In 2001, Greece’s politicians came to an agreement to change their currency to the euro; after showing historically high levels of inflation and with a distrusted monetary policy, this implementation came with great expectations. However, with little to no influence over their new currency monetary policy, Greece quickly saw a tremendous reduction of their interest rates and 10-year Greek government bonds declined from 20 percent to 3 and a half percent in 2005. Experts believe that Greece’s lack of influence on their currency was the underlying cause of the debt crisis that would emerge upon Greece in 2009.
How did it happen?
The Greek crisis was erupted by the fiscal and banking crisis that had been suffocating Ireland, Spain, and Italy during the Great Financial Crisis. As the Greek financial crisis emerged, interest rates began to rise and the 10-year government bond yielded an astonishing 27 percent in the beginning of November in 2011 (1). Imploding with their debt burden and, since it was clear to the world that Greece had ran an understating deficit for years, their urge to borrow money on the international markets was rejected. Instead, Greece sought help from the European Central Bank (ECB) which, in regard to the collapse of Wall Street in 2008, declared an international bailout for Greece in order to avert another global crisis.
The international bailouts did not, however, come as a “friend-in-need help,” no. With the loans came major restrictions that could easily be seen as a setback for Greece, but considering the state of burden, there was no room for bargaining. Greece had to access those loans instantaneously so that its leaders could start steering the ship, as calmly as possible, in the right direction. However, many experts believe that restrictions, such as curbing tax evasion, budget cuts, and the tons of reforms imploded to reduce government’s baffling payroll instead have caused the country’s economy to contract by 25% in the last five years (2). This is mainly due to the disappointment of how those loans have been allocated. The loans were expected to help Greece to stabilize their finances and reduce market fears. However, a staggering majority of the capital have been aimed to pay off Greece’s international loans which consequently have put the contracting country off focus, that already phases a lot of restrictions (3). Therefore, Greece have focused much of their capital from the bailout programs on paying their international loans instead of focusing on investment towards companies and rebuilding their country.
What is happening today?
The situation in Greece is still turbulent; however, there are some experts that sees the current situation as a turning point. Greece, as soon as they have paid off July 20 payment, will be eligible for ECB’s QE plan. If this happens, not only will the chances of having a Grexit lessen, but it will also come as an opportunity for investors to start investing in the country again. As a light of dawn, the Greece stock market have responded positively to this possibility. The Athens Stock Exchange has rallied about 17% over the past 3 months and Greek bonds yielded a 16% rate of return over the same period of time (4). But do not be fooled, a Grexit is not off the table just yet.
However, the mother of all EU crisis has quietly been gathering steam again. Without an additional bailout aid, Greece risks to default on 3.5 billion euros ($3.9 billion) on the debt payment in July which may, after all, raise the question of a Grexit. It is an ambiguous request to ask for more after the 86 billion euro ($96 billion) bailout that was made last year. However, that bailout has been treated very badly, considering Greece avoided defaulting by loaning Athens 13 billion euros ($14 billion) in exchange for major pension program and tax reforms (5).
In addition, there is also the predicament that Greece demands their debt relief that the European partners agreed to impose in a short future. This was in 2012, and it has become a major turnback for Greek banking system ever since they got denied upon retribution when Greece achieved, with substantial trouble, a surplus of 1.5 billion euros ($2.07 billion) in 2013 (6). The same disappointment arose in March when the euro-group of finance ministers met and recognized Greek government’s need to reduce their ratio of debt to gross domestic product.
The outlook for Greek economy lies in whether or not they make the payment in July as well as if the ECB reckon them to be eligible for the QE programs that would be a great opportunity for Greece to regain their investors’ trust in them. International investment in the country is truly a viable solution right now; because, as we have seen, the bailouts more or less focus on the financial market, its debt, and not the backbone of the country: the people and its companies. Regaining trust for international investors can come as a helping hand to put focus on the countries companies and people that after all are among, if not the only source to repaying the debts fair and square. The people of Greece demand change and they need recovery.
What are your thoughts on the Greek crisis? Will they recover?
Send your e-mails to the author at: Jhallin@sbeconomic.com
(1) Kouretas, Georgios P. The Greek Debt Crisis: Origins and Implications. Athens: Athens U, n.d. Web.
(2) Zavis, Alexandra. "How Did Greece Get into Its Debt Crisis and What Happens Next?" Los Angeles Times. Los Angeles Times, 29 June 2015. Web. 17 July 2016.
(3) "Greece to Receive Another Chunk of Bailout Aid." The New York Times. The New York Times, 17 June 2016. Web. 17 July 2016.
(4) Chrysoloras, Nikos, Jenny Paris, and Andrew J. Barden. "Tsakalotos Says Greece Will Soon Qualify for ECB's QE Plan." Bloomberg.com. Bloomberg, 8 June 2016. Web. 17 July 2016.
(5) Spiegel, Peter. “Greece’s debt crisis looks familiar, but consequences may be worse” FT.com. Financial times, 21 April 2016. Web. 17 July 2016.
(6) "Greece Sees 2013 Primary Budget Surplus at 1.5 Billion Euros: Deputy Finance Minister." Reuters. Thomson Reuters, 23 Apr. 2014. Web. 17 July 2016.