Greece Financial Crises
Greece is in deep turmoil politically, economically and socially almost from
last five years and circumstances are getting even worse. Some
economists are saying that Greece could be the first "developed” country
which can go into bankruptcy. So what exactly happened? How did Greece
get to this point? Let’s find out.
Greece and Eurozone (officially called Euro area)
Europeans countries were always at war with each other and went into
huge crises at every level, and they lost their political credibility globally.so
it was decided that lost creditability can be recovered only by political,
social, legal and economic integration. Hence, at the end of World War II,
the continental political climate favoured unity in democratic European
countries which lead to the formation of the European Union.
further to make stronger economic integration, all the major economies
came across with the idea of the eurozone which was introduced in 1999.
That is member countries will have the same currency that is Euro, and its
monetary policies will be governed by a central bank called European
central bank (ECB) though countries can control their fiscal policies.it was a
successful launch as it valued strong against US Dollar. but there were
certain strict conditions to enter into eurozone like the Budget deficit of
government cannot exceed 3% government Debt to GDP ratio cannot
exceed 60%, lower Interest rates etc. Greece entered the eurozone in
2000.
How did Greece get to this point?
Greece became unstable politically and economically in back in the 1970s
due to government coup (dictatorship) but bounced back later. In the 1990s
Greece growth spiked and Greece entered the eurozone. And it got
inextricably linked with the strong economies like France and Germany
which increased its creditability of taking more debt at low-interest rates
and as result government spending and public borrowing were
skyrocketed.
Government spending which was a major setback was
●
●
●
●
●
Greece Olympics 2004
Defence deals with the US and Germany(not needed at all)
pensions plans
corrupt Tax system(massive tax evasion)
High subsidy.
Greek people were having access to a personal loan at low-interest rates
and they borrowed like hell.
All the above-mentioned factors were a burden to the government and also
return on the spending was good for nothing and when the international
recession of 2008 hit. Greece deteriorated into debt crises and was unable
to pay the debt. But now the question arises every government spends as
Greece did, but why Greece went into severe such debt crises ??? Well,
Greece is not a victim but a criminal who understated its debt to the whole
world. This came to light in 2009 when the new government of Greece
came into power and revealed that they have been falsifying the reports for
years and the possibly same thing was done to get into the eurozone.
Where Greece stands right now and to whom Greece owes money?
Well, Greece is having a total debt of 400 billion dollars which is 170% of its
annual GDP and over the next 50 years, they are scheduled to repay the
debt. GDP growth in the first quarter of 2015 was -0.2%, the unemployment
rate is 26% and there will be no growth expected at least for the next 5
years.
So who are Greece creditors? and how much Greece owes to its creditors?
EFSF-European financial stability facility ( an organization made by
eurozone members to Pool money and help stabilize member countries in
crises).
Banks include the International monetary fund (IMF), European central
bank(ECB), Greek banks.
The Greek government has been continuously defaulting on its loan
payments since 2011 and interest soared to 24% from 2%.
So to stimulate the Greek economy Bailout package (Financial assistance
to failing economy to save it from collapse)of 110 billion euros was
proposed by the European Commission. But with some conditions which
are known as Austerity (policies in an aim to reduce the government budget
deficit).
Austerity measures imposed on Greece are:
●
●
●
the increase in taxes
cutting subsidies
Cutting government spending
Around 20% of a bailout, an amount was received out which 90%
was used to pay off creditors and people got nothing which leads to
unemployment, protest and riots.
Prime Minister Alexis Tsipras called a referendum for rejecting bailout
package and to exit the eurozone and coming back to its own currency
Greek Drachma. Greeks also voted in favour of rejecting the bailout. But
later the Greek government accepted the bailout package because taking
an exit from the eurozone can make things even worse.
Impact on India
Of course, there will be some effect on India but not too much. As Euro will
be tending to devalue which will make costlier imports for Europeans, but
not too much, as Greece is just 2% of eurozone And Exposure of Indian
stocks in European market especially in Greece is very less.
Writer's Opinion
In my opinion, Greece should follow the Iceland model of recovery as
Iceland rejected Bailout offers, they also rejected to pay foreign creditors
and let their banks fail. They transferred the only domestic loan to new
banks. Around 5 years Iceland showed no growth but now they are growing
at 3%. It involves huge risk but as Greece is not big and dynamic economy
they can afford to do this.
Rohan Sharma