The Financial Crisis of Greece Would Not Sound All Greek To U, If U Read This Article..

The recent economic crisis in Greece has taken the entire European Union by a storm. The Greek economy was one of the fastest growing economies in the Euro zone from the turn of the millennium till 2007. The ruckus began in 2008 when two of the country’s largest industries-shipping & tourism were both terribly affected by the slump with revenues falling 15% in 2009.

The Root Cause

The main cause for the crisis was increase in govt. deficits and debt levels to an exorbitant amount. In 2010, the Greek govt. deficit was anticipated to be 13.6% which is one of the highest in the world in relation to the GDP. The Greek govt. bond market is heavily reliant on foreign investors, estimates suggesting 70% of the Greek bonds are held externally. Standard & Poor’s {a credit rating agency [CRA]-which rates public and private sector on the basis of their credit worthiness} downgraded Greek debt rating to “junk status” on 27^th April, 2010. [This means that according to S&P, the govt. is mostly likely to default on the payment of debt]. Following the downgrading by other CRA’s like Flitch, Moody’s, the Greek govt. yields rose drastically in 2010. {Yield is the rate of return the investor gets on a bond.....to compensate the investor for the increase in risk that he takes when he invests in a Greek govt. bond (which is likely to default according to credit rating agencies), the return on bonds i.e. the yield increased}.

Austerity Measures and Protests from the Public

The govt. had taken a round of austerity measures like the Economic Protection Bill which included public sector pay cuts, pension reductions, new taxes on company profits, and increase in value added taxes amongst others. On 23 April 2010, the Greek government requested that the EU/IMF bailout package be activated. In response to a new round of cost cutting actions taken by the government a nation wide strike was called for May 5. The estimated 100,000 protestors marched through Athens and accused the govt. of being “thieves”. Demonstrators broke windows, threw petrol bombs, rocks, bottles at the police, burnt cars on fire across the city.

Limitations of Greece and Effect of Crisis on other Countries

Without a bailout agreement, there was a possibility that Greece would have been forced to default on some of its debt. Due to the fact that Greece is part of EU, it cannot print its own currency. This limitation prevents it from doing away with a portion of obligations or stimulating its economy with monetary policy.

There is a possibility that Greek crisis will cause investors to lose faith in investors in other Euro zone countries like Portugal, Spain & Ireland all of whom have debt and deficit issues.

Controversies

There have also been many controversies surrounding the whole issue that took place. The Credit Rating Agencies have been under fire for a tendency to act conservatively. In Greece, the market responded to the crisis much before the downgrade of Govt. bonds was declared by CRA’s. The role of Goldman Sachs is under severe scrutiny, because it was discovered that the govt. of Greece paid the bank millions of dollars in fees 2001 (along with other banks) for arranging transactions that hid the level of borrowing. This enabled the govt. to spend beyond what they actually could by effectively hiding it from EU overseers.

The Trillion Dollar Rescue Package

On 9^th May, 2010, Europe’s Finance Ministers approved almost a trillion dollars for crisis aimed at ensuring financial stability all across Europe. Stocks worldwide surged as fear of Greek debt crisis subsided. The Euro made its biggest gain in 18 months. Commodity price also rose after the following announcement.

However the package is conditional on all the countries doing fiscal adjustment & structural reform. An immediate revival of economic fortunes cannot be expected.