Greece Debt Crisis

Hi Guys

I am back with another article of interest - The Greek Debt Crisis. In this article, I will try to explain what exactly happened with Greece, how it got into this crisis situation and how this affect would the global economies.

How it happened?

Throughout the 1990’s, Greece consistently ran into budget deficits. Its currency at that time was the Drachma. It had to join the Euro in 2001 rather than in 1999 like many other nations. Good time prevailed for the country shortly and it enjoyed growth for 7 years (2001- 2007). This growth as many economists have referred was because of the cheaper loans that were being sold.

The sub-prime crisis of 2008 had hit the globe very hard and Greece was also one of them. It was unable to come out of recession because it had been printing more money as the Euro was controlled by the European Central Bank (ECB), the unemployment went to 28%.

In 2010 – the International Monetary Fund, the European Commission and the ECB bailed out Greece with a covenant that Greece would undertake austerity measures and increase taxes. This did not work and the economy did not go up. Another round of bailout package was provided and the total figure was now close to £ 170 Billion.

The current prime minister – Mr Alex Tsipras rose to power because of the rising discontent amongst the Greeks and the stringent covenants put up by the lenders. The current situation is that the unemployment is at 28% and debt is 18% of the GDP.

The talks have been going on a number of issues like - pensions, labour market reforms, the civil service and the budget surplus. Many international corporations have pulled out their money from Greece and a majority of the debt is held by rich EU nations.

Where is the money going?

Much of the loans that went into Greece have been used to pay up its International Loans and not on the Economy. The taxations system is in a mess in which they have 6 bands of taxes and a lot of pension funds (130+ funds).

The other problem is that when Greece did cut some of its spending, the EU and ECB asked for a reduction in wages rather than a cut in spending. So, while the military budget remains intact, soldiers have seen their wages fall by 40 per cent. Their experience is replicated across other public sector fields – notably by healthcare professionals.

Unfortunately, investors have lost confidence in the Greek government's ability to walk this tightrope – so they have been demanding ever higher rates of interest to compensate for the risk that they might not get their money back. The higher its borrowing costs, the harder it is for the Greek economy to grow itself out of trouble.

Events began to spiral out of control when credit rating agencies downgraded Greek government debt to "junk" status, pushing the cost of borrowing so high that the country effectively had its international overdraft facility cancelled overnight.

What many investors fear is that the only way out of this vicious circle is for Greece to walk away from its existing debts and try to go it alone – potentially triggering a wave of similar defaults in other indebted European countries, and jeopardizing the euro itself. In the meantime, what many Greeks fear is that the IMF option is just going to prolong the agony – and drive the country to the brink of political as well as economic collapse.

According to calculations by Reuters, it owes its official lenders €242.8b, with Germany its biggest creditor. The lenders include the IMF (International Monetary Fund), the ECB (European Central Bank) and the Euro zone governments. Many of the loans don't mature for years, even decades.

How will all this affect other countries?

The euro is already tumbling on international markets. If Greece defaults it leaves many of its neighbors short. Germany is owed €57b, France €43b, Italy €38b and Spain €25b – on top of those countries' contributions to the IMF loans. The loans don't mature for almost 30 years, there is almost no interest on them and some of the loans came with a 10-year moratorium on interest payments, so it's not like the countries need the money back immediately. However it's still a lot to have to take off the bottom line.

Confidence in Europe, and the euro, has been profoundly shaken. Eyes will turn to the continent's other weak economies such as Portugal, Spain and Italy. They may start to lose capital and investment.