For the last 6 years, Greece has been a country burdened with bad debt and the threat of default on loans that will take more than a few generations to pay back. During that time, the economy has failed to improve, and again Greece is potentially on the verge of defaulting on its loan obligations, and leaving the European Union.

1. Could Grexit be just around the
corner? The European Union is on
the verge of losing its first member

2. For the last 6 years, Greece has been a country
burdened with bad debt and the threat of default
on loans that will take more than a few
generations to pay back. During that time, the
economy has failed to improve, and again
Greece is potentially on the verge of defaulting
on its loan obligations, and leaving the
European Union.

3. Two years ago, the threat of a Greek Exit from the
EU (referred to as Grexit), sent the stock markets
into a mild panic. Volatility increased and investors
were jittery. Any minor news headlines triggered
investors to sell their shares in fear that another
Global Financial Crisis (GFC) would send markets
plummeting. This time around, investors are
complacent. Why?

4. In 2009, Greece’s international credit rating was
downgraded as it was deemed the government
would default on its ballooning debt. This resulted
in severe spending cuts that the economy has
simply not recovered from. Greece wasn’t the first
country to succumb to a debt crisis, however. In
fact, over the last 100 years, there have been no
less than 83 countries who have defaulted on their
economic debt or required debt restructuring. And
we’re not talking countries that are so small they
barely have a government to run them.

5. Countries such as China (1921, 1932, 1939),
Germany (1932, 1939, 1948), Brazil (too many
times to mention, but more recently in 1990),
Russia, Sweden, Turkey, Poland, and the list goes
on. Of course, most of these examples revolved
around global wars or following conflicts.

7. Why does a country create
debt?
The simple answer is to fund government
operations and expansion. The revenue generated
internally within the country’s economy may not be
sufficient for it to maintain a standard of living, or
even grow.

8. Therefore, the country raises capital either through
internal debt or external debt. Both might be
through issuing Bonds or Securities or even selling
off Assets, or it might be through international
organizations such as the World Bank or
International Monetary Fund (IMF).

9. Citizens of a country have expectations that the
government will support the community and provide
an environment that is safe and prosperous. Taxes
and other revenue streams will fund most of this,
but if there is an economic downturn and the
government does not have the means to fund
continued growth, then they will look towards other
means to raise capital to assist in helping the
economy.

10. Much of the debt is held with the country’s very own
Central Bank. The Central Bank is a separate,
independent body to the government. It is usually
privately owned and operated, in most cases by
banks and bankers.

11. So what ends up happening is that when a
government borrows from their central bank, it will
have to pay interest on the loan. The Central Bank
is not going to Risk lending money to a government
without having a reward. And just like your home
loan or car loan, the Central Bank would prefer that
you never pay it off but continue paying interest as
it is how they make their money.

12. For most countries, they are constantly paying
interest that is compounding on itself and the debt
is continually getting bigger. Until such time as the
government cannot actually pay the interest on the
debt, and they default. Basically, the country
becomes bankrupt.

13. Can’t pay your debt? …
Bailout!
In 2010, Greece was on the verge of defaulting on
their debt repayments. Even after reducing
spending, the threat of default was imminent.
Eurozone countries, the IMF and ECB (European
Central Bank), referred to as the Troika, approved a
$145 billion USD rescue package. To date, the
bailout total has amassed to 240 billion Euros.

14. Further spending cuts occurred. Referred to as
Austerity Measures, the government was spending
less and less, but citizens were struggling more and
more. Unemployment skyrocketed and protests
lead to clashes in the streets. Basically, the
economy remained in trouble.

15. By 2011, the Troika wanted more budget cuts but
Greece needed more financial support. They
received 109billion Euros through the European
Financial Stability Facility, but it did little to help the
economy. At this point, the country is merely
fighting off the wolves.

16. And so it has been over the last 6 years. Greece
negotiates bailout funding but the economy fails to
find any traction. Some argue that it is the mindset
of the Greek population that needs to change (early
retirements and being supported by government
pensions, tax dodging, government spending). But
economic default is not new, and it will be
something the world will continue to see in the
future as it is how our economies are run.

17. Next Deadline looming
On June 5, the Greek government is scheduled to
repay 300 million Euros to the IMF. This is the first
of 4 repayments that total $1.76 billion. Economists
expect that Greece has the ability to pay this first
installment, but they might struggle with the
remaining repayments.

18. The global stock markets are certainly not fearing
default. Two years ago this situation resulted in the
markets capitulating and retracing, causing volatility
to increase sharply as fear of a defaulting Greece
could lead to an exit from the EU. IMF president
Christine Lagarde was quoted as saying on
Thursday 28th May that a Greek Exit from the EU
was a “potential”. Doomsayers predict that a Grexit
would be the beginning of the end for the EU, but
leading economists are not so sure.

19. An exit of Greece from the EU would have minimal
impact on most of the EU. It is the Banking system
that would feel the brunt with much of the Greek
debt owned by Central Banks and the IMF.
Indirectly, the impact would be felt by the larger
banking institutions in Germany and France.

20. Can Europe afford Greece defaulting on their
loans? There is a real case for the default having
an economic impact on Europe. Less money in the
system, less ability to lend to more stable countries,
and subsequently, a long struggle to recover.

21. But we have seen America thrive post-GFC, and
Japan has continued to function as one of the
largest economies in the world despite having one
of the largest Debt to GDP out of all developed
nations. More recently, we have also seen countries
such as Ireland and Iceland, two of the most recent
debt defaulting nations, recover and prosper.

22. News headlines might scream doom and gloom for
world economics. But in the end, major changes
will need to occur for Greece to start on the road to
recovery. Either as the mindset of its people, or as
a nation that plays the bankruptcy card and starts
all over again.

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