Greek government-debt crisis

Greece joined the eurozone in 2001.

Between 1998 and 2007, Greece's annual economic growth per person was 3.8 percent -- the second

fastest rate in Europe. But there were weaknesses within. The booming economy in Greece and other

countries such as Ireland and Spain caused prices to rise, and the countries gave generous pay rises to

their workers, which made their exports more expensive. That made the countries less competitive, but

since they were growing so fast, it didn't matter too much.

Then the financial crisis hit. As economic growth slowed, these countries’ competitive weaknesses and

unsustainable debt loads suddenly became glaringly obvious.

The Greek government-debt crisis (also known as the Greek depression) started in late 2009. It was the

first of five sovereign debt crises in the eurozone.

To avert calamity, the International Monetary Fund, the European Central Bank and the European

Commission — issued the first of two international bailouts for Greece, which would eventually total

more than €240billion.

The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts

and steep tax increases. They also required Greece to overhaul its economy by streamlining the

government, ending tax evasion and making Greece an easier place to do business.

In 2012, Greece's government had the largest sovereign debt default in history. On June 30, 2015,

Greece became the first developed country to fail to make an IMF loan repayment. At that time,

Greece's government had debts of €323 billion.

Total debt - €323 billion (EUR) --> Eurozone 60% --> Other bonds 15% --> International Monetary Fund ("IMF") 10% --> European Central Bank ("ECB") 6% --> Greek Bank 3 % --> Others 6%

Factors

In Greece, triggers included the turmoil of the Great Recession, structural weaknesses in the Greek

economy, and a sudden crisis in confidence among lenders. It became the epicenter of Europe’s debt

crisis after Wall Street imploded in 2008.

With global financial markets still reeling, Greece announced in late 2009 that it had been understating

its deficit figures for years, raising alarms about the soundness of Greek finances. Fears developed about

Greece's ability to meet its debt obligations, due to revelations that previous data on government debt

levels and deficits had been misreported by the Greek government. This led to a crisis of confidence,

indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps

compared to the other Eurozone countries – Germany in particular.

Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was

veering toward bankruptcy, which threatened to set off a new financial crisis.

There are also many well-documented problems stemming from the design of the euro zone itself – that

the countries share a common currency even though they have different tax-and-spending policies. So

that means that even though Greece workers aren’t as economically competitive as Germans, Greece

can’t lower the value of its currency to make its products cheaper abroad and stimulate exports.

Greece Statistics

First quarter 2015 average - Greece’s G.D.P. and Unemployment Rates in Europe Source: Eurostat

Gross government debt as a percentage of GDP plotted through 2014 fourth quarter Source: Eurostat

Eurozone. Interest rates on 5-year government bonds

Greece has received billions in bailouts, why has there still been a crisis?

The bailouts were supposed to stabilize Greece finances and quell market fears that the euro union itself

could break up. While it has helped, Greece’s economic problems haven’t gone away. The economy has

shrunk by a quarter in five years, and unemployment is above 25 percent.

The bailout money mainly goes toward paying off Greece’s international loans, rather than making its

way into the economy. And the government still has a staggering debt load that it cannot begin to pay

down unless a recovery takes hold.

Greece’s relations with Europe are in a fragile state, and several of its leaders are showing impatience,

unlikely to tolerate the foot-dragging of past administrations. Under the terms of the bailout, Greece

must pass dozens of laws before the end of the year, many of them measures that were supposed to

have been passed years ago.

Key dates for Greece - and the eurozone

28 February 2015 Current programme of loans ends

First quarter of

2015

Greece's funding needs estimated at €4.3bn by end

of March

19-20 March 2015 EU leaders' summit

20 July 2015 €3.5bn bonds held by the European Central Bank

mature

20 August 2015 €3.2bn bonds held by the European Central Bank

mature

Countries who join currency and credit unions must obey the union’s rules. However, Greece freely

joined the Eurozone and it must knuckle under. It was lent money recklessly by Europe’s payday loan

sharks – mostly German banks – who knew it could not repay. It is bankrupt and with 25% unemployed

cannot hope to cover its debts. So, Greece is bankrupt and must reschedule, which means reduce, its

debts.

For its current condition, two pressing financial issues are faced by Greece: whether the government can

pay its bills and the stability of the banks. On 16th February 2015, Greece had rejected an EU offer to

extend its current €240 billion bailout. By the end of this month, if they still not able to reach an

agreement, it may unable to borrow from anyone (not even other European governments), the Greek

government would simply run out of euros. Without a deal Greece is likely to run out of money.

A Greek official described the draft agreement as “unacceptable” because it restated that Greece must

continue in its current bailout programme. “The Greek authorities have indicated that they intend to

successfully conclude the programme, taking into account the new government’s plans,” stated a phrase

in the rejected communique, which had been crossed out.

It was now "up to Greece" to decide if it wanted more funding or not. Greece has proposed a new

bailout programme that involves a bridging loan to keep the country going for six months and help it

repay €7bn (£5.2bn) of maturing bonds.

Consequences of Exiting Eurozone

The living standards of Greece could fall by 80% within a few weeks of exit.

The government would have to impose a freeze on withdrawals and on people taking money out of the

country. This could lead to queues of ordinary Greeks trying to empty their bank accounts before they

get converted into a new currency worth substantially less than the previous one.

Nervous depositors in other struggling Eurozone countries, such as Spain or Italy, may also move their

money to the safety of a German bank account, sparking a banking crisis in southern Europe. Confidence

in other banks that have lent heavily to southern Europe - such as the French banks - could also be

affected. The banking crisis could conceivably spread worldwide, just as it did in 2008.

Greek businesses would face a legal and financial disaster. Some contracts governed by Greek law would

be converted into a new currency, while other foreign law contracts would remain in euros. Many

contracts could end up in legal disputes over whether they should be converted or not. Greek

companies who still owe big debts in euros to foreign lenders, but whose main sources of income are

converted to a devalued non-euro currency, would be unable to repay their debts.

In the wider Eurozone, businesses, afraid for the euro's future, may cut investment. Faced with a

barrage of bad news in the press, ordinary people may cut back their own spending. All of this could

push the Eurozone into recession.

The euro could lose value in the currency markets, providing some relief for the Eurozone by making its

exports more competitive in international trade. But the flipside is that imports from the rest of the

world would become more expensive - especially the US, UK and Japan.

Sources

http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=0

http://www.ft.com/intl/cms/s/0/2eb55cd6-82b7-11df-85ba-00144feabdc0.html#axzz3oVoZOJ7s

http://www.washingtonpost.com/news/wonkblog/wp/2015/07/01/the-forgotten-origins-of-greeces-

terrible-crisis-will-make-you-think-twice-about-whos-to-blame/

http://www.thenation.com/article/goldmans-greek-gambit/

https://en.wikipedia.org/wiki/Greek_government-debt_crisis