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Greek Financial Crisis

PUBLISHED BY:
DR. RAKESH KUMAR KHURANA
DECEMBER 11, 2015

   
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 Greek Financial Crisis

Every nation with a resource deficit borrows from the international community and financial institutions to meet its development needs. A nation’s failure to serve its debt liabilities (principal and interest) comes under ‘sovereign default’. Greece was recently put in this category due to its inability to serve its debt obligations. The Greek financial crisis started in the end of the year 2009 and was triggered by structural weaknesses in the economy, great recession and a crisis of confidence among the lenders.

 

Greece is a member country of theEuropean Union and the European Currency Zone and enjoys being a member of such a large grouping. The introduction of a Common Currency reduced the trading costs among the nations and encouraged trade volume among them. However, being a peripheral nation in this union, Greece saw labour costs jumping and its exports become less competitive. Consequently, its current account deficit started swelling. It led to borrowing from other countries and international financial institutions.

 

The members of the European Currency Zone are free to run their own fiscal and tax policies. In this context, Greece failed to have an efficient fiscal management of its resources. Moreover, the great recession that had hit the USA in 2008, spread to Europe and the European core countries’ funds to Greece started drying up. Besides, Greece committed a blunder by reporting wrong data to the European Union about its economy to show that it satisfied the required parameters committed for the European Currency Zone. Consequently, Greece could no longer borrow to finance its trade and budget deficits.

 

Therefore, a significant rise in the Debt-to-GDP ratio has been observed, with unemployment rate rising to about 25 percent. Besides, economic growth slowed down to a minimum. When it made some efforts to improve its fiscal position by cutting expenditures, it further slowed down the growth and tax revenues. International confidence in the economy deteriorated and the international capital either stopped moving in or started flying out only to further aggravate the problem.

 

Recognizing the contagion effect of the Greek financial crisis on the global economy in general, and the European economies in particular, the European Commission, the European Central Bank and the International Monetary Fund planned a bailout package for Greece. In May 2010, the troika responded by launching a €110 billion bailout loan to rescue Greece from sovereign default. It was  accompanied by some conditions regarding austerity measures, structural reforms and privatization of government assets. Even then, the recessionary conditions could not improve, and Greece was again bailed out with €110 billion in 2012.

 

Though some signs of economic revival started appearing and it seemed that the confidence of the global community would be restored, but it was short-lived. Many economists have held ‘austerity measures’ responsible for the weakness of the economy and much of the continuing problems.

 

The leftist party (Syriza) derived political mileage from the ‘austerity measures’ as it believed that this was the chief culprit behind the Greek economic problems. The government, under the leadership of Alex Tsipras, promised to renegotiate the austerity measures with the lenders. He was successful in getting a ‘no’ vote in the referendum held to accept the bailout package with such severe austerity conditions. Ultimately, the lenders relented and relaxed the conditions to help solve the debt crisis.

 

In the end, it must be understood that such bailout packages are only a temporary arrangement to avert sovereign default. The real survival of the economy depends on an overhaul of the economy by streamlining the government, ending tax evasion and making Greece an easier place to do business in.

  

 


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