Greece Crisis Essay Example for Free

Greece Crisis probeYears of unrestrained outgo, cheap lending and failure to implement financial reforms left Greece badly unfastened when the globular stinting downturn struck. This whisked away a curtain of partly fiddled statistics to reveal debt levels and shortages that exceeded limits set by the euroz one(a).Greece was living beyond its means even in advance it joined the euro. After it adopted the single currency, habitual spending soared.Public sector wages, for example, rose 50% surrounded by 1999 and 2007 far faster than in approximately opposite(a) eurozone countries. The judicature also ran up bear-sized debts suffering for the 2004 Athens Olympics.And while money flowed go forth of the brasss coffers, its income was hit by widespread tax evasiveness. So, after years of overspending, its bud total deficit the difference between spending and income spiralled out of control.Moreover, much of the borrowing was c formerlyaled, as successive classica l governments sought to meet the 3%-of-GDP cap on borrowing that is take of members of the euro.When the global financial downturn hit and Greeces hidden borrowings came to thinly the clownish was ill-prepared to cope.Debt levels get toed the point where the region was no longer able to re net profit its loans, and was forced to ask for garter from its atomic number 63an partners and the IMF in the form of massive loans.In the short term, however, the conditions attached to these loans pose compounded Greeces woes.How big are these debts?National debt, rank at 300 billion ($413.6 billion), is bigger than the countrys economy, with some estimates predicting it will reach 120 percent of gross domestic product in 2010. The countrys deficit how much more(prenominal) it spends than it takes in is 12.7 percent.So what happens now?Greeces credit rating the assessment of its ability to repay its debts has been downgraded to the lowest in the eurozone, heart it will likely b e viewed as a financial black hole by inappropriate investors. This leaves the country struggling to pay its bills as stakes rates on existing debts rise. The Greek government of Prime Minister George Papandreou, which inherited much of the financial burden when it took office late last year, has already scrapped most of its pre-election promises and must implement harsh and unpopular spending cuts. Will this hurt the rest of Europe?Greece is already in major breach of eurozone rules on deficit management and with the financial markets betting the country will oversight on its debts, this reflects badly on the credibility of the euro. in that location are also fears that financial doubts will infect other nations at the low end of Europes economic scale, with Portugal and the Republic of Ireland coming to a lower place scrutiny. If Europe needs to re clear to rescue packages involving bodies such as the International Monetary Fund, this would further aggrieve the euros reputa tion and could give out to a substantial fall against other key currencies. If Greece does not repay its creditors, a dangerous precedent will leave been set. This may make investors increasingly nervous slightly the like disputationss of other highly-indebted nations, such as Italy, or those with weak economies, such as Spain, repaying their debts or even staying inner(a) the euro.If investors stop buying bonds issued by other governments, then those governments in turn will not be able to repay their creditors a potentially disastrous vicious circle.To combat this risk, European leaders have agreed a 700bn-euro firewall to protect the rest of the eurozone from a full-blown Greek default.Moreover, if banks in the weaker eurozone countries that are already struggling to find enough capital of the United States are forced to write off even more loans they have made something that becomes more likely if the eurozone economy falls deeper into recession they will become weaker still, undermining corporate trust in the entire banking system.Eurozone banks may then find it even hard to borrow, and on that pointfore to lend, potentially sparking a second credit crunch, where bank lending effectively dries up, hurting the economy further.This problem would be exacerbated by savers and investors taking money out of banks in vulnerable economies, such as Greece, Portugal and Spain, and moving it to banks in safer economies such as Germ any or the Netherlands.These potential scenarios would be made immeasurably worsened if Greece were to leave the euro. The country would near certainly reintroduce the drachma, which would devalue dramatically and quickly, making it even harder for Greece to repay its debts, and setting an even worse precedent.So what is Greece doing?As already mentioned, the government has started slashing away at spending and has implemented asceticism measures aimed at reducing the deficit by more than 10 billion ($13.7 billion). It has hi ked taxes on fuel, tobacco and alcohol, increase the retirement age by two years, imposed public sector pay cuts and applied tangled new tax evasion regulations. Are people happy with this?Predictably, quite the opposite and there have been warnings of resistance from various sectors of society. Workers nationwide have staged strikes closing airports, government offices, courts and schools. This industrial proceeding is evaluate to continue. How are Greeces European neighbors helping?Led by Germanys Chancellor Angela Merkel, all 16 countries which make up the euro zone have agreed a rescue plan for their ailing neighbor. The package, which would only be offered as a last resort, will involve co-ordinated bilateral loans from countries inside the common currency area, as wellspring as funds and technical assistance from the International Monetary Fund (IMF).According to a stick statement on the EU Web site, a majority of the euro zone States would contri simplye an amount estab lish on their Gross Domestic Product (GDP) and population, in the event that Greece needed support after help littleness to access funds in the financial markets. This means Germany will be the main contributor, followed by France. Although the resolve did not mention any specific figure, a senior European official quoted by Reuters give tongue to that the potential package may be worth around 20 billion euro (US$26.8 billion). However any European-backed loan package requires the unanimous approval of European Union members, meaning any euro zone country would have effective veto power.By the end of 2009, as a result of a combination of foreign and local factors the Greek economy faced its most-severe crisis since the restoration of democracy in 1974 as the Greek government revised its deficit from a prediction of 3.7% in early 2009 and 6% in folk 2009, to 12.7% of gross domestic product (GDP). In early 2010, it was revealed that through the assistance of Goldman Sachs,JP Mor gan Chase and numerous other banks, financial products were developed which enabled the governments of Greece, Italy and possibly other countries to hide their borrowing. This had enabled Greek governments to spend beyond their means, while contact the deficit targets of the European Union and the monetary union guidelines. In May 2010, the Greek government deficit was again revised and estimated to be 13.6% for the year, which was one of the highest in the world relative to GDP.Total public debt was forecast, harmonize to some estimates, to hit 120% of GDP during 2010, As a consequence, there was a crisis in international confidence in Greeces ability to repay its sovereign debt. In order to avert such a default, in May 2010 the other Eurozone countries, and the IMF, agreed to a rescue package which involved giving Greece an immediate 45 billion in bail-out loans, with more funds to follow, totaling 110 billion. In order to secure the funding, Greece was required to adopt harsh asceticism measures to bring its deficit under control. Their implementation will be monitored and evaluated by the European Commission, the European Central Bank and the IMF. On 15 November 2010 the EUs statistics body Eurostat revised the public finance and debt figure for Greece followers an excessive deficit procedure methodological mission in Athens, and put Greeces 2009 government deficit at 15.4% of GDP and public debt at 126.8% of GDP making it the biggest deficit (as a division of GDP) amongst the EU member nations (although some have speculated that Irelands in 2010 may prove to be worse).The financial crisis particularly the austerity package put forth by the EU and the IMF has been met with anger by the Greek public, leash to riots and social unrest. Despite the long range of austerity measures, the government deficit has not been reduced checkly, mainly, according to many economists, payable to the subsequent recession. Consequently, the countrys debt to GDP co ntinues to rise rapidly. The Greek public sector continues to be bloated, but the government has been reluctant to make civil servants redundancies. Immigrants are some convictions treated as scapegoats for economic problems by far-right extremists.Why should Greece Default.Contagion. Unemployment. Haircuts. Seemingly endless summits of the Troika. The news coming out of Europe continues to be opprobrious and at the center of the storm is Greece, a Eurozone member drowning in its sovereign debt. In the shadow of the global financial crisis of 2008, the specter of a disorderly Greek default has spooked investors and policymakers alike. Greece, a country that contributes less than 3% of Eurozone GDP, is holding the international economy hostage. The uncertainty arising from ineffectual rescue packages, prolonged negotiations, and poor implementation of austerity measures is slowing foreign investment in the EU and increasing volatility on the exchanges. Decisive action is desperately needed, but when will it come? It is in both Greece and the Eurozones best interest for the unavoidable to take place, now, before more rescue packages tie Greece to unachievable goals in the short run. Greece should default and beget the painful process of recovery outside of the Eurozone. The Greek crisis is testing the long-term viability of the euro experiment, an integrated European fiscal and monetary union, with supranational well-worns for spending and taxation, a common central bank, and a common currency.Ironically, a preeminent motivation for the establishment of the Eurozone was to protect Europe from U.S. financial disruptions, when, in fact, the reverse scenario seems of greater concern today. With the accident of Greeces sovereign debt default, banks, bondholders, and private creditors those with high levels of exposure and counterparty risk are on high agile and shaping (if not delaying) negotiations. The EU makes up 20% of the global economy and constitutes the heroicst single market by GDP. In the Eurozone alone there are roughly 320 million people, comparable to the United States. But unalike the U.S. dollar, a national currency in a Federalist system, the euro is issued in states that maintain drastically different fiscal policies. How can policymakers realistically equilibrise the interests of economic powerhouses like France and Germany, who contribute 50 percent of Eurozone GDP, with the interests and needs of the other fifteen member-states?The challenge before policymakers is to deepen European integration the move toward political, economic, and cultural homogeneity in order to sustain a Eurozone, while realizing when a line needs to be drawn in order to keep the whole thing from falling apart. From a political standpoint, Greece does not appear to be ad honesting with sufficient speed to justify inclusion in the zone. Its government is under siege tax evasion is endemic across all levels of society and people no longer t rust the government due to its inept handling of the budget, most notably in the cooked books of the Papandreou government. From an economic standpoint, the longer the Eurozone waits to act, the more Greeces balance sheet deteriorates. Since 2008, economic output has fallen by 6.5% and debt as a percent of GDP has skyrocketed from 133% to 163% on a linear projection. Interest rates will continue to go up. And culturally, it is prison term to accept and jazz the societal differences that give Europe its charming vibrancy. Put another way, when the Germans go to bed, the Greeks go out to dinner. close to things will likely never change in Europe and the architecture of the Eurozone needs to account for that. Is there light at the end of the tunnel for Greece?In fact, recent economic history offers some induce for optimism. In December 2001, Argentina experienced the largest default on sovereign debt the world had ever seen. corresponding Greece, the default had been preceded by a decade of toxic economic policies, mismanagement, and corruption. A political crisis culminating in 5 different presidents over the course of two weeks exacerbated the economic situation. After accepting 22 billion dollars in aid through debt reduction deals and other channels by the end of 2001, Argentina had made petty(a) progress in the way of reform. The default was disorderly and disruptive. But after drastic moves, including unpegging the Argentine peso from the U.S. dollar, and a series of post-default investments from the international community, Argentina rebounded with remarkable success. Today, you are more likely to read intimately the burgeoning start-up culture and innovation centers of Buenos Aires than you are about bailouts and unemployment. There is a path forward for Greece, but the time to default is now. Of course, innovation centers wont hurt either.Whether you should follow a particular political or economic policy depends very much on the costs and benefi ts of following said political or economic policy. If the costs are higher than the benefits then of course you shouldnt be doing it this is just standard logic. We can go further too. If youve got two and only two unpalatable options then you should go for the one that has the least costs, is the least painful. Which is why Greece should default altogether on its debts and leave the euro. The standard mainstream solution for a country with Greeces problems is exactly that if the debt is too much to pay then dont pay it. Better that some lenders lose their money than an entire population get screwed down into poverty to pay it back. That might not be quite fair on the lenders but tough people before profit. And this has at least been partially through with the private sector holders of Greeces debt all taking a 70% haircut last month. Its the second part of the standard solution (and yes, this is the entirely standard solution, the sort of thing the IMF recommends) is to devalue the currency.For if you dont youve got to have years, decades even, of grinding austerity to try to regain economic competitiveness. But, of course, being in the euro, Greece cannot do this. So Greece must leave the euro. From the other side the standard protestation is that Greece is still running a large budget deficit. This means that a default cannot be done for the government will still need to borrow money just to pay the police and the pensions. So while in theory a default and devaluation would be better than grinding austerity it just cannot be one. But this is to miss the point that Felix Salmon makes Once you strip out Greeces debt payments, the countrys primary deficit is pretty modest just 1% of GDP or so.There are two different budget deficits. The one where we include all the interest that has to be remunerative and the one where we dont that latter being the primary deficit. So, with a default then the interest wont be paid. And the Greek Government will then have to cut spending (or raise taxes) by 1% of GDP because they cannot borrow any more. The point here being that this is less cuts than theyre already being told they have to do. Balancing the budget without having to pay the interest will be easier than what theyre being told they have to do to stay inside the euro. And devaluation will make recovery a great deal easier than decades of internal austerity. Thus it is actually in Greeces own interest to default on the outstanding debts and to leave the euro and devalue the New Drachma. Not that theyll have much choice about that last of course.WHY SHOULD GREEECE NOT DEFAULT.1. Things could get really messy.One of the biggest problems about having a country faint the Eurozone is that this feat was neither planned for, nor has ever been attempted before. Who knows what can happen? For all we know, the situation could get even messy. If Greece gets booted out of the euro zone, theyd have to revert back to using the drachma and this alone is a daunting task. The Greek government would have to make sure that this process goes through without a glitch in order to prevent a flight of capital and social unrest. Now thats a tall-stalked order considering how Greece cant seem to come up with a stable government to begin with.2. A bank run could take place in Europe.Even if Greece manages to reintroduce the drachma, a massive capital outflow from Greece is still very likely as financial institutions and investors wont be willing to put their money in such an unstable environment. With the rest of the PIIGS nations being touted as next in line to exit the euro zone, large amounts of money are likely to flow out of these countries as well.3. It might lead to a euro zone break-up.Economist Nouriel Roubini pointed out that, unless Portugal and Ireland are able to restructure their debt successfully, they could wind up following Greece out of the euro zone. Although he mentioned that an exit by these smaller countries probably wo uldnt disrupt the entire region or the global financial market, he also remarked that the existence of the euro zone would be in jeopardy once the bigger debt-ridden countries such as Spain and Italy think of leaving. On top of that, the ECB and several euro zone countries hold a part of Greeces debt in their balance sheets, which means that a Grexit and the debt default that could follow would force them to realize large losses. And if the finances of the ECB or Germany are in shambles, who would be left to save the euro zone?4. Another Lehman calamity waiting to happen?Several analysts are also worried that a Grexit would eventually lead to a Greek debt default, which could result in a credit freeze similar to what happened when the Lehman Brothers declared bankruptcy in 2008. At that time, banks were unable to absorb the losses and the chain of bankruptcies that followed, eventually leading to a financial crisis. This time around, another financial meltdown could take place if investors, banks, and other governments are forced to accept losses from holding Greek debt. Firewalls could collapse, banks could refuse to lend, spending could be constrained, and another global recession could be possible.Of course, monolithic Brother Germany is keen on preventing a full-blown crisis from happening, with analysts speculating that euro zones top economy would come up with a Grashall Plan or a Marshall Plan for Greece. Under this proposed mega-bailout package, Germany and the rest of the euro zone nations could pool billions of Euros in order to buy Greece more time. Then again, another bailout package could be accompanied by stricter austerity requirements, which Greece is neither willing nor able to carry out. With that, it seems that a Grexit isnt a matter of if, but rather a question of when.