The debt crisis began in Greece in late 2009 when the new government revealed the budget deficit was much higher than previously reported. This undermined market confidence in Greece and caused borrowing rates to rise sharply. The crisis spread to other European nations like Portugal, Ireland, Spain and Italy who had taken on large debts. A bailout package was created by the IMF and Eurozone nations to help Greece, but long term solutions are still needed to restore confidence and prevent the crisis from worsening or spreading further. National austerity measures are being implemented but more fiscal coordination between European states may be required to contain the problem.

1. When the whole financial world was busy speculating about the economic scenario of
United States and predicting what could save the mighty US there was a bigger financial
crisis looming in the other side of the world, the Europe. The 10 year bond spread of several
EU countries, such as Greece, Portugal, Spain etc have been on a rise for quite some time.
The trigger, however was the announcement made by George Papandreou's new socialist
government in Greece that the 2009 budget deficit will be 12.7 percent of GDP -- more than
double the previously published on 5th November, 2009. This led to a tremendous loss in
market confidence. The Greek government, already laden with a debt of about $300 billion
left over by the previous government, found a steep rise in the market rate for servicing their
debts. This was just the beginning of the crisis now engulfing almost all the whole economic
world.
So what is a debt crisis? Debt crisis is the inability or unwillingness of major debtors to
service their debts, or serious fears of this. A debt crisis occurs if major debtors are unable
or unwilling to pay the interest and redemption payments due on their debts, or if creditors
are not confident. Governments have no money of their own; their spending must be
covered by taxes. If they spend more than they take in, they bridge the gap by borrowing.
The rate at which this money is borrowed is determined by the current market rates and the
economic condition of the borrowing country. So a developing economy finds it much more
difficult to borrow, than a developed one. What happened in Europe, was that some
countries such as Greece, Spain, Portugal etc, due to their membership in the EU found it
more and more simpler to borrow money at lesser rates to fund their public development
liabilities. But due to widespread corruption, lesser and lesser amount of this money was
actually used for the purpose. The rating of these countries has been on a free fall since last
autumn. As a result these faltering countries are facing sharply higher interest rates,
problems refinancing their debt, and, ultimately, default—something that has not happened
in a developed European economy since 1948.
But how did an economy like Greece, got into the EU, with strict membership criteria, in the
first place? The answer may lie with the study made by the EU statistics agency Eurostat. It
says that in 2001, Goldman Sachs secretly helped the right-wing Greek government meet
EU membership criteria by masking the extent of public deficit and national debt. Even in
good times, Greece had very high borrowings and debt. It overspent and under taxed but

2. some of this was concealed in the returns it sent to Brussels. Thus until the revelation of the
new Greek government, the investors had a faith in the Greek economy and the rate of
borrowing was at par with developed economies.
Now let’s see what the implications of this crisis are. The following chart lists the amount of
debt these some of the European nations actually owe.
Nation Money they owe Whom they owe
(billion $)
Portugal 286 Mostly Spain. Also France, Germany,
Britain
Greece 367 Mostly European Nations
Ireland 867 Mostly European Nations
Spain 1100 Mostly France, Germany & Britain
Italy 1400 Mostly France. Also Germany & Britain
It’s amply clear that most EU nations are dependent on one another. On first glance, it
seems that major economies like France, Germany and Britain are not in the blue. But they
are the major donor of the PIIGSs nations which make them very vulnerable to any of these
countries defaulting. Any default will result in the breakdown of the banking system of the
EuroZone. This crisis is bound to have a snow ball effect. The default will have global
implications too. Since Greece is an EU member using the reserve currency euro in the 16
of the 27 states representing the EuroZone, any default will have serious ramifications. This
is because, the euro being the second most traded currency in the world after the U.S.
dollar, it has multifaceted impact on the financial markets dealing with high volume trading
especially in the futures exchange. The global market is in the process of recovering from
the meltdown it faced in the previous two years. Any crisis in Euro front will seriously
damage the confidence in the market. The investors will become more wary and the limping
global economy will move back to crutches.
So what’s being done to prevent it? On 14th January 2010, the Greek government
announced a stability plan, saying it will cut its deficit to 2.8% by 2012. A new package of
public sector pay cuts and tax increases was passed in Greece to save an extra 4.8 billion
Euros on the 5th of March. On the 25th of the same month Euro zone leaders and the IMF
agreed to create joint financial safety net to help Greece. On 7th May, the heads of state and
governments of the 16 EuroZone nations on Friday launched a historic 110 billion-euro

3. financial aid package to bailout heavily indebted Greece from bankruptcy and vowed to fight
speculators endangering the stability of their common currency. To prove its seriousness to
tackle the crisis, Greece announced austerity drives to cut up to 30 billion Euros in the next
3 years. After nationwide protests, the drive was finally approved by the Greece
government. Portugal, Spain and Italy followed suit and announced their own austerity
drives. The bailout announced is expected to help Greece in short terms.
The big question looming around is whether the bailout is enough? Well the answer is yes
and no. In the short term this bailout will revive market confidence. But the developments
must be strictly monitored from now on. A major cause of concern is the market
apprehensions about the intentions of Germany. Being an export oriented nation, it has
gained in a major way due to the weakening of the euro. In such fragile time, such
apprehensions are really worrying.
Moreover the bailout is conditional. The Greek government must honor their promises on
cost cuts. Spain and Portugal are in a better condition as they lower level of debt with
respect to their GDP. So they still can borrow and help their way out. But this must be done
cautiously to prevent a Greece like situation. The EuroZone countries must take the help of
the IMF which have a far better image. This will go a long way in improving their image. A
closer fiscal union allowing direct transfers between states may be a feasible solution to
contain the problem.
Other than austerity drives, some other options must also be taken in account. A major
structuring of the expenditure must be done. A major portion of the money spent for defense
purpose can be allotted for development expenditures. The short term investors, who look
for using such situations to make quick money, must be kept in control. A collective effort
within the EuroZone nations is a must for tackling this problem. In the coming months, it is
of utmost importance that the market confidence be restored in EU nations so that this crisis
doesn’t go out of hand. Putting a limit to the fiscal deficit can be a stepping stone towards
this. But in doing so, the individual governments must be allowed to decide on their
spending and tax policies.
Thus it’s safe to assume that the Euro nations are seriously looking for solutions. With the
whole world following any developments in this regard, it’s of utmost importance the
EuroZone nations deliver on their promises and bring back the euro to a fast track recovery.