The Greece Debt Crisis
Greece crisis in short is about the defaults in payment to the IMF. This means that Greece economy doesn’t generate enough money to pay its debts.
What is EU?
EU is an union of mostly European countries established for mutual benefit of the states in terms of political and economical stability. EU aimed to have a common currency of Euro across the all its members to facilitate easy business. Under the EU the countries have to adhere to strict policies such as a debt to GDP ratio of not more than 0.6.
How it all began?
In 2001 Greece adopted the Euro currency, 12 years after being a part of EU. Being a part of EU, Greece could never meet the Maastricht Criteria or known as the Euro convergence criteria. They are as follows.
1) Inflation of no more than 1.5 % above the average rate of the three EU member states with the lowest inflation over the previous year
2) A national budget deficit at or below 3 percent of gross domestic product (GDP)
3) National public debt not exceeding 60 percent of gross domestic product. A country with a higher level of debt can still adopt the euro provided its debt level is falling steadily
4) Long-term interest rates should be no more than two percentage points above the rate in the three EU countries with the lowest inflation over the previous year
5) The national currency has to be follow a Exchange Rate mechanism devised by EU ,2 years prior to entry.
Greece was sailing smoothly and harnessing the power of the Euro. This meant a lower interest rates on loans and a good inflow of investment capital. In 2004 it came to notice that Greece had being lying about adhering to Maastricht criteria. Surprisingly, the EU could not impose any sanctions because removing Greece from the EU could weaken the Euro itself. This was not addressed because EU wanted the Euro to stay strong in the International markets. This was done in a way to attract countries like UK and Denmark to join EU.
The Greece debt crisis is now uncontrollable. In 2009 Greece admitted a deficit of 13 % of GDP. Referring to point 2 of EU criteria it was way above the set requirement. The rating agencies further aggravated the problem by lowering credit ratings which scared the creditors off . This meant that Greece could not get credit at lower interest rates as it used to earlier. Higher interest rates would again add up to the national Debt that is already prevalent. Weighing the options Greece went for austerity measures in 2010. An austerity method is a way to reduce deficit by reducing government spending and increasing tax rates. This also employs imposing harsh fines on tax defaulters. This was done to bring the faith back on Greece. As per the measures imposed, it planned to reduce the deficit to 3% of GDP in the next two years. But even after imposing the measures Greece warned that it might default again.
IMF and EU had to come for rescue. They released Euro 240 Billion emergency funds in return of more austerity measures. The money was only enough to pay the interest on the previous acquired debts. This emergency loan catalyzed another reaction in the economy. The economy fell by a quarter. This meant that the revenue from the taxes also reduced by a quarter. The political system went into a upheaval. There were riots in the street as the unemployment rose to 25% . In 2011 another Euro 190 Billion was provided by the European Financial Stability Facility. The ramifications were unforeseen. The debt to GDP ratio went 3 times the specified limit by 2012.
Why the EU doesn’t want Greece to leave?
France, Germany and other states are under the same austerity measures and are paying huge installment of the loan money. The bailout programmes were there to give Greece a cushion to recover from the debt and buy some time to restructure its economy. As the plan succeeded in case of other countries it din’t with Greece. If Greece leaves the EU and becomes self independent by adopting its own currency Drachma, the system could stabilize for Greece. If such a case happens and Greece attains autonomy, then countries under the EU would follow suit and bail out of the union.
But to economists it barely seems a possibility as the autonomy from EU will allow the printing of more local currency by devaluing the Drachma. Devaluation of the currency means exports will be cheaper and it will attract more tourists. But in the long run it might prove fatal as the import costs will increase and the international debt holders will suffer losses if the Drachma plummets. Also more currency in the country could cause an hyperinflation.
If Greece defaults?
Greece defaults will have a concatenating effect across the world. Consider the case of Lehman Brothers. Increase the scale tenfold and visualise. The Banks will go bankrupt. This could cause a major loss to other banks in Europe who were debt holders to Greece. Private investors could loose billion of Euros.
The Eu Central Bank holds a risk of the loan money. But that is not the major concern. Other indebted countries may willfully default.
wait for July 5 2015.
The Greek people will vote whether they want to accept the EU’s further austerity measures in return for an additional Euro 15.3bn bailout.