Greek Sovereign Debt Crisis

Like many other countries, Greece’s government has, for years, borrowed money to balance its books. But even before the financial crisis of 2008, Greece had a history of unsustainably high debt levels and fiscal irresponsibility. A large portion of these debts were hidden off balance sheet. In 2008, the financial crises lead to a global recession which affected the Greek economy quite badly. Since tax revenues started falling and welfare payments were on the rise, it became harder for the Greek government to service its debt and all the hidden debt came out into the open. Rating agencies started downgrading Greek debt at a very steep pace. Resultantly, the borrowing costs for Greece sky rocketed as the markets did not want to have anything to do with the country due to the loss of trust. Being a part of the Eurozone, a monetary bloc with a common currency and monetary policy controlled by the ECB, it could neither devalue its currency nor cut interest rates to stimulate growth. It had to turn to the ECB and EU for assistance, which was granted under the condition of the government adopting austerity measures. Greece could not default it’s debts unilaterally as its European partners would stop funding the country. Also Greece leaving the Eurozone (Grexit) would not help because if it started printing its own currency to repay the loans it would result in deep inflation in the long run and would also prevent Greece from getting any financial aid from its Eurozone members at a time when it had limited sources of credit. Hence, Greece had to accept the austerity conditions. Over the years, the cuts in public sector funding deepened the Greek recession and reduced tax revenues making it tougher for the country to repay debts in the future. Let us now look at how the events unfolded and where they stand as of now.

In October, 2009, George Papaconstantinou, finance minister in Greece’s new socialist government, disclosed that the nation’s deficit would soar this year to almost 12.5 per cent of gross domestic product. This marked the beginning of a series of rating downgrades and an upward trajectory of government bond yields. During 201 0, the parliament approved the first few sets of austerity measures, as demanded by EU, ECB and IMF (the troika) to grant the bailout package. Later during the year Papandreou, the IMF, and euro-zone leaders (the trioka) agree to a €110 billion ($143 billion) bailout package that would take effect over the next three years. By the end of 2011 most rating agencies has downgraded Greek debt to Junk status. During June, 2011, Evangelos Venizelos assumed new Finance Minister. 2011 also marked the introduction of a series of new austerity measures. Public unrest increased with each, leading to widespread protests which often turned violent with people being injured and building being burnt. The masses weren’t happy, and they wouldn’t sit back. In November 2011, the private investors agreed a “haircut” of 50% in converting their existing bonds into new loans. In return for the austerity measures and debt reductions, EU Member States agreed to a new €100 billion loan and a retroactive lowering of the bailout interest rates. Later during the year, Prime Minister George Papandreou resigned and was replaced by Lucas Papademos.

By early 2012, the private sector participation reached 83.5% of Greek bond holders. It was during the 2012 elections that the radical left party and far right party started increasing their rates. A coalition government was formed with the participation New DemocracyPASOK and DIMARAntonis Samaras, the president of New Democracy, became the new Prime Minister of Greece. All throughout 2012 and 2013 up until mid 2014, introduction of new austerity measures continued in the face of worsening public unrests and protests.

After a slew of political changes throughout Greece and other parts of Europe, finally on January 25th 2014 the Coalition of the Radical Left won a historic victory in the Greek legislative elections due to their anti-austerity measures. The new government was formed by the cooperation of Coalition of the Radical Left and Independent GreeksAlexis Tsipras swore in as new Prime Minister while Yanis Varoufakis was chosen as the new finance minister. The new government promised to heal the humanitarian crisis that was a result of years of austerity and not bow down to the troika.

However, Greece needed money. So in February 2014, after much negotiation the Eurozone agreed to give Greece a four month loan extension on the condition that it introduces reformative measures that are acceptable to creditors. Syriza had to step down from its absolute anti-austerity stand in order to strike a deal and buy Greece some time. But the deal was seen by most as reasonable for both parties.

Eurozone finance ministers have given their approval to Greece’s economic reform plans, but the longer battle over the Greek bailout has just begun. The possibility of a Grexit is still on the cards even though Greece claims not to consider it. A Grexit  would lead to uncertainty and immense turmoil. A number of possible outcomes could result out of this- the countries unifying and increasing their solidarity or on the contrary the Eurozone may disintegrate.  

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