The Greek economy was one of the fastest growing in the eurozone from 2000 to 2007; during that

period, it grew at an annual rate of 4.2% as foreign capital flooded the country.[5] A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. According to an editorial published by the Greek right-wing newspaperKathimerini, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974. After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream.[6] In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance public sector jobs, pensions, and other social benefits.[7] Since 1993 the ratio of debt to GDP has remained above 100%.[8] Initially currency devaluation helped finance the borrowing. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds could command. Thelate-2000s financial crisis that began in 2007 had a particularly large effect on Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009.[8] To keep within the monetary union guidelines, the government of Greece had misreported the country's official economic statistics.[9][10] In the beginning of 2010, it was discovered that Greece had paidGoldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing.[11] The purpose of these deals made by several successive Greek governments was to enable them to continue spending while hiding the actual deficit from the EU.[12] In 2009, the government of George Papandreou revised its deficit from an estimated 6% (8% if a special tax for building irregularities were not to be applied) to 12.7%.[13] In May 2010, the Greek government deficit was estimated to be 13.6%[14] which is one of the highest in the world relative to GDP.[15] Greek government debt was estimated at 216 billion in January 2010.[16] Accumulated government debt was forecast, according to some estimates, to hit 120% of GDP in 2010. [17] The Greek government bond market relies on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally.[18] Estimated tax evasion costs the Greek government over $20 billion per year.[19] Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January).[20] According to theFinancial Times on 25 January 2010, "Investors placed about 20bn ($28bn, 17bn) in orders for the five-year, fixedrate bond, four times more than the (Greek) government had reckoned on." In March, again according to the Financial Times, "Athens sold

5bn (4.5bn) in 10-year bonds and received orders for three times that amount."[21] [edit]Downgrading of debt On 27 April 2010, the Greek debt rating was decreased to the upper levels of 'junk'[29] status by Standard & Poor's amidst hints of default by the Greek government.[30] Yields on Greek government two-year bonds rose to 15.3% following the downgrading.[31] Some analysts continue to question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would fail to get 30 50% of their money back.[30] Stock markets worldwide declined in response to this announcement.[32] Following downgradings by Fitch and Moody's, as well as Standard & Poor's,[33] Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds.[34] Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear."[35] On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold for Greek debt "until further notice",[36] meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. [37] Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier.[38] As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.[39] [edit]Danger of default

Further information: Sovereign default

Interest rate of Greek two-year government bonds traded in the secondary marketreflecting the markets' assessment of investment risk (source: Bloomberg). Without a bailoutagreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen 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. [40][41] 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, perhaps 50 or 25 percent.[42] It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.[43]

Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an orderly default on Greeces public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate[44] (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.[45] At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy. For example, the U.S. Federal Reserve expanded its balance sheet by over$1.3 trillion USD since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt, that money to be destroyed when the debt is paid back, later.[46] Greece represents only 2.5% of the eurozone economy.[47] Despite its size, the danger is that a default by Greece will cause investors to lose faith in other eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues.[48] Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. [49] Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister Jos Luis Rodrguez Zapatero as "complete insanity" and "intolerable".[50] Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece,[51] and it does not face a risk of default.[52] Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.[53] [edit]Austerity packages Greece adopted a number of austerity packages since 2010. According to research published on 5 May 2010 by Citibank, the fiscal tightening is "unexpectedly tough". It will amount to a total of 30 billion (i.e. 12.5% of 2009 Greek GDP) and consist of 5% of GDP tightening in 2010 and a further 4% tightening in 2011.[54] [edit]First austerity package The first round came with the signing of the memorandums with the IMF and the ECB concerning a loan of 80 billion euro. The package was implemented on 9 February 2010 and included a freeze in the salaries of all government employees, a 10% cut in bonuses, as well as cuts in overtime workers, public employees and work-related travels.[55]

[edit]Second austerity package (Economy Protection Bill) On 5 March 2010, amid new fears of bankruptcy, the Greek parliament passed the Economy Protection Bill, which was expected to save another 4.8 billion.[56] The measures include (in addition to the above):[57] 30% cuts in Christmas, Easter and leave of absence bonuses, a further 12% cut in public bonuses, a 7% cut in the salaries of public and private employees, a rise of VAT from 4.5% to 5%, from 9% to 10% and from 19% to 21%, a rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported cars of up to 10%30%, among others. On 23 April 2010, after realizing the second austerity package failed to improve the country's economic position, the Greek government requested that the EU/International Monetary Fund (IMF) bailout package be activated.[58] Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. [59][60][61] The IMF had said it was "prepared to move expeditiously on this request".[62] Shortly after the European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan. The Troika was led by Servaas Deroose, from the European Commission, and included also Poul Thomsen (IMF) and Klaus Masuch (ECB) as junior partners. In return the Greek government agreed to implement further measures.[63] [edit]Third austerity package On 1 May 2010, Prime Minister George Papandreou announced a new round of austerity measures, which have been described as "unprecedented".[64] The proposed changes, which aim to save 38 billion through 2012, represent the biggest government overhaul in a generation.[65] The bill was submitted to Parliament on 4 May and approved on separate votes on 29 June and 30 June.[66][67] It was met with a nationwide general strike and massive protests the following day, with three people being killed, dozens injured, and 107 arrested.[65] The measures include:[68][69][70]

An 8% cut on public sector allowances (in addition to the two previous austerity packages) and a 3% pay cut for DEKO (public sector utilities) employees.

Public sector limit of 1,000 introduced to bi-annual bonus, abolished entirely for those earning over 3,000 a month. Limit of 500 per month to 13th and 14th month salaries of public employees; abolished for employees receiving over 3,000 a month.

Limit of 800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over 2,500 a month.

Return of a special tax on high pensions.[which?]

Extraordinary taxes imposed on company profits. Rise in the value of property (and thus higher taxes). Rise of an additional 10% for all imported cars. Changes were planned to the laws governing lay-offs and overtime pay.[specify] Increases in value added tax to 23% (from 19%), 11% (from 9%) and 5.5% (from 4%). 10% rise in luxury taxes and sin taxes on alcohol, cigarettes, and fuel. Equalization of men's and women's pension age limits. General pension age has not changed, but a mechanism has been introduced to scale them to life expectancy changes. A financial stability fund has been created.[specify] Average retirement age for public sector workers will be increased from 61 to 65.[71] The number of public-owned companies shall be reduced from 6,000 to 2,000.[71] The number of municipalities shall shrink from 1,000 to 400.[71] On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and theInternational Monetary Fund. The deal consisted of an immediate 45 billion in loans to be provided in 2010, with more funds available later. A total of 110 billion has been agreed.[72] [73] The interest for the eurozone loans is 5%, considered to be a rather high level for any bailout loan. The European Monetary Union loans will be pari passu and not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. The loans should cover Greece's funding needs for the next three years (estimated at 30 billion for the rest of 2010 and 40 billion each for 2011 and 2012).[54] According to EU officials, France and Germany[74] demanded that their military dealings with Greece be a condition of their participation in the financial rescue.[75] As of 12 May 2010 the deficit was down 40 percent from the previous year.[71] [edit]Fourth austerity package (Mid-term plan) 2011 saw the introduction of further austerity. In the midst of public discontent, massive protests and a 24-hour-strike throughout Greece,[76][77] the parliament debated on whether or not to pass a new austerity bill, known in Greece as the "mesoprothesmo" (the mid-term [plan]).[78][79] The government's intent to pass further austerity measures was met with discontent from within the government and parliament as well,[79]but was eventually

passed with 155 votes in favor[78][79] (a marginal 5-seat majority). The new measures included:[80] [81] raise 50 billion euros by denationalizing companies and selling national property, an increase in taxes for anyone with a yearly income of over 8,000 euro, extra tax for anyone with a yearly income of over 12,000 euro, an increase in VAT in the housing industry, an extra tax of 2% for combating unemployment, an increase in taxes for pensioners by means of lower pensions ranging from 6% to 14% from the previous 4% to 10%, the creation of a specialized government body with the sole responsibility of exploiting national property, and others. On 11 August 2011 the government introduced more taxes, this time targeted at people owning immovable property.[82] The new tax, which is to be paid through the owner's electricity bill,[82] will affect 7.5 millionPublic Power Corporation accounts[82] and ranges from 3 to 20 euro per square meter.[83] The tax will apply for 20112012 and is expected to raise 4 billion Euro in revenue.[82] On 19 August 2011 the Greek Minister of Finance, Evangelos Venizelos, said that new austerity measures "should not be necessary". [84] On 20 August 2011 it was revealed that the government's economic measures were still out of track;[85] government revenue went down by 1.9 billion euro while spending went up by 2.7 billion.[85] On a meeting with representatives of the country's economic sectors on 30 August 2011, the Prime Minister and the Minister of Finance acknowledged that some of the austerity measures were irrational,[86]such as the high VAT, and that they were forced to take them with a gun to the head.[86] [edit]Objections to proposed policies See also: 20102011 Greek protests

The crisis is seen as a justification for imposing fiscal austerity[87] on Greece in exchange for European funding which would lower borrowing costs for the Greek government.[88] The negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. Joseph Stiglitz has also criticised the EU for being too slow to help Greece, insufficiently supportive of the new government, lacking the will power to set up sufficient "solidarity and stabilisation framework" to support countries experiencing economic difficulty, and too deferential to bond rating agencies.[89] As an alternative to the bailout agreement, Greece could have left the eurozone. Wilhelm Hankel, professor emeritus of economics at the Goethe University Frankfurt suggested[90] in an article published in theFinancial Times that the preferred solution to the Greek bond 'crisis'

is a Greek exit from the euro followed by a devaluation of the currency. 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.[citation needed] In the documentary Debtocracy made by a group of Greek journalists, it is argued that Greece should create an audit commission, and force bondholders to suffer from losses, like Ecuador did. On a poll published on 18 May 2011, 62% of the people questioned felt that the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Giorgos Papakonstantinou, to handle the crisis.[91] Evangelos Venizelos replaced Mr. Papakonstantinou on 17 June. 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece's economy.[91] 64% felt that the possibility of bankruptcy is likely, and when asked about their fears for the near future, polls showed a fear of: unemployment (97%), poverty (93%) and the closure of businesses (92%).[91] The social effects of the Greek austerity measures have been severe, including poor and needy foreign immigrants, but even some Greek citizens, turning to NGOs for healthcare treatment.[92] On 17 October 2011 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.[93] The money for this agency will come from the profits made by tackling tax evasion.[93] -----Early last month at a high security VTB Capital conference in Moscow, Prime Minister Vladimir Putin told a gathering of more than 2,000 people a record for VTBs annual Russia Calling event that we are through destroying things. Russia is not perfect, he said, but it is in better shape than nearly all of southern Europe. Russia is through watching its economy crumble. For Putin, Russias crisis days are done. They lived through what Greece and Italy are going through now, and are better off having come out of it. On Thursday, speaking at the CEO Summit at the annual Asian-Pacific Economic Cooperation conference in Hawaii, Russian president Dimitry Medvedev said, the global economic situation at the moment is really far from ideal, but in my view Russia is more crisis-resistant now than it was in 2008. We have established mechanisms to stabilize the financial system and support the

most vulnerable production and manufacturing sectors facing hardships. Russia has been grappling with inflation all year long and has been increasing interest rates. If the economy slows, it has room to reduce interest rates to help the economy along. The country has its fair share of problems, including fighting the perception of Russia as a corrupt and untrustworthy place to do business. Moreover, Russia is an oil and gas economy which depends on commodity prices and gas demand from abroad to maintain a budget surplus. Russia will end the year with a small surplus due to high oil prices this year, and record high natural gas sales volume. The country is also moving slowly to privatize some state assets in an attempt to reduce pension costs, seen as one of the biggest problems in Greece and Italy as high state employee retiree plans are struggling to keep up with tax revenues needed to pay those obligations. Medvedev said at the APEC summit that Russia launched a new round of privatization in the oil, banking and infrastructure sectors; the most significant and sensitive sectors of national economy. Our main goals here are to make the economy more effective and to encourage competition. Russia is modernizing. A new financial center is being built across from the Moscow River that promises to make Russia one of the top five securities markets in the world. While Moscow is home to more billionaires than New York City or Hong Kong, according to Forbes, the countrys per capita income is still lower than Italy and Greece. Its not a poor country per se, but their standard of living is not comparable to that of an Italian. But as Italians have lived beyond their means and are being forced to pay for it now, Russia has lived through various economic and political crisis just since 1991, when the Soviet Union ceased to exist. Its learned its lesson, says Putin and Medvedev. And from a fiscal standpoint, the numbers show that Russia is better than Italy. - The likes of Greece and Italy may find it tricky to issue international or domestic debt next year, but Russia and Saudi Arabia are stepping up to the plate. In a week when investors have become increasingly anxious about political risk in Russia (could the Arab Spring be followed by a Russian Winter?), Russias undeterred finance ministry said today the country plans to issue a Eurobond early next year and will pick 3-4 banks to lead the deal in the next few weeks, after 22 banks bid for the opportunity. Russia launched a $5.5 billion bond last year, its first international bond since its 1998 default, as well as a rouble Eurobond in Feb 2011.

Yields on Russias bonds are enough to make peripheral euro zone debtors weep, at 4.5 percent for the countrys $3.5 billion 2020 tranche. Compare that with Italy 10-year debt at 7 percent and Greece 10-year atwell33 percent. According to Tim Ash, head of CEEMEA research at RBS: With pressure on the political front, and an uncertain global environment, the MOF wants to get some cash in the bank. Budget performance this year has been stellar, putting the administration in a strong position to bankroll a Putin election campaign. Meanwhile, the normally debt-averse but AArated Saudi Arabia is in talks with banks about issuing a riyal-denominated sukuk, five banking sources told Reuters yesterday, following a spate of recent Islamic finance bonds from the Gulf region. Middle East borrowers are looking relatively unscathed by the downdraft in almost all global assets this year. But even less successful frontier market bonds are more appealing than some euro zone debt. Distressed debt broker Exotix points out that Ivory Coasts bond, on which it defaulted this year, is trading at higher levels than Greece. According to Exotixs analysts: Credit crunch does not do justice to what Greece is enduring, Choke is a more fitting and ominous descriptionIn our opinion, Greece could yet trigger the collapse of the euro.--------------The eurozone is going through three crises at the moment: a banking crisis, a currency crisis and a sovereign bonds crisis, and whatever response the union chooses in response to the tough economic situation, it will have political consequences. The eurozone was originally built on a conflict of interests. With the foundation of the union, countries with powerful economies, such as Germany, France and the Netherlands, gained access to the vast European consumer market, which accounts for 17 percent of all purchases made in the world. The introduction of the eurozone also created new consumers of the countries that do not produce sufficient commodities and services Greece, Portugal, Italy, Spain, Ireland and the Eastern European nations. But these nations are dependent on imports, which they buy with money they borrow on the capital markets. For many years, it seemed as if this scheme might work forever. But nothing is infinite in this world. This money has owners a bank from France, a business in Germany or a farmer from the Netherlands. It is a vicious circle.

In order to understand the potential scenarios for the further development of the euro crisis, it is necessary to take a look at the fundamentals of the Greek economy. Greece is objectively one of the least developed economies in Europe, and the reasons for this are not limited to the countrys national mentality, short working days and lack of natural resources. Since 1960, Greece has turned into an industrial-agrarian economy as a result of inflows of foreign capital, state policy encouraging the development of big industrial enterprises, and the expansion of foreign trade. Sea transport, including international freight by Greek ships, and international tourism, account for about 50 percent of the Greek economy. The Greek economy has thus lived on top-down subsidies, which have led to monstrous corruption that eventually started slowing down the entire economy. Corruption was the ultimate reason for the increase in state investments and spending, on the one hand, and the reduction in foreign and private investments, on the other. Because of its poor legislation and ubiquitous corruption, Greece has gained a reputation for being the least attractive investment destination in the European Union. Today, the state holds a considerable share in the Greek economy, controlling 77 percent of the Agricultural Bank of Greece and 34 percent in Hellenic Postbank, as well as blocking or controlling stakes in the electricity and telephone monopolies. Furthermore, the state owns the DEPA national gas company and the DESFA natural gas transport operator. Finally, the government owns the countrys cargo ports, the OPAP lottery and betting monopoly and real estate. Italy is not in much better shape, although it has different problems. According to Nouriel Roubini, an economic adviser to U.S. President Barack Obama, under the circumstances, Italys only option may be to give up on the euro and go back to the lira, even if this move triggers a break-up of the eurozone. At least this is what the economist wrote in his Financial Times column. The surging rates on Italys sovereign bonds mean a rising risk that Italy might lose access to the debt market. This, in turn, could lead to a forced restructuring of its 1.9 trillion euro public debt, given that the economy is too big to fail but also too big to save. A default or partial debt remission would address the debt burden problem, but it would not resolve other economic problems, including corruption, the large current account deficit, lack of external competitiveness and a plunge in gross domestic product and economic activity. Italy will not escape default which is the correct term for not being able to repay debts, fully or partially without EU financial injections. The country will retain access to capital markets but the interest rates on its sovereign debt, which have topped 7 percent, will ultimately

prove unaffordable and Italy will stop borrowing for a year at the most. To address the current problems, the eurozone needs to bring out some big guns: a cash reserve that would prevent Italy, Greece and other potential countries from sliding towards insolvency. But Europe has no such reserve. Germany and France have their own problems and challenges on which to spend their money. The possible options suggested by the markets common eurobonds, issuing additional euros or financial multipliers are out of the question given Germanys position and complications with the collective treaties of the European Union. The eurozone will have to impose severe financial and economic caps for eurozone members, for example, limiting annual inflation rates to 3 percent and public debt to 100 percent of GDP. If a country fails to meet the requirements, it automatically loses the right to

issue the euro starting from the following quarter. As a result, Greece would be the first economy to be expelled from the eurozone but not from the European Union. Portugal, Spain and Ireland will follow, and finally, Italys time will come. It seems that the most viable option is to form a consolidated eurozone core with a common financial and tax policy that would unite the few economically sound nations. The creation of a federative euro-union based upon Germany, France and the Benelux nations is one possible way to prevent disaster. But it is a hard decision and would require new limitations on national sovereignty, which not all EU member-states will be ready to adopt. And in this scenario, federalization of the Eurozone may result in the disintegration of the European Union.