GREEK DEBT

CRISIS...
 What is the main cause of the crisis?
The ECB was empowered to make only monetary policies.
And that’s the core of the problem Europe faces: the ECB made
monetary policies while member states continued to make fiscal
policies. After the creation of the ECB, countries like Greece could
now borrow large amounts of money at very low-interest rates.
Interest rates for loans to smaller European countries which were
previously above 20% became less than 5%.
Greece began to borrow recklessly – primarily so politicians could
use it for populist programmes like high pensions, low taxes,
higher salaries etc. This led to increasing government debt –
which Greece managed to repay with EVEN MORE borrowed
money.

 When did the crisis finally hit Greece & other

countries?
This cycle continued until 2008 when the US housing market
suffered a collapse and the globe became engulfed in the largest
financial crisis since the Great Depression in 1929. The world
experienced an acute credit crisis, and borrowing stopped. Greece
couldn’t borrow anymore, couldn’t repay its debts – and Europe
suddenly realized the mountainous magnitude of the Greek debt:
 175% of the country’s GDP, the largest sovereign debt in HISTORY.
Greece couldn’t repay its debt nor could it pay for all the new jobs
and social measures it had unwisely created. This led to a spike in
unemployment, a crisis of confidence, decrease in foreign
investment, and political uncertainty. And because of this the
entire eurozone suffered heavily.

 Europe’s reaction towards the crisis—

To help Greece pay up its debts, Germany and other countries agreed
to provide it with bailouts – meaning Germany would pay Greece’s bills.
But under one condition – Greece had to agree to certain austerity
measures. Austerity measures meant that the Greek government would
have to cut spending, raise taxes, limit budgets and borrow less in the
future so that such an incident never happened again. This is hugely
unpopular in Greece and has led to unemployment and austerity riots.
Greece has received 2 major bailouts till now, and both involved severe
austerity measures. But Greece is still in debt and has been unable to
repay the bailouts. This week it became the first developed country to
default on a bailout.

 The crisis nearly became a global catastrophe-

For a brief period of time, the Eurozone's woes became an obsession of
policymakers all around the world because it looked like they might
cause a global banking crisis in which national bankruptcy would lead to
bank runs, which would lead to new bankruptcies and catastrophe
without end.

 Government summary report results—

The government summary report results indicate the five main
causes for eruption of the debt crises and it basically tried to
outlined the plan about how to combat the crises—

1. GDP growth rates: After 2008, GDP growth rates were

lower than the Greek National Statistical Agency had
anticipated. In the official report, the Greek ministry of
finance reports the need for implementing economic
reforms to improve competitiveness, among others by
reducing salaries and bureaucracy, and the need to redirect
much of its current governmental spending from non-
growth sectors into growth stimulating sectors.
2. Government deficit: Huge fiscal imbalances developed
during the six years from 2004 to 2009, where "the output
increased in nominal terms by 40%, while central
government primary expenditures increased by 87% against
an increase of only 31% in tax revenues." In the report the
Greek Ministry of Finance states the aim to restore the
fiscal balance of the public budget, by implementing
permanent real expenditure cuts (meaning expenditures
are only allowed to grow 3.8% from 2009 to 2013, which is
below the expected inflation at 6.9%), and with overall
revenues planned to grow 31.5% from 2009 to 2013,
secured not only by new/higher taxes but also by a major
reform of the ineffective Tax Collection System.
3. Government debt-level: Mainly deteriorated in 2009 due to
the higher than expected government deficit. Since the
debt-to-GDP ratio had not been reduced during the good
years with strong economic growth, there was no longer
any headroom left for the government to continue running
large deficits in 2010, neither for the years ahead, due to
the annual debt-service costs being on the rise towards an
unsustainable level. Implementation of an urgent fiscal
 consolidation plan was therefore needed, to ensure the
deficit rapidly would decline to a level compatible with a
declining debt-to-GDP ratio. On this basis the government's
report emphasized, that in addition to implementing the
needed structural economic reforms, it was urgent each
year in the coming four-year period also to implement
packages of both permanent and temporary austerity
measures. Implementation of this entire package of
structural reforms and austerity measures, in combination
with an expected return of positive economic growth in
2011, would then result in the baseline deficit being
forecast to decrease from €30.6 billion in 2009 to only €5.7
billion in 2013, while the debt-level relative to GDP would
stabilize at 120% in 2010–2011 and begin declining again in
2012 and 2013.
4. Budget compliance: Budget compliance was acknowledged
to be in strong need of future improvement, and for 2009 it
was even found to be "A lot worse than normal, due to
economic control being more lax in a year with political
elections". In order to improve the level of budget
compliance for upcoming years, the Greek government
wanted to implement a new reform to strengthen the
monitoring system in 2010, making it possible to keep
better track on the future developments of revenues and
expenses, both at the governmental and local level.
5. Statistical credibility: Problems with unreliable data had
existed ever since Greece applied for membership of the
Euro in 1999. In the five years from 2005 to 2009
Eurostat each year noted a reservation about the fiscal
statistical numbers for Greece, and too often previously
reported figures got revised to a somewhat worse figure,
after a couple of years. In regards of 2009 the flawed
statistics made it impossible to predict accurate numbers
 for GDP growth, budget deficit and the public debt; which
by the end of the year all turned out to be worse than
originally anticipated. Problems with statistical credibility
were also evident in several other countries, however, in
the case of Greece, the magnitude of the 2009 revisions
and its connection to the crisis added pressure to the need
for immediate improvement. In 2010, the Greek ministry of
finance reported the need to restore trust among financial
investors, and to correct previous statistical methodological
issues, "by making the National Statistics Service an
independent legal entity and phasing in, during the first
quarter of 2010, all the necessary checks and balances that
will improve the accuracy and reporting of fiscal statistics".

 Failure of the rescue—

To justify the new lending, the lenders had to be assured that the
deficits would end and that the country would grow enough to be
able to service its debt. In May of 2010, an analysis was
conducted to see if such a scenario was realistic. The report
basically concluded that if Greece undertook drastic reforms it
could close its deficits and begin growing so that over time the
debt would be manageable.

 Downgrading of creditworthiness (December

2009 – April 2010)
On 23 April 2010, the Greek government requested an EU/IMF bailout
package to be activated, providing them with a loan of €45 billion to
cover their financial needs for the remaining part of 2010.Standard and
poor’s slashed Greece's sovereign debt rating on 27 April to BB+ amidst
hints of default by the Greek government, in which case investors were
thought to lose 30–50% of their money.
On 3 May 2010, the European Central Bank (ECB) suspended its
minimum threshold for Greek debt, which meant that the bonds
became eligible as collateral even with junk status. The decision was
supposed to guarantee Greek banks' access to cheap central bank
funding.
 Shutdown of banks and stock market (June
2015 – present)
On Saturday 27 June 2015, the Greek government announced a
shutdown of all banks in the country for at least ten days (six banking
days), stating they would re-open on 7 July. It also said automated
teller machines, a large number of which had run out of cash, would
"operate normally again by Monday noon at the latest" and that
withdrawals would be limited to €60 a day for each account with
exemptions for pension payments.
The Atens Stock Exchange(ATHEX) was also to be closed for a week,
according to kathimerini, since the announced closure of Greek banks
requires a suspension in Greece of the European TARET2 international
financial settlement system, which also processes ATHEX
settlements. Western Union has also stopped operating in Greece,
since Monday 29 June, and would not be open for at least a week.
 Economic effects of the crises--
Greek GDP suffered its worst decline in 2011 when it clocked growth of
−6.9%;a year where the seasonal adjusted industrial output ended
28.4% lower than in 2005, during that year, 111,000 Greek companies
went bankrupt (27% higher than in 2010). As a result, the seasonally
adjusted unemployment rate also grew from 7.5% in September 2008
to a then record high of 23.1% in May 2012, while the youth
unemployment rate during the same time rose from 22.0% to
54.9%. On 17 October, Minister of finance Evangelos
Venizelos announced that the government would establish a new fund,
aimed at helping those who were hit the hardest from the
government's austerity measures. The money for this agency would
come from a crackdown on tax evasion.

 Social effects of the crises--

The social effects of the austerity measures on the Greek population
have been severe, as well as on poor and needy foreign immigrants,
with some Greek citizens turning to NGOs for healthcare treatment and
having to give up children for adoption. In February 2012, it was
reported that 20,000 Greeks had been made homeless during the
preceding year, and that 20 per cent of shops in the historic city centre
of Athens were empty. The same month, Poul Thomsen, a Danish IMF
official overseeing the Greek austerity programme, warned that
ordinary Greeks were at the "limit" of their toleration of austerity, and
he called for a higher international recognition of "the fact that Greece
has already done a lot fiscal consolidation, at a great cost to the
population"; and moreover cautioned that although further spending
cuts were certainly still needed, they should not be implemented
rapidly, as it was crucial first to give some more time for the
implemented economic reforms to start to work.
SOLUTIONS IMPLEMENTED---
 First Economic Adjustment Programme for
Greece (May 2010 – June 2011)
On 1 May 2010, the Greek government announced a series of
austerity measures to persuade Germany, the last remaining
holdout, to sign on to a larger EU/IMF loan package. The next day
the eurozone countries and the International Monetary Fund agreed
to a three-year €110 billion loan, retaining relatively high interest
rates of 5.5%,conditional on the implementation of austerity
measures. Credit rating agencies immediately downgraded Greek
governmental bonds to an even lower junk status. The new austerity
package was met with great anger by the Greek public, leading
to massive protests, riots and social unrest throughout Greece. On 5
May 2010, a national strike was held in opposition to the planned
spending cuts and tax increases. Nevertheless, the new extra fourth
package with austerity measures was approved on 29 June 2011,
with 155 out of 300 members of parliament voting in favour.

 Second Economic Adjustment Programme for

Greece (July 2011 – present)
EU emergency measures continued at a summit on 21 July 2011 in
Brussels, where euro area leaders agreed to extend Greek (as well
as Irish and Portuguese) loan repayment periods from 7 years to a
minimum of 15 years and to cut interest rates to 3.5%. They also
approved the construction of a new €109 billion support package,
of which the exact content was to be debated and agreed on at a
later summit. On 27 October 2011, eurozone leaders and the IMF
also came to an agreement with banks to accept a 50% write-off
of (some part of) Greek debt.The austerity measures helped
Greece bring down its primary deficit from €25bn (11% of GDP) in
2009 to €5bn (2.4% of GDP) in 2011, but as a side-effect they also
contributed to a worsening of the Greek recession. Overall the
Greek GDP had its worst year in 2011 with a −7.1% decline. The
unemployment rate also grew from 7.5% in September 2008 to a,
at the time, record high of 19.9% in November 2011.
Solutions under consideration—
  Possible default or restructuring
Without a bailout agreement, there was a possibility that Greece
would prefer to default on some of its debt. The premiums on
Greek debt rose to a level that reflected a high chance of a
default or restructuring. Analysts gave a wide range of default
probabilities, estimating a 25% to 90% chance of a default or
restructuring. A default would most likely have taken the form
of a restructuring where Greece would pay creditors, which
include the up to €110 billion 2010 Greece bailout participants
i.e. Eurozone governments and IMF, only a portion of what they
were owed. It has been claimed that this could destabilise the
Euro Interbank Offered Rate, which is backed by government
securities.

 Possible withdrawal from the eurozone

Some economists have argued that an orderly default is unavoidable
for Greece in the long run, and that a delay in organising an orderly
default (by lending Greece more money throughout a few more years),
would just end up hurting Greece as well as EU lenders and neighboring
European countries even more. Fiscal austerity or a euro exit is the
alternative to accepting differentiated government bond yields within
the Euro Area. If Greece remains in the euro while accepting higher
bond yields, reflecting its high government deficit, then high interest
rates would dampen demand, raise savings and slow the economy. An
improved trade performance and less reliance on foreign capital would
be the result.
 Europe’s future in Greece’s hand. An entire
continent is at stake—
Instead it is a tragedy, where an outcome that all sides say they
do not want—Greece’s exit from the euro—seems increasingly
likely. The chaos is evidence that leaving the euro would be
disastrous for Greece, not least because modest gains from
default and devaluation would be overwhelmed by political and
economic instability. For the rest of Europe, too, “Grexit” has
well-rehearsed risks, notably that of a failing state on the
continent’s south-eastern flank. But as the drama has become
more desperate, so Europeans seem less worried. They take
comfort from the fact that Greece is uniquely dysfunctional.
Game-playing and repeated miscalculation have poisoned the
negotiation.

PREPARED BY-ISHITA GROVER

ROLL NO-56……