Financial crisis greece essay
Essay on the Economic Crisis in Greece
The Greek economy, one of the fastest growing in the Eurozone during 2000 to 2007, grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large deficits. According to an editorial published by the Greek newspaper Kathimerini, 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 leaning military junta, the government wanted to bring back left leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, run large deficits to finance public sector jobs, pensions, and other social benefits. Since 1993 debt to GDP has remained above 100%.
To begin with lower currency value through devaluation helped finance the borrowing. After the introduction of the euro Greece was able to borrow due to the lower interest rates government bonds could command. The 2008 global financial crisis had a particularly huge impact on Greece. Two of the country’s largest industries tourism and shipping were badly affected by the downturn with revenues falling 15% in 2009.
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To show that the country was following the monetary union guidelines, the government of Greece has been found to have consistently and knowingly misreported the country’s official economic statistics. In the beginning of 2010, it was found that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing.
The purpose of these deals made by several subsequent Greek governments was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers. The emphasis on the Greek case has tended to overshadow similar irregularities, and manipulating statistics (to cope with monetary union guidelines) that have also been observed in cases of other EU countries, especially Ital. However, Greece was seen as the worst case.
In 2009, the Papandreou government revised its deficit from an estimated 6% to 12.7%. In May 2010, the Greek government deficit was estimated to be 13.6%, which was one of the highest in the world relative to GDP. Greek government debt was estimated at €216 billion in January 2010.
Accumulated government debt is forecast, according to some estimates, to hit 120% of GDP in 2010. The Greek government bond market is reliant on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally.
Greece faced another problem of tax evasion which costed the Greek government over $20 billion per year. Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January).
According to the Financial Times on 25 January 2010, “Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate 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.”
On 27 April 2010, the Greek debt was rated as junk by Standard & Poor’s amidst fears of default by the Greek government. Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts question Greece’s ability to refinance its debt.
Standard & Poor’s estimates that in the event of default investors would lose 30-50% of their money. The stock exchanges worldwide declined in response to this downgrading. Later on Fitch, Moody’s and S&P also downgraded Greek bond yields. Yet on 3 May 2010, the European Central Bank suspended its minimum threshold for Greek debt “until further notice”, meaning the bonds will remain eligible as collateral even with junk status.
On 2 May 2010, a loan agreement was reached between Greece, the other Eurozone countries, and the International 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. The interest for the Eurozone loans is 5%, considered to be a rather high level for any bailout loan. The government of Greece agreed to impose a fourth and final round of austerity measures.
Economics Essay Sample: Greek Debt Crisis
A debt crisis occurs when a country is unable to pay back or refinance its government debt without any external help. The Greek debt crisis started in 2009 when the government announced that it had previously misreported the data on public debt and deficit levels (Alderman et al., 2015). This event harshly and negatively affected Greece’s ability to borrow from the markets since mistrust of financial creditors led to very high borrowing rates for the country (Higgins & Klitgaard, 2011). Therefore, Greece was forced to ask for help from international organizations such as the International Monetary Fund and the EU agencies.
A few major causes of the Greek debt crisis could be identified. One of them is substantial structural deficit which means that the government spends more money on consumption than it receives from different revenue sources (e. g., tax collections) (Higgins & Klitgaard, 2011). Accumulated government deficit represents government debt since country’s government has to borrow from various sources to finance current spending. Greece was borrowing significant amounts of money during 2000s due to the above reason. The financial crisis of 2007–2008 significantly affected shipping and tourism which were very important for the Greek economy. Therefore, the ability of Greece to finance its consumption without resorting to borrowing was rather limited. Moreover, the above mentioned problems with statistical credibility have aggravated the situation. The process of budget planning was complicated due to fact that reported numbers for GDP growth, public deficit and debt were quite different from real figures. Thus, recognition of this discrepancy in statistical data by the Greek government led to unfortunate consequences for the country. Finally, corruption as well as tax evasion are very problematic in Greece (Greek Ministry of Finance, 2010). The country is in need of tax collections to repay loans and finance consumption. However, the government is not able to collect all the revenues that are supposed to be collected due to corrupted public agents and persistent tax evasion which is caused by a low social trust.
In conclusion, the Greek debt crisis is now one of the most problematic issues of the EU. Greece continues to borrow from international organizations such as the IMF since it is not able to borrow from the markets anymore.
The International Monetary Fund forces the Greek government to implement structural reforms and impose harsh austerity terms to ensure loan repayments which leads to public dissatisfaction by the government and even greater tax evasion. Greece missed a loan repayment to the IMF for the first time on June 30, 2015. The Greek debt crisis is a current phenomenon that should be analyzed in the dynamics of the upcoming events.
Alderman, L., Kanter, J., Yardley, J., Ewing, J., Kitsantonis, N., Daley, S., Russell, K., Higgins, A., & Eavis, P. (2015, July 16). Greece’s Debt Crisis Explained. The New York Times. Retrieved from http://www. nytimes. com/interactive/2015/business/international/greece-debt-crisis-euro. html
Greek Ministry of Finance. (2010). Update of the Hellenic Stability and Growth Programme Including an Updated Reform Programme. Retrieved from http://ec. europa. eu/economy_finance/economic_governance/sgp/pdf/20_scps/2009-10/01_programme/el_2010-01-15_sp_en. pdf
Higgins, M., & Klitgaard, T. (2011). Saving Imbalances and the Euro Area Sovereign Debt Crisis. Current Issues in Econmics and Finance, 17(5), 1–11.
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Greek Financial Crisis. This essay will begin by identifying the financial problems and analyze its causes, followed by a discussion of the fiscal and monetary policies that can be applied especially in the eurozone context,
Extracts from this document.
After Iceland and Ireland, Greece becomes the third country to face bankruptcy with huge budget deficit and public debt in the recent economic downturn. This struck the market by surprise and prompts three major rating agencies to downgrade Greece’s credit rating (Reuters 2010). Greece’s fraud on deficit management leads the financial markets to believe that the country will default on its debts. This undermines the credibility of the euro, and there has been a debate of whether to provide financial backing to Greece among other EU members. This essay will begin by identifying the financial problems and analyze its causes, followed by a discussion of the fiscal and monetary policies that can be applied especially in the eurozone context, an examination of its impact, and finally draws the conclusion. Greek financial crisis remains unknown until October in 2009, when the new government disclosed that the 2009’s budget deficit and public debt accounted for 12.7% and 113.4% of its own GDP, which are far beyond the EU standards of 3% and 60% (EurActiv 2006, Reuters 2010). After the announcement, Fitch Ratings cut the nation’s credit rating-the assessment of the ability to repay debts-from A — to BBB+ (Reuters 2010). . read more.
?? On the spending side, the government will reduce its own operating expenses, consumption and social welfare while public investment is cut by more than a half (smh 2010). On the tax revenue side, Greek government has applied hard new tax evasion rules that hike consumption taxes and value added tax on fuel, tobacco and alcohol (CNN 2010). In the deficit cutting proposal, �2.4 billion additional revenue will generate from numerous tax evaders and evasive social security payments (Sills and Weeks 2010). By taking these steps, the government hopes to slash the deficit below the 3% EU limit by 2012 (smh 2010). However, the fiscal solution is difficult and politically unpopular to implement. It is estimated by the OECD that the cost of healthcare and pensions between now and 2050 will rise by 16.8 percent of GDP in Greece, which is much bigger than other EU members (Elliott 2010). Thousands of Greek civil servants went on a 24-hour strike by means of closing schools and grounding flights after the government revealed detailed measures of the deficit-reduction package (Reuters 2010). Yet positive signal shows the government’s proposal works somehow as its deficit has dropped in January (Reuters 2010). . read more.
The implementation of the aid plan, nevertheless, remains uncertain and eurozone countries are likely to adopt flexible approaches to assist Greece and other countries that encounter sovereign debt crisis (Willis 2010). To conclude, severe corruption and tax evasion along with adoption of the euro and its special economy structure lead to the huge budget deficit and public debt occurred in Greece in 2009. This damaged the government’s credibility on loans and drove the economy into crisis. Greece’s financial crisis also sent the euro into trouble with the risk that the euro will depreciate and even vanish as a reserve asset. In order to tackle this crisis, the Greek government has toughly carried out austerity fiscal policies that reduce government spending and raise taxes despite its political unpopularity. As a member of the European Union, the Bank of Greece cannot use seignorage to finance Greece’s budget deficits by printing money. However, the EU and IMF are said to offer Greece a �45 billion rescue package to help Greece get through this current crisis. Yet the implementation of the bailout remains uncertain and Greece still faces the threat of going bankrupt. . read more.
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