Running head: The causes of the debt crisis in Greece The causes of the debt crisis in Greece Oleksandr Zaviriukha 300686394 Centennial College Author Note This paper was prepared for Economics 401 Taught by Professor Aurelia Best
Table of contentsAbstractThe causes of the debt crisisThe possible ways outConclusionReferences
Abstract Nowadays, it is so strange to observe economical crisis in the prosperous countries ofWest, all of which seems to be rich and strong. But today, after the 2008 crisis, Europe is facingnew debt crisis, which has already affected Greece, Ireland, Portugal, Spain and Italy. http://www.guardian.co.uk/business/blog/2011/oct/17/europe-debt-hangover-alarm-bells Greece was one of the poorest countries, when it became a member of European Unionin 1981. However, Greece had a strategic importance in the Balkans, which caused huge amountof investments in country and its economy. Furthermore, homeland of the European civilization,Greece started to attract a lot of visitors from North America and Western Europe. All thesefactors create a new economical environment for Greece and it was one of the fastest growing ineuro zone in earliest 2000s. Now, Greece is one of the poorest countries of euro zone and it’s facing huge problemswith a sovereign debt crisis, 175% of GDP of the country. There are numerous demonstrationsall the time in the different cities of the country, the governments change each other almost everymonths. Although, it has started more than 2 years ago the situation is more likely to get evenworth despite the cutting of expenses and assist of the Germany and leaders of the EU. IMF and
ECB (European Central Bank) are taking the negotiations to provide Greece with a new bailoutpackage and this is expected to reduce Greek sovereign debt to 117% by the end of the year. Onemore problem is that Germany is a main owner of Greek bonds and obligations and default ofthis country will affect not just themselves but whole union. So, what had happened to the Greek economy? Why this problem had appeared so fastand is growing so rapidly? In this paper I will cover and discuss all the reasons which caused aGreek debt crisis as well as possible ways out for the country.
The causes of the debt crisis There is number of reasons which caused a debt crisis in Greece: 1. Firstly, Greece was affected by the 2008th year crisis particularly hard because its main industries — shipping and tourism — were especially sensitive to changes in the business environment. Tourism – one of the main points which caused a growing of Greece economy earlier, appeared to be one of the most important causes of its crisis later. By the time when Greece entered the euro zone in 2002 its rapid growth in tourism industry began to decrease for several reasons. The main is the enormously high prices for the trips and services for the visitors. Greeks decided that they can easily make the prices higher than it should be and overcharge the tourists because of natural beauty of the country and its historical and cultural places. However, the tourists started to choose often a close alternative – Turkey. Turkey has beautiful beaches, excellent service and many places to visit as well for much lower price. So, Ankara started to struggle with Athens for the tourists and was doing well, inevitable beating Greece with a number of tourists. When in 2008 the crisis began, it has added one huger problem to the previous one.2. Furthermore, in 2004 Greece was hosting for the summer Olympic Games. The costs were huge. Government had to build new airports, roads, hotels, facilities and stadiums around the Athens. Moreover, Greece had to complete new transportation plan of rebuilding the Athens infrastructure and clean up the whole city. The costs of doing all of these points were astronomically high, these costs created a high budget deficit in the next year, beside the decrease in tourism. 3. Finally, I have mentioned before, that Greece had an important strategic position and has experienced high rate on investments in 80th-90th. This fact played a negative role for Greece also. From the observations of my friend and his family, who have been living in Athens from 1993 till 2009, Greeks enjoyed the new financial opportunities, taking huge loans
without any fear and not paying for some usual taxes. For example, there is no tax on property. The famous business in Greece was to take loans and to buy many apartments our houses for rent. What is more, after the crisis has come, Greeks refused to start paying higher taxes in order to save economy and began the demonstrations and protests. “ In November 2004, the media reported that Greece had misrepresented its financialsituation in order to join the Euro zone in 2002. It had never met the criteria and should not havebeen allowed to become a member of the single currency zone. With this kind of attitude towardsspending and debt, one would think that the other member states would have been keeping aclose eye on Greeces spending and economic situation. There have been several cases ofcorruption involving politicians in the country over the last decade, with money allegedly beingmisappropriated. There also seemed to be no repercussions for those involved in such scandals.Just as in some countries in the developing world, a walk around Athens would show that theblack economy is thriving.” (1)
The possible ways out On 23 April 2010, the Greek government requested an initial loan of €45 billion from theEU in order to eliminate the debt in the 2011. There are a lot of controversy what is the best wayfir Greece and Europe to deal with the debt crisis. Those, who stand for united Union claim that Europe will eventually save Greeceeconomy and eliminate the sovereign debt. The analytics say that despite the huge amounts ofnew loans paid to Greece in the last few years, the default and secede from the Union will fatallyaffect Greece and whole EU. To prevent the civil strikes and disorders in Greece the IMF, EUand ECB eventually agreed to provide Greece with new 130$ billion package in order toeliminate the debt level to 120% of GDP. “For the first time, the bailout deal also included adebt restructure agreement with the private holders of Greek government bonds (banks, insurersand investment funds), to "voluntarily" accept a bond swap with a 53.5% nominal write-off,partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and thematurity prolonged to 11-30 years (independently of the previous maturity). It is the worldsbiggest debt restructuring deal ever done, affecting some €206 billion of Greek governmentbonds. “(2) “The debt write-off had a seize of €107 billion, and caused the Greek debt level to fallfrom roughly €350bn to €240bn in March 2012, with the predicted debt burden now showing amore sustainable size equal to 117% of GDP, somewhat lower than the originally expected120.5%.” (3)
http://seekingalpha.com/article/201597-european-debt-crisis-right-around-the-corner-u-s-housing-collapse-redux-on-the-way From the other hand there are those, who is sure that Greek default is just a matter of timeand it will be more beneficial for Greece and EU, if Greece will claim default as fast as possible.According to these economists there are several reasons for that: - “Greek default is inevitable. It is not a matter of if, but how. A default is built into the terms of the proposed second bailout package, in which private creditors are expected to swap or roll over their holdings of Greek bonds, taking a loss in the process. “ (4) - “Investors are already assuming Greece will default, and are preparing for it. Greece has been on an obvious downward spiral for nearly two years now. Its one-year bonds are trading at a yield well over 100% — clear indication investors believe a default is coming. Since the markets are already anticipating a default, there isn’t as much downside in actually having one.” (4) - Many economists and analytics assume a default will happen and the bailout program is not working. There is no big progress despite of hundreds of billions of
Euros and 2 years of struggling. The main reason the bailout is failing is that no one believes that Greece can fix its finances and reform its economy under this program.- “The euro zone would do more good by using the Greek bailout money elsewhere. The leaders of the zone could, for example, utilize the funds to support Spain and Italy, the crises in which are the real threat to the future of the euro. Or maybe it’s best to use the Greek bailout funds to recapitalize and shore up the European banking sector, which would minimize the impact of a Greek default.” (4)- The bailout program is pushing Greek social and economical environment towards complete disaster. GDP shrank is growing, protesters are almost always on the streets, unemployment rate is higher than 16% and it is not the worst situation, many economists claim.
ConclusionIn this paper work I have pointed main reasons of the dept crisis in Greece and the ways they canchoose to follow in order to stabilize the economy of the country. I reserve my judgment,because this is extremely tough issue, even best world economists are not sure about the future ofGreece. To my mind, European Union will continue its tries to save Greek economy and keep itin euro zone, despite the weakness of Greek government and social protests. I venture to assumethat this tactic will succeed in some way, but leaders of the EU such as Germany and France willspend huge amounts of money on that.Greeks need to understand that the world has changed since their entry to the EU. The country isno longer as strategically important to Western Europe as it once was. They have to work hardand to sacrifice a lot in order to save their economy and their country.
References1. http://www.chillibreeze.com/articles_various/Greek-debt-crisis-810.asp2. http://www.investmenteurope.net/investment-europe/opinion/2155438/greek-rescue- package-term-solution-hsbcs-willem-sels3. http://www.reuters.com/article/2012/02/29/us-europe-greece-idUSTRE81S0NP201202294. http://business.time.com/2011/09/23/six-reasons-why-greece-should-default/5. “ Europe and financial crisis” , 2011, edited by Pompeo Della Posta and Leila Simona Talani