"The uieek Ciisis".

From late 2009, Iears oI a sovereign debt crisis developed among Iiscally conservative investors concerning some
European states, intensiIying in early 2010. This included eurozone members Greece, Ireland, Italy, Spain and
Portugal, the so-called "PIIGS" countries and also some non-Eurozone EU countries. Iceland, the country which
experienced the largest crisis in 2008 (see 2008-2011 Icelandic Iinancial crisis) when its entire international
banking system collapsed, has emerged less aIIected by the sovereign debt crisis as Icelandic citizens reIused to bail
out Ioreign banks in a reIerendum. In the EU, especially in countries where sovereign debts have increased sharply
due to bank bailouts, a crisis oI conIidence has emerged with the widening oI bond yield spreads and risk insurance
on credit deIault swaps between these countries and other EU members, most importantly Germany.
While the sovereign debt increases have been most pronounced in only a Iew eurozone countries they have become
a perceived problem Ior the area as a whole. In May 2011, Greek public debt gained prominence as a matter oI
concern. The Greek people generally reject the austerity measures and have expressed their dissatisIaction through
angry street protests. In late June 2011, Greece's government proposed additional spending cuts worth 28bn euros
(25bn) over Iive years. The next 12 billion euros Irom the Eurozone bail-out package will be released when the
proposal is passed, without which Greece would have had to deIault on loan repayments due in mid-July.
Concern about rising Government debt levels across the globe together with a wave oI downgrading oI European
government debt created alarm in Iinancial markets. On 9 May 2010, Europe's Finance Ministers approved a rescue
package worth t750 Billion (then almost a trillion dollars) aimed at ensuring Iinancial stability across Europe by
creating the European Financial Stability Facility (EFSF).
On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a t110 billion loan Ior
Greece, conditional on the implementation oI harsh austerity measures. The Greek bail-out was Iollowed by a
t85 billion rescue package Ior Ireland in November, a t78 billion bail-out Ior Portugal in May 2011, then
continuing eIIorts to meet the continuing crisis in Greece and other countries.
In October 2011, Eurozone leaders meeting in Brussels agreed a package oI measures designed to prevent the
collapse oI member economies due to their spiralling debt. This included a proposal to write oII 50 oI Greek debt,
to increase the EFSF to about t1 trillion and to require European banks to achieve 9 capitalisation.
Causes
The Greek economy was one oI the Iastest growing in the eurozone Irom 2000 to 2007; during that period, it grew
at an annual rate oI 4.2 as Ioreign capital Ilooded the country. A strong economy and Ialling bond yields allowed
the government oI Greece to run large structural deIicits. According to an editorial published by the Greek right-
wing newspaper Kathimerini, large public deIicits are one oI the Ieatures that have marked the Greek social model
since the restoration oI democracy in 1974. AIter the removal oI the right-wing military junta, the government
wanted to bring disenIranchised leIt-leaning portions oI the population into the economic mainstream. In order to
do so, successive Greek governments have, among other things, customarily run large deIicits to Iinance public
sector jobs, pensions, and other social beneIits. Since 1993 the ratio oI debt to GDP has remained above 100.
Initially currency devaluation helped Iinance the borrowing. AIter the introduction oI the euro in Jan 2001, Greece
was initially able to borrow due to the lower interest rates government bonds could command. The late-2000s
Iinancial crisis that began in 2007 had a particularly large eIIect on Greece. Two oI the country's largest industries
are tourism and shipping, and both were badly aIIected by the downturn with revenues Ialling 15 in 2009.
To keep within the monetary union guidelines, the government oI Greece had misreported the country's oIIicial
economic statistics. In the beginning oI 2010, it was discovered that Greece had paid Goldman Sachs and other
banks hundreds oI millions oI dollars in Iees since 2001 Ior arranging transactions that hid the actual level oI
borrowing. The purpose oI these deals made by several successive Greek governments was to enable them to
continue spending while hiding the actual deIicit Irom the EU.
437adi3 41 debt
On 27 April 2010, the Greek debt rating was decreased to the upper levels oI 'junk status by Standard & Poor's
amidst hints oI deIault by the Greek government. Yields on Greek government two-year bonds rose to 15.3
Iollowing the downgrading. Some analysts continue to question Greece's ability to reIinance its debt. Standard &
Poor's estimates that in the event oI deIault investors would Iail to get 3050 oI their money back. Stock markets
worldwide declined in response to this announcement.
Following downgrading by Fitch and Moody's, as well as Standard & Poor's,

Greek bond yields rose in 2010, both
in absolute terms and relative to German government bonds. Yields have risen, particularly in the wake oI
successive ratings downgrading. According to %he Wall Street Journal, "with only a handIul oI bonds changing
hands, the meaning oI the bond move isn't so clear.
On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold Ior Greek debt "until Iurther
notice", meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee
Greek banks' access to cheap central bank Iunding, and analysts said it should also help increase Greek bonds'
attractiveness to investors. Following the introduction oI these measures the yield on Greek 10-year bonds Iell to
8.5, 550 basis points above German yields, down Irom 800 basis points earlier.

As oI 22 September 2011, Greek
10-year bonds were trading at an eIIective yield oI 23.6, more than double the amount oI the year beIore




DeIicit spending is the amount by which a government, private company, or individual's spending exceeds income
over a particular period oI time, also called simply "deIicit," or "budget deIicit," the opposite oI budget surplus.
This diIIerence is usually made up by borrowing or minting new Iunds and occurs Ior numerous reasons. Today,
one oI the major reasons cited Ior deIicit spending is to ensure high levels oI economic activity. Whilst there is
signiIicant economic data testament to this, there is also growing evidence to the contrary and oI the great inIluence
oI government deIicits upon a national economy. Indeed, the use oI deIicit Iinancing to maintain total spending or
eIIective demand was an important discovery oI the economic depression oI 1930 however, recently, swelling
deIicits have been the root cause oI problems Ior several member states oI the Eurozone, putting them at risk oI
deIault. With Greece's budget woes considered the most grave; this article Iocuses on this member state and the
mounting speculation oI the eIIects on the stability oI the Euro currency and the entire Euro region as a whole. The
Greek crisis has sparked Iears that this may be only the beginning oI a deeper sovereign debt crisis that could
ultimately destabilize the Eurozone In the midst oI a sluggish recovery in the global economy, the key questions
right now are whether these Iears are exaggerated and more importantly, how to deal with these problems.

To explain Iurther, the government steps in when the economy enters a recessionary state in light oI the pile up oI
private debt during the boom years. Measures taken by the government include increased social spending in
addition to issuing its own debt to bail out private institutions Ior the debt that is implicitly guaranteed by the
government, speciIically bank debt. This Ieature is particularly pronounced during the last boom-bust cycle that led
to unsustainable private debt growth Iorcing governments to add large amounts to its own debt.

The Eurozone government debt stood at 85 oI GDP at the end oI 2009; and according to market players, the
Eurozone is miles away Irom a possible debt crisis. The same however, cannot be said Ior some individual
countries, in particular Greece. The economy is plagued with a weak political system that has been adding
government debt at a much higher rate than the rest oI the Eurozone, in addition the country has a debt level
exceeding 100 oI GDP. Greece is currently Iacing its worst debt crisis in decades amid the global recession and
has come under political pressure Irom the European Union to straighten out its Iinances and obey deIicit limits
intended to support the shared euro currency. According to Greek oIIicials, the debt spiral is not anticipated to Iorce
the country to deIault on its payments and have pledged to do anything necessary to improve the current Iinancial
and economic position. The Greece economy entered into a recession in 2009 aIter years oI robust growth. Greek
Prime Minister George Papandreou announced a raIt oI measures intended to reduce the staggering public debt by
2012 at the latest, and gradually bring the budget deIicit oI 12.7 as at 2009 to below the Euro zone`s requirement
oI 3 oI GDP by the end oI 2013. Despite these, the newly elected government has the challenging task oI
convincing international markets and investors that its measures would be suIIicient. This is evidenced by the price
the risk oI Greek government bonds 250 basis points higher than the risk oI German government bonds.

According to Paul De Grauwe a member oI the Group oI Economic Policy Analysis, advising the EU Commission
President, the growing skepticism oI the Iinancial markets has a lot to do with the poor communication by the EU-
authorities that have given conIlicting signals about their readiness to give Iinancial support to Greece iI a
sovereign debt crisis were to erupt, The Greece economy is struggling under a massive debt oI over 294 billion
euros (412 billion dollars), a runaway public deIicit estimated at 12.7 oI output, a triple downgrade oI its
sovereign debt ratings and doubts over dodgy data. In December 2009, ratings agencies Standard and Poor's (S&P)
and Fitch downgraded Greece's credit rating on doubts that recent measures announced by the centre-leIt
government would be able to tame the country's ballooning public debt. According to S&P, the downgrade
reIlected the view that the measures the Greek authorities have recently announced to reduce the high Iiscal deIicit
are unlikely, on their own, to lead to a sustainable reduction in the public debt burden. Furthermore, it is believed
that the government's eIIorts to reIorm the public Iinances would Iace domestic obstacles that would likely require
sustained eIIorts over a number oI years to overcome. There are mixed views on whether or not bail-outs in the
Eurozone are illegal.

debt c7isis

In the Iirst weeks oI 2010, there was renewed anxiety about excessive national debt. Some politicians,
notably Angela Merkel, have sought to attribute some oI the blame Ior the crisis to hedge Iunds and other
speculators stating that "institutions bailed out with public Iunds are exploiting the budget crisis in Greece and
elsewhere". Although some Iinancial institutions clearly proIited Irom the growing Greek government debt in the
short run, there was a long lead up to the crisis. EU politicians in Brussels turned a blind eye and gave Greece a
Iairly clean bill oI health, even as the reality oI economics suggested the Euro was in danger. Investors assumed
they were implicitly lending to a strong Berlin when they bought eurobonds Irom weaker Athens as Dynastic
politics rewarding social groupings increased the economy`s corruption and dysIunction. Historic enmity to Turkey
led to high deIense spending, and Iuelled public deIicits Iinanced primarily by German and French banks.
On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made oI relatively high-
interest loans) be activated. The IMF had said it was "prepared to move expeditiously on this request". The initial
size oI the loan package was t45 billion ($61 billion) and its Iirst installment covered t8.5 billion oI Greek bonds
that became due Ior repayment.
On 27 April 2010, the Greek debt rating was decreased to BB (a 'junk' status) by Standard & Poor amid Iears
oI deIault by the Greek government. The yield oI the Greek two-year bond reached 15.3 in the secondary
market. Standard & Poor's estimates that, in the event oI deIault, investors would lose 3050 oI their
money. Stock markets worldwide and the Euro currency declined in response to this announcement.
On 1 May, a series oI 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 Ior Greece (retaining a
relatively high interest oI 5 Ior the main part oI 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.
The November 2010 revisions oI 2009 deIicit and debt levels made accomplishment oI the 2010 targets even
harder, and indications signal a recession harsher than originally Ieared.
Japan, Italy and Belgium's creditors are mainly domestic institutions, but Greece and Portugal have a higher percent
oI their debt in the hands oI Ioreign creditors, which is seen by certain analysts as more diIIicult 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 deIicit, less FDI, etc.
On a poll published on 18 May 2011, 62 oI the people questioned Ielt that the IMF memorandum that Greece
signed in 2010 was a bad decision that hurt the country, while 80 had no Iaith in the Minister oI Finance, Giorgos
Papakonstantinou, to handle the crisis. Evangelos Venizelos replaced Mr. Papakonstantinou on 17 June. 75 oI
those polled gave a negative image oI the IMF, and 65 Ieel it is hurting Greece's economy. 64 Ielt that the
possibility oI bankruptcy is likely, and when asked about their Iears Ior the near Iuture, polls showed a Iear oI:
unemployment (97), poverty (93) and the closure oI businesses (92).
On 13 June 2011, Standard and Poors lowered the Greek sovereign debt to a CCC rating, the lowest in the world,
Iollowing the Iindings oI a bilateral EU-IMF audit which called Ior Iurther austerity measures. AIter the major
political parties Iailed to reach consensus on the necessary measures to qualiIy Ior a Iurther bailout package, and
amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuIIled cabinet, and asked Ior a
vote oI conIidence in the parliament. The crisis sent ripples around the world, with major stock exchanges
exhibiting losses.
Some experts argue the best option Ior Greece and the rest oI the EU should be to engineer an orderly deIault on
Greece`s public debt which would allow Athens to withdraw simultaneously Irom the eurozone and reintroduce its
national currency the drachma at a debased rate. Economists who Iavor this approach to solve the Greek debt crisis
typically argue that a delay in organising an orderly deIault would wind up hurting EU lenders and neighboring
European countries even more.
A scenario where Grecce cancels payment on their debts or a part oI them would create a nasty situation in Greece
as well as Ior those who lent the money. Since the Greek government has a budget deIiIicit also iI no interests are
paid, it is dependent on loans, otherwise salaries, pensions and more can't be paid. Since Greece does not have its
own currency, only a Ioreign one, it can not solve such a situation by printing banknotes and equivalent actions.

Auste7ity packaes
Greece adopted a number oI austerity packages since 2010. The Iirst round oI austerity came with the signing oI the
memorandums with the IMF and theECB concerning a loan oI 80 billion euro. This Iirst package oI austerity
measures, implemented on 9 February 2010, included a Ireeze in the salaries oI all government employees, a 10
cut in bonuses, as well as cuts in overtime workers, public employees and work-related travels. Demonstrations and
strikes Iollowed the implementation oI the measures.
Following Iears oI bankruptcy, Iurther measures were implemented on 3 March 2010. These included (in addition
to the above): 30 cuts in Christmas, Easter and leave oI absence bonuses, a Iurther 12 cut in public bonuses, a
7 cut in the salaries oI public and private employees, a rise oI VAT Irom 4.5 to 5, Irom 9 to 10 and Irom
19 to 21, a rise oI tax on petrol to 15, a rise in the (already existing) taxes on imported cars oI up to 10
30, among others. There were Iurther protests on 5 and 11 March.
The second austerity package Iailed to improve Greece's economic position, and on 23 April 2010 Prime
Minister George Papandreou appealed to the European support mechanism Ior help, which asked Ior the
implementation oI more austerity measures. The new measures, announced on 2 May 2010, included: replacement
oI the 13th and 14th salaries oI public employees with an allowance oI 500 Euro Ior those with salaries oI less than
3,000 euro and complete eradication oI the 13th and 14th salary Ior those with salaries oI over 3,000 Euro,
replacement oI the 13th and 14th pension with an allowance oI 800 euro Ior those with a pension oI less than 2,500
Euro, Iurther cuts in salaries (in addition to the two previous austerity packages) by 8 Ior public employees, rise
oI the VAT Irom 21 to 23 and Irom 10 to 11, rise in the special tax Ior the consumption oI tobacco, alcohol
and petrol by 10, rise in the value oI property (and thus higher taxes), rise oI an additional 10 Ior all imported
cars, and others.
2011 saw the introduction oI Iurther austerity. In the midst oI public discontent, massive protests and a 24-hour-
strike throughout Greece, the parliament debated on whether or not to pass a new austerity bill, known in Greece as
the "mesoprothesmo" (the mid-term [plan]). The government's intent to pass Iurther austerity measures was met
with discontent Irom within the government and parliament as well, but was eventually passed with 155 votes in
Iavor (a marginal 5-seat majority). The new measures included: raise 50 billion euros by denationalizing companies
and selling national property, an increase in taxes Ior anyone with a yearly income oI over 8,000 euro, extra tax Ior
anyone with a yearly income oI over 12,000 euro, an increase in VAT in the housing industry, an extra tax oI 2
Ior combating unemployment, an increase in taxes Ior pensioners by means oI lower pensions ranging Irom 6 to
14 Irom the previous 4 to 10, the creation oI a specialized government body with the sole responsibility oI
exploiting national property, and others.
On 19 August 2011 the Greek Minister oI Finance, Evangelos Venizelos, said that new austerity measures "should
not be necessary". On 20 August 2011 it was revealed that the government's economic measures were still out oI
track; government revenue went down by 1.9 billion euro while spending went up by 2.7 billion.
On a meeting with representatives oI the country's economic sectors on 30 August 2011, the Prime Minister and the
Minister oI Finance acknowledged that some oI the austerity measures were irrational, such as the high VAT, and
that they were Iorced to take them with a gun to the head. On 11 August 2011 the government introduced more
taxes, this time targeted at people owning immovable property. The new tax, which is to be paid through the
owner's electricity bill, will aIIect 7.5 million Public Power Corporation accounts and ranges Irom 3 to 20 euro per
square meter. The tax will apply Ior 20112012 and is expected to raise 4 billion Euro in revenue.