Greece’s Debt Crisis

The Effect of Greek Debt Crisis: This is what the we can learn

The Greek debt crisis has been so far the most dangerous amount of supreme debt that Greece was obliged to pay the European Union in between 2008 & 2018. Back in 2010, Greece stated that it would default on that debt which threatened the viability of Eurozone. To avoid defaulting, the EU did loan Greece enough amount to continue paying. This was most huge financial rescue for a bankrupt country. As at January 2019, Greece only made to repay 41.6 billion euros. Greece has scheduled its debt payments far beyond 2060.

In exchange for that loan, the EU needed Greece to come up with some austerity measures. The reforms were aimed to strengthen Greek’s government as well as its financial structures. They managed to do that but they went ahead to mire Greece into a recession which did not come to an end until 2017. This crisis leads to the Eurozone debt crisis and created fear that it would likely transform into a worldwide financial crisis. A warning was actually made of the destiny of other EU members which were heavily indebted. The massive crisis was brought about by a nation whose economic output was no bigger compared to the State of Connecticut in U.S.

Summary of Greek Crisis

In the year 2009, Greece’s budget deficit went beyond 15% of its GDP. The fear of defaulting became even wider once the 10-year bond increased ultimately leading to the Greece’s bond market collapse. This was likely to shut down Greece’s potential to finance other debt repayments.

Timeline of the event

In 2009, Greece made an announcement that its budget deficit was to be 12.9% of its GDP. This was more than 4 times the European Union’s 3% limit. The rating agencies Fitch, Standard, Poor’s and Moody’s degraded Greece’s credit ratings. This scared off the investors which raised the cost for future loans.

In 2010, Greece made an announcement of planning to lower the deficit to 3% GDP in 2 years. Greece tried to reassure EU lenders that it was budgetary responsible. After only 4 months, Greece warned that it would default instead.

In 2011, the Financial Stability Facility in Europe added one hundred and ninety billion euros to that bailout. Regardless of the name change, the money came from the EU countries.

By the year 2012, Greece’s ratio of debt-to-GDP rose to all the way to 175% which was almost 3 times the EU’s 60% limit. Bondholders later agreed on a haircut which saw the exchange of 77 billion euros bonds for a debt worth 75% less.

In 2014, the economy in Greece seemed to recover since it grew by 0.7%. The government managed to sell bonds which balanced the budget.

In 2015, voters elected Syriza party which promised to battle the austerity measures. On the 27th of June the same year, the Greek Prime Minister announced a referendum about the measures. He made false promises that the “no” vote was to give Greece better leverage to negotiate on a 30% debt relief from the European Union. On the 30th June, Greece missed the scheduled payment of 1.55 billion euros. Both sides termed it as a delay as opposed to an official default. After 2 days, the IMF gave a warning that Greece required 60 billion euros as aid.

Greece’s Debt Crisis

Towards March 2016, a prediction was made by the Bank of Greece that the economy was likely to return to its normal growth by summer. However, it only shrank by 0.2% in 2015 although the Greek banks still lost money. They were not in a hurry to call it bad debt with hope that their borrowers were to repay after the economy improved. This tied up funds which would otherwise be lent to other ventures.

The Greek Prime Minister in May 2017 agreed to cut the pensions and later widen the tax base. As a result, the EU gave Greece extra 86 billion euros as loan. Greece used that to make extra debt payments. The Prime Minister hoped that he would reduce the outstanding debt of 293.2 billion euros. However, the German government failed to concede before its September elections.

On the 15th of January, 2018, Greek’s parliament agreed on some new austerity measures which qualified for the other round of bailouts. On 22nd January, the finance ministers in Eurozone approved six billion to seven billion euros. All the same, the new austerity measures made it much difficult for the union’s strikes to bring mayhem in the country.

Causes

The seeds of this crisis were sown in 2001 once Greece decided to adopt the euro to be its currency. Greece was an EU member from 1981 but was unable to enter the Eurozone. Greece’s budget deficit was too high for Eurozone’s Maastricht Criteria.  Things went well amid the first few years. Just as other Eurozone countries, Greece was benefiting from the Euro’s power. It managed to lower interest rates and later brought in the investment capital & loans.

In the year 2004, Greece made an announcement that it had lied on the Maastricht Criteria. The European however did not impose any sanctions for 3 reasons. France & Germany too were spending much more above the limit during that time. It would therefore seem hypocritical sanctioning Greece before imposing their austerity measures. There was confusion on what sanctions were to be applied. They would expel Greece which would be disruptive since the euro would be weakened.

The European Union aimed at strengthening the euro’s power in the international currency markets. A stronger euro would convince the other EU countries such as the United Kingdom and Denmark to adopt the same. Consequently, Greek debt rose till the crisis exploded in 2008.

Unsustainable Growth

As the economy of Greece contracted after the crisis, the ratio of debt-to-GDP skyrocketed and peaked at 180% back in 2011. The last nail on the coffin was in 2009 after the new Greek government which was led by Papandreou’s son known as George arose into power. This revealed that the deficit was 12.7 percent more than two times the figure which was disclosed previously. This sent the debt crisis on another higher gear.

Finale words

Greek’s debt crisis got its origin from the fiscal profligacy in previous governments. This proves that just like individuals there is no nation which can manage to live beyond its means. Due to that, Greeks might have to come up with hard austerity measures for many years to come.

References:

  • https://www.investopedia.com/articles/personal-finance/061115/origins-greeces-debt-crisis.asp
  • https://www.thebalance.com/what-is-the-greece-debt-crisis-3305525
  • https://time.com/5381385/what-the-world-can-learn-from-the-greek-debt-crisis/
  • https://www.forbes.com/sites/francescoppola/2018/08/20/lessons-for-the-eurozone-from-the-greek-debt-crisis/#7b6e2ffd55dd
  • https://www.worldpoliticsreview.com/articles/27891/the-lasting-impact-of-the-debt-crisis-continues-to-haunt-greece