The Greek Debt Crisis - 2018 sec1

The Greek Debt Crisis

        The Greek government-debt crisis (also known as the Greek Depression) is the sovereign debt crisis faced by Greece in the aftermath of the financial crisis of 2007-2008. It reached the populace as a series of sudden reforms and austerity measures that led to impoverishment and loss of income and property.


2002

 ➤Euro replaces Drachma. Greece take advantages from this such as low cost for issuing or   borrowing, and reliable currency. 

2009
     ➤Greece announced its budget deficit would be 12.9% ( more than 4 times the EU's 3% limit)
     ➤Rating agencies lowered Greece's credit ratings to junk status
     ➤George Andreas Papandreou (Prime Minister of Greece from 2009 to 2011) announces programme of   tough public spending cuts.

2010
     ➤The Troika launched a €110 billion bailout loan

2011
     ➤The European Financial Stability Facility added 190 billion euros to the bailout. 

2012
     ➤February - The second bailout programme was ratified.
     ➤December - the Troika provided Greece with more debt relief, while the IMF extended loans

2013
     ➤Greece’s Parliament approves unpopular new austerity measures.

2015
     ➤June - Alexis Tsipris announced a referendum on austerity measures.
     ➤November - Greece's four biggest banks privately raised 14.4 euros billion as required by the ECB.

2017
     ➤May - Tsipras agreed to cut pensions and broaden the tax base. In return, the EU loaned him another 86 billion euros.
     ➤July - Greece was able to issue bonds again. 

HOW DOES THE CRISIS AFFECT THE FINANCIAL SYSTEM?

In the European Union, most real decision-making power, particularly on matters involving politically delicate things like money and migrants, rests with 28 national governments, each one beholden to its voters and taxpayers.

Since Greece’s debt crisis began in 2010, most international banks and foreign investors have sold their Greek bonds and other holdings, so they are no longer vulnerable to what happens in Greece. (Some private investors who subsequently plowed back into Greek bonds, betting on a comeback, regret that decision.)

And in the meantime, the other crisis countries in the Eurozone, like Portugal, Ireland and Spain, have taken steps to overhaul their economies and are much less vulnerable to market contagion than they were a few years ago.

IF GREECE HAS RECEIVED BILLIONS IN BAILOUTS, WHY HAS THERE STILL BEEN A CRISIS?

The money was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems have not gone away. The economy has shrunk by a quarter in five years, and unemployment is about 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.

The government will now need to continue putting in place deep economic overhauls required by the bailout deal Prime Minister Alexis Tsipras brokered in August, as well as the unwinding of capital controls introduced after political upheaval prompted a run on Greek banks.

WHAT HAPPENS IF GREECE LEAVES THE EUROZONE?

Without an agreement, Greece would abandon the euro and reinstate the drachma. That would end the hated austerity measures. The Greek government could hire new workers, reduce the 25 percent unemployment rate and boost economic growth. It would convert its euro-based debt to drachmas, print more currency and lower its euro exchange rate. That would reduce its debt, lower the cost of exports and attract tourists to a lower-cost vacation destination.

At first, that would seem ideal for Greece. But foreign owners of Greek debt would suffer debilitating losses as the drachma plummeted. That would debase the value of repayments in their own currency. Some banks would go bankrupt. Most of the debt is owned by European governments, whose taxpayers would foot the bill.

Plummeting drachma values could trigger hyperinflation, as the cost of imports skyrocket. Greece imports 40 percent of its food and pharmaceuticals and 80 percent of its energy. Many companies refused to export these items to a country that might not pay its bills. The country couldn't attract new foreign direct investment in such an unstable situation. The only countries that have signaled they would lend to Greece are Russia and China. In the long run, Greece would find itself back to where it is now: burdened with debt it can't repay. 

Interest rates on other indebted countries might rise. Rating agencies would worry they'd leave the euro also. The value of the euro itself might weaken as currency traders use the crisis as a reason to bet against it. 

WHAT HAPPENS IF GREECE DEFAULTS?

A widespread Greek default would have a more immediate effect. First, Greek banks would go bankrupt without loans from the European Central Bank. Losses could threaten the solvency of other European banks, particularly in Germany and France. They, along with other private investors, hold 34.1 billion euros in Greek debt.

Eurozone government and ECB own many billion euros. IF Greece defaults, it won’t put the future of them at risk. Some countries, like Germany, won't be affected by a bailout. Even though Germany owns the most debt, it is a tiny percentage of its GDP. Smaller countries face a more serious situation. Finland's portion of the debt is 10 percent of its annual budget.

For these reasons, a Greek default wouldn’t be worse than the 1998 LTCM debt crisis. The IMF prevented many defaults by providing capital until their economies had improved. The IMF owns 21.1 billion euros of Greek debt, not enough to deplete it.

The differences would be the scale of defaults and that they are in developed markets. It would affect the source of much of the IMF's funds. The United States wouldn’t be able to help. While a huge backer of IMF funding, it is now overindebted itself. There would be no political appetite for an American bailout of European sovereign debt.

WHAT OPTIONS DO OTHER COUNTRIES HAVE TO PUSH ITS ECONOMY OUT OF RECESSION?

>>Policies to avoid a Recession                            

1. Expansionary monetary policy – cutting interest rates should help to boost aggregate demand. As well as cutting base rates, the monetary authorities could try and reduce other interest rates in the economy.

2. Quantitative easing involves the Central Bank electronically creating money and using this money to buy long-dated securities. This increases bank reserves and should help encourage bank lending. Also, it reduces interest rates on bonds which should help encourage spending and investment.

3. Helicopter money. Helicopter money is a policy to increase the money supply and give money directly to consumers. This is effective in a period of deflation – where consumers are reluctant to spend and banks are reluctant to lend money.

4. Expansionary fiscal policy involves increasing government spending and/or cutting taxes. This injection into the circular flow is financed by government borrowing. If the government cut income tax or VAT, it increases disposable income and therefore increases spending.

5. Ensure financial stability. If people lose confidence in the banking system, it could cause bank closures, rapid fall in confidence and decline in money supply (like the US in 1932). Therefore, Central Bank/government act as lender of last resort – guaranteeing savings.

6. Devaluation. A devaluation in the exchange rate can cause a boost in aggregate demand. A fall in the value of the dollar makes exports cheaper and imports more expensive increasing domestic demand.

7. Higher Inflation Target. This is a conscious decision to target growth rather than inflation.  The argument is that if the economy gets stuck in a period of low inflation, this causes lower economic growth. Targeting higher inflation rate helps to break out of a deflationary spiral.

WHAT OPTIONS DO GREECE HAVE TO PUSH ITS ECONOMY OUT OF RECESSION?

>> Greece increase the VAT tax and the corporate tax rate. It must close tax loopholes and reduce evasion. It should reduce incentives for early retirement. It has to raise worker contributions to the pension system. A significant change is the privatization of many Greek businesses, including electricity transmission. That reduces the power of socialist parties and unions.

Credits:

https://www.thebalance.com/what-is-the-greece-debt-crisis-3305525

https://www.nytimes.com/interactive/2016/business/international/greece-debt-crisis-euro.html

https://www.theguardian.com/world/2017/jun/22/greek-debt-imf-eu-bailout

http://www.bbc.com/news/world-europe-33225461

https://www.huffingtonpost.com/joergen-oerstroem-moeller/the-greek-crisis-explaine_b_7634564.html