crisis and unchecked spending by the government gradually pushed Greece's external debt and budget deficits to unimaginable levels. The debt has now actually shot up from 90 per cent of the country's GDP in 2008 to over 150 per cent now. Similarly, the budget deficit has peaked at 13 per cent of the GDP.

Situation on the Ground
The domestic economy is reeling under severe recession. Global rating agency Fitch has already downgraded the government debt rating to the lowest rating for an investment grade bond. This has a direct bearing on the foreign investors' interest in investing in government securities and other instruments. The country will actually default, if it doesn't arrange 80 billion euros in the next few months.

Impact on Europe and Other Countries
The Eurozone would receive a big jolt if Greece defaults on its debt. A significant part of Greek bonds are held by financial institutions in Eurozone countries. Then, global investors having lost a lot of money holding Greek bonds could dump government bonds of countries like Spain, Ireland, Portugal and Belgium that are seen to have similar budgetary problems.

Options for Bridging the Gap
There are only two options for the Greece government; raise money from the market (that will come at a high interest rate) and borrow from the European Union and IMF (which will come with many conditions). In fact, the EU and IMF are working on a bailout package of about 45 billion euros.

What It Means for India
There is little impact in the short term given India's limited trade with Greece. However, if the contagion spreads into the Eurozone there could be some tremors in India. It would not only impact Indian exports to the region (Europe accounts for 25 per cent of India's exports), but also foreign capital inflows into the country. It would also keep Dalal Street on its toes. Global stock markets are already jittery and stocks could drift lower if the crisis festers.