Essay on The Greek Debit Crisis

Submitted By aspangenberg
Words: 1209
Pages: 5

The Greek Debt Crisis: Can Greece’s Economy Recover?
The Greek debt crisis is one of the biggest economic challenges our global economic system has faced. Fear of Greece’s enormous debt as a percentage of it’s Gross Domestic Product (GDP) and its ability to pay the interest as well as the principle of her bonds, has every nation and global markets holding its collective breath. The question of concern is can Greece recover regardless of the amount of money loaned to her? Today, the world has said no, as Greece’s bondholders have agreed to accept a 50% reduction in their holdings in Greek debt.
A brief account of the recent history of the Greek economy is needed to understand how Greece has gotten to this situation.
In January 2001, Greece joins the European Union (EU) and her economy shifts from Greek backed drachmas to euros backed by the European Central Bank (ECB). The ECB is much like the United State’s Federal Reserve (the Fed). According to the ECB’s web site (2012), “The Eurosystem is responsible for defining and implementing the monetary policy of the euro area. This is a public policy function that is implemented mainly by financial market operations. Important for this task is the full control of the Eurosystem over the monetary base. As part of that, the ECB and the national central banks (NCBs) are the only institutions that are entitled to actually issue legal tender banknotes in the euro area. Given the dependence of the banking system on base money, the Eurosystem is thus in a position to exert a dominant influence on money market conditions and money market interest rates.” However, unlike the Fed, the ECB has many limitations that can prevent it from forcing its members to be entirely truthful with them. In November of 2004 Daniel Howden and Stephen Castle reported that, “Greece admitted yesterday that the budget figures it used to gain entry to the euro three years ago were fudged. The Finance Minister, George Alogoskoufis, said the true scale of Greece's budget deficit was massively understated enabling Athens to dip below the qualification bar and into the EU's single currency.”
At the same time in 2004 the full glory of the nation of Greece was on display during the Olympic Games. However, this national pride came at a steep cost. According to Alogoskoufis, as reported by the embassy of Greece (2004), to support the Olympics’ construction and infrastructure projects contracted by the government of Greece, the government made an injection of about 7.2 billion euros into Greece’s economy. As learned in basic economics, this type of capital injection by government with multipliers would lead to an economic boom. As economic theory suggested, Greece’s economy took off and GDP rose about 4% per year until 2007. According to figures released by the European Commission, IMF, during this period Greece did nothing to pay down her national debt, which remained at 98% to 100% of her GDP (greekdefaultwatch.com 2011).
In 2009, as typically seen in the business cycle, recession hit Greece. According to the United States CIA (2012), Greek GDP contracted by about 2% in 2009, 4% (est.) in 2010, and 5% (est.) in 2011. During this same period the CIA records also indicated Greek debt increased to approximately 165% (est.) of GDP by 2011 (3). Additionally, Greece’s unemployment rates were about 12.5% in 2010 and 17% in 2011.
The world recognized Greece’s continued debt woes and investors stated to fear that Greece would default on her promises to repay her mounting debt. In May 2010 after months of heated debate Gabi Thesing and Flavia Krause-Jackson of Bloomberg (2010), reported, “Euro-region ministers agreed to a 110 billion-euro rescue package for Greece to prevent a default and stop the worst crisis in the currency’s 11-year history from spreading through the rest of the bloc.” In return, Greece was forced to adopt austerity polices. These policies included increasing sales taxes from…