|
Executive Summary – The crisis in Greece has reached epic proportions and there can be some serious repercussions if Greece is declared bankrupt or leaves the eurozone. Here is a brief summary on the crisis in Greece and the current situation.
|
Download PDF
1. How did it begin?
Greece has been running an unsustainable economy for many years due to overspending. The 2008 financial crisis affected the world economy including Greece. Post that, in 2009, Greece announced that it has a budget deficit of more than 12% of GDP which means the country had much more spending than what it was earning. This resulted in investors and lenders getting alarmed. Foreign investments stopped and what was present in the Greek markets was withdrawn. Loans to Greece became very expensive.
2. What did the government do about it?
The government was not presenting a true picture of the state of the economy to the European Central Bank (ECB) about the true state of economic affairs in the country. It was borrowing recklessly. There were too many populist measures like high pensions for many people and low taxes which leads to increased government expenditure. Unemployment figures were high. To decrease the number of unemployeds, the government gave them employment in public sector. But these extra employees could not contribute to productivity leading to no output but higher expenditure in the form of salary and other welfare measures. It was disguised unemployment.
Debt reached an high of 350 billion euros in 2010. In 2010, the International Monetary Fund (IMF) and European Union (EU) pledged to lend 110 billion euros to Greece to help the government. This came with measures like spending cuts, wage cuts and prudent pension policies which did not go down well with the Greek population leading to protests and collapse of the government. In 2012, the EU again lent 130 billion euros to help the Greek government repay debt.
3. How does the economic crisis in Greece affect Europe and the rest of the world?
Many international banks and foreign investors had bonds and other investments in Greece which made the world economy vulnerable to Greece’s fall. Some investors have exited these investments and so the vulnerability is lesser now. Countries like Finland and Germany have given loans to Greece and if Greece defaults on these payments, there could be unhealthy economic consequences in these countries. But the world economy seems less vulnerable to the Greek crisis as neighbouring countries have also taken steps to improve their economies. But there could be indirect links as markets are closely connected which could lead to harmful situations.
4. What is Grexit?
Grexit is a combination word from the words ‘Greece’ and ‘exit’. Greece can opt to stay in the eurozone or exit the eurozone. If they exit, euro will not be their currency any more apart from other things. If it leaves the eurozone, austerity measures can be stopped and euros can be converted to drachmas which will have a lower value than euro. It can print currency on certain conditions and work towards reviving the economy. But this can lead to drachma’s value going really down and lenders to Greece can face losses. Banks can go bankrupt and it can lead to uncertainty in the country. If Greece stays in the eurozone and defaults, Greek banks could be declared bankrupt, private investors and other lenders including countries could face losses.
5. What is the current Situation?
Greece was to make a payout of 1.5 billion euros to IMF on June 30. It defaulted on the payment and the Eurozone countries have agreed to give funds only if reform package with austerity measures are accepted which Greece was refusing to do. Moreover in a referendum, the Greek public has voted that it does not want to go ahead with the bailout with austerity measures. Banks are closed till July 16 for now and stock markets were closed for some time. Greece will have to decide what it wants to do quickly as banks are running out of money and there is a withdrawal limit set at 60 euros per day for a person.
As per latest news, the Eurozone is in talks with the Greek leadership and they have agreed to make economic reforms, pension cuts and higher taxes. Greece wants to write off some of its massive debts, but Europe rejected it with the proposal that the grace period can be extended. Greece will have to give some control of government revenue to Europe and have monitoring so that it can be used to repay loans. More talks are in progress and we will have to wait and watch how the entire scenario unfolds. As per the latest news, Europe has agreed to offer another bailout worth 96 billion dollars if the Greece government goes ahead with certain economic reforms and the creditors are able to supervise the economy closely. Yesterday, the Greek Parliament approved of this bailout with the package of austerity measures to be taken by Greece.
Greece Crisis in pictures to help understand better –
0 Comments