Final Test

Final Test
Class: MBA (Master in International Business)

Course Title: International Financial Management
Course Code: 4082268
Submitted To:
Mr. Jiruo Zhang
Submitted By:
Malaika Noor
Student ID (2022510017)
Date of Submission: 5 December, 2022

Grexit or Not
What is Grexit?
Grexit, an abbreviation for "Greek exit," refers to Greece's potential withdrawal from the Euro-zone, and
a return to the Drachma as its official currency instead of the Euro. A term for the potential withdrawal
of Greece from the Eurozone (the economic region formed by those countries in the European
Union that use the euro as their national currency).
History of Grexit:
Greece became a part of the Eurozone in 2001. However, it wasn’t until the 2009 financial crisis
that the extent of the country’s financial troubles became clear; in 2010 Greece’s debt-to-GDP
ratio was 146%. There are several causes of Greece’s debt problems. The first is follows a
succession of governmental tax evasion and corruption.
This is thought to have taken place over several decades and was misreported in order to keep
within the Eurozone monetary guidelines. The second is that when Greece joined the Eurozone,
its labor costs went up significantly, making its trade deficit increase. Third: when the financial
crisis happened two of Greece’s biggest industries, shipping and tourism, slowed dramatically.
Once Greece’s deficits became clear, investors raised interest rates in exchange for loans that
Greece needed to stimulate the economy. This made Greece’s deficit problem worse, which in turn
increased interest rates. In 2010, to avoid a Grexit, the European Commission, the European
Central Bank (EBC), and the International Monetary Fund (IMF) agreed to a €110 billion loan
with conditional austerity measures, structural reforms, and privatization.
However, in the following year the recession worsened as the economy began to contract, causing
widespread unemployment and economic stagnation. To ease this, in 2012 a second bailout for
€130 billion was issued. This appeared to be working until 2014 when the country slipped back
into recession.
Following this, the leftist Syria-led government was elected by the Greek people with a mandate
to end austerity which many saw as crippling the economy, and as a result, loan payments were
withheld. Greece has since held a number of referendums; on July 5, 2015, Greek citizens voted
to reject the bailout terms.
This caused stocks to plummet as the perceived probability of a Grexit increased and also resulted
in a liquidity crisis, with the EBC continuing to provide Emergency Liquidity Assistance to Greek
banks. Should Greece run out of money, it will be forced to print an alternative currency – and this
would be the Grexit from the official Eurozone.
The Root Causes of the Greek Predicament:
The fundamental reasons for the Greek situation are that prior to accepting enrollment in the currency
union, the crucial due diligence required to assure Greece's economic stability was not carried out. Its
debt to GDP was too high yet it was nonetheless let in, leading to free riding through the creation of a
sizable amount of debt as a result of the cheaper access to credit using the Euro. Given that Greece only
has shipbuilding and tourism as industries, this money was used inefficiently. As a result, it began to fall
behind on its debt and needed help from the wealthier nations, including Germany. They risk going
bankrupt if this stops.
The Cost and Benefits of Staying in the Euro Zone for Greece:
The euro makes it easier, cheaper and safer for businesses to buy and sell within the euro area and to
trade with the rest of the world. Improved economic stability and growth. Better integrated and therefore
more efficient financial markets. Greater influence in the global economy.
The measures that need to be taken to keep Greece in the Euro zone in
the long run if that is desirable:
Greece’s European partners, by the austerity conditions they have imposed, have brought the country to
its knees—a depression, with 25 percent unemployment, more than 50 percent youth unemployment,
and a 25 percent drop in GDP from the before the crisis level. in this case, Greece’s partners are trying to
impose an economic philosophy, austerity, that has proven itself a failure—in return for money, 90
percent of which went to the creditors, with only paltry amounts going to the Greek people.
Still, there’s an easy way forward for Greece to stay within the Eurozone: an agreement that the primary
surplus (the excess of revenues over expenditures, excluding interest payments) would remain at 1
percent until there was a restoration of sustained growth (say, GDP growth of 2 percent for at least two
years and unemployment less than 15 percent) in return for structural reforms—openly discussed within
society and the parliament. Careful attention should be given to prioritization: to structural reforms that
are systemically important and are likely to have significant and sustained effects on long term economic
performance and the government’s budgetary position, not just increasing the number of unemployed or
those surviving at the margin of society.
Of course, the European Central Bank will have to continue to serve as Greece’s central bank, acting as a
lender of last resort, and even the IMF has said that debt relief will be needed.
What actions can the government take to increase national income growth in Greece?
 Privatization of state assets both to raise revenue and to increase competition.
 Cuts in the national minimum wage.
 Measures to reduce entry barriers to certain occupations / professions including transport.
 Cutting taxes on employing workers to boost employment.
If you were a disinterested outside advisor for the Greek government,
would you advise Grexit or not? Why or why not?
If I were a consultant, I would suggest that they stay in the European Union and review all of their policies
and goals, including their monetary, tax, and wage plans, in order to bring about successful reforms and
reconciliations. Which will aid in economic stabilization and prevent a crisis for the nation. They should
never have allowed Greece to leave the European Union. Due to the fact that these countries, which are
currently part of the euro zone, are significantly stronger and more developed than other countries, the
value of their currencies is very high globally.

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Final Test

Class: MBA (Master in International Business)

Date of Submission: 5 December, 2022

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