Greek Crisis Case Study

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Greek Crisis, Case write-up

Describe the first rescue package in May 2010 of 110bn Euros?

With Greek economy deteriorating in 2010, IMF agreed to provide €15 billion on April 24 as the fist part of the rescue package. Three days following, Standard & Poor’s downgraded Greek bonds by three notches to BB+, or “junk” status, which directly caused Greece loose its access to capital markets. On May 2, EU and IMF claimed an aid package of €110 billion. “The number was based on an allowance of €100 billion so Greece could stay out of the markets for three years, plus an added 10 billion for the safety of the baking system,” Papaconstantinou, the Greek finance minister, explained.
EU countries provided €80 billion, while IMF provided the rest €30 billion. The loans would be disbursed in tranches beginning at May 2010 for a period of three years. Greece will pay a 5% interest on the debt and repay the principal over five years. The package aimed to enable Greece to roll over 100% of its existing debt in the private markets by 2013. Greece would begin repaying the €110 billion loans in the third quarter of 2013. In return, Greece agreed to undertake structural reforms to improve growth and reduce the fiscal deficit blew 3% by 2014.
Describe the creation and conditions of the EFSF?
A new “European Financial Stability Facility” (EFSF) was incorporated one week after the rescue package for Greece was announced, on June 7th 2010 in Luxembourg. EFSF was formed in the fears of global financial panic following the claim of Greek rescue package, and in the political gap when Merkel’s party lost regional election. Merkel was fantastically against providing aid to EU countries. “The EFSF’s objective is to preserve financial stability of Europe’s monetary union by providing temporary financial assistance to euro area Member States in difficulty.” EFSF loans is up to €440 billion. It could make loans directly and seek funds in the market, and was designed to have AAA rating. Conditions for loans would be similar to those required of Greece.