You are on page 1of 9

GREECE ECONOMIC CRISIS Causes & Implications

Sachin Suman 29Nov2011

Contents
Contents.................................................................................................................2 Introdution.............................................................................................................3 Few facts about Greece...........................................................................................3 Causes ...................................................................................................................4 Pictorial representation of Greece Crisis.................................................................7 Government Surplus or deficit since 2001...............................................................8 Long term interest rates.........................................................................................9

Introdution
For years, Greece has been spending money it doesn't have. The government there took advantage of the economic good-times to borrow money and spend it on pay-rises for public workers and projects such as the 2004 Olympics. It began to run-up a bigger and bigger deficit (the gap between how much a country brings-in from tax, and what it spends). Athens olympics Greece enjoyed high public spending during the boom years, including an expensive Olympics. After the world economy went bad, Greece suffererd. Banks started to view it as a country that might not be able to manage its money. They worried Greece might eventually fail to pay its loans, and even go bankrupt. To cover the risk, banks started charging Greece more to borrow cash - making the problem even worse. Eventually the government there went looking for help. It is now borrowing 110 billion euros (95bn) from other EU countries and the International Monetary Fund. That money is being loaned at a much better rate, but comes with tough conditions. Greece has to promise to cut its budget deficit. It's those cuts that have led to the riots in Athens

Few facts about Greece


Economy, in European Union: 11th largest Latest GDP figure: -0.3% (Third quarter of 2009) Gross debt in 2010, forecast: 125% of GDP Gross debt in 2007: 94.5% of GDP Jobless rate: 9.7% Population: 11,260,402 Stocks performance in 2010: -10.5% (to 11 February) Greece benefited from joining the euro in 2001. But the Greek government went on something of a spending spree and public spending soared. Now, it is suffering from its huge spending - and widespread tax evasion - as it finds itself unable to cope with its huge debt loads and meet EU deficit rules. Greece's deficit is, at 12.7%, more than four times higher than European rules allow.

Causes
From late 2009, fears of a sovereign debt crisis developed among investors concerning some European states, intensifying in early 2010 and thereafter. On the side of the excessively borrowing states the governments have had problems to finance further budget deficits and service existing high debt levels. This included Eurozone members Greece, Ireland, Italy, Spain and Portugal, and also some non-Eurozone European Union (EU) countries. Especially in countries where government budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany. While the sovereign debt increases have been most pronounced in only a few eurozone countries, they have become a perceived problem for the area as a whole. Concern about rising government debt levels across the globe together with a wave of downgrading of European government debt created alarm in financial markets. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). In October 2011, eurozone leaders meeting in Brussels agreed on a package of measures designed to prevent the collapse of member economies due to their spiralling debt. This included a proposal to write off 50% of Greek debt owed to private creditors, increasing the EFSF to about 1 trillion and requiring European banks to achieve 9% capitalisation. Despite the debt crisis in a number of eurozone countries the European currency remained stable, trading even slightly higher against the Euro bloc's major trading partners than at the beginning of the crisis. The three most affected countries, Greece, Ireland and Portugal, collectively account for six percent of eurozone's gross domestic product (GDP). In the early-mid 2000s, Greece's economy was strong and the government took advantage by running a large deficit. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industriesshipping and tourismwere especially sensitive to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early 2010, as concerns about Greece's national debt grew, policy makers suggested that emergency bailouts might be necessary. On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. The IMF had said it was "prepared to move expeditiously on this request". The initial size of the loan package was 45 billion ($61 billion) and its first installment covered 8.5 billion of Greek bonds that became due for repayment.

On 27 April 2010, Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default. The yield of the Greek two-year bond reached 15.3% in the secondary market. Standard & Poor's estimates that, in the event of default, investors would lose 3050% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement. Former Prime Minister George Papandreou and European Commission President Jos Manuel Barroso after their meeting in Brussels on 20 June 2011. On 1 May 2010, a series of austerity measures was proposed. The proposal helped persuade Germany, the last remaining holdout, to sign on to a larger, 110 billion euro EU/IMF loan package over three years for Greece (retaining a relatively high interest of 5% for the main part of the loans, provided by the EU). On 5 May, a national strike was held in opposition to the planned spending cuts and tax increases. Protest on that date was widespread and turned violent in Athens, killing three people. On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a 110 billion loan for Greece, conditional on the implementation of harsh austerity measures. The Greek bail-out was followed by a 85 billion rescue package for Ireland in November, a 78 billion bail-out for Portugal in May 2011, then continuing efforts to meet the continuing crisis in Greece and other countries.

The November 2010 revisions of 2009 deficit and debt levels made accomplishment of the 2010 targets even harder, and indications signal a recession harsher than originally feared.

Japan, Italy and Belgium's creditors are mainly domestic institutions, but Greece and Portugal have a higher percent of their debt in the hands of foreign creditors, which is seen by certain analysts as more difficult to sustain. Greece, Portugal, and Spain have a 'credibility problem', because they lack the ability to repay adequately due to their low growth rate, high deficit, less FDI, etc. In May 2011, Greek public debt gained prominence as a matter of concern. The Greek people generally reject the austerity measures, and have expressed their dissatisfaction through angry street protests. In late June 2011, Greece's government proposed additional spending cuts worth 28bn euros (25bn) over five years. The next 12 billion euros from the Eurozone bail-out package will be released when the proposal is passed, without which Greece would have had to default on loan repayments due in mid-July. On 13 June 2011, Standard and Poor's downgraded Greece's sovereign debt rating to CCC, the lowest in the world, following the findings of a bilateral EU-IMF audit which called for further austerity measures. After the major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuffled cabinet, and asked for a vote of confidence in the parliament. The crisis sent ripples around the world, with major stock exchanges exhibiting losses.

Greeces first adjustment plan was launched in March 2010 with 80 billion euros in support from the European governments and 30 billion euros from the IMF. This adjustment program hoped to reestablish the access to private capital markets by 2012. However it was soon found that this process would take longer than expected. In July 2011 there was a new package instilled in which an extra 109 billion euros in support of Greece which included a large privatization effort. Some believe that this will cause more debt for Greece. With this new package it is projected that there will be a 3.8% decline in 2011 but a .6% growth in 2012, following with a 3.5% increase in 2013, where it will eventually plateau in 2015 at 6.4%.

Some experts argue the best option for Greece and the rest of the EU should be to engineer an orderly default on Greeces public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more. In the early hours of 27 October 2011, Eurozone leaders and the IMF came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt, the equivalent of 100 billion. The aim of the haircut is to reduce Greece's debt to 120% of GDP by 2020.

Pictorial representation of Greece Crisis

Government Surplus or deficit since 2001


Greece and few other countries are always in deficit since 2001

Long term interest rates


Interest rate and inflation is sky rocketing in the greece

You might also like