Greek Debt Crisis Simple Explanation
What exactly is the Greek Debt Crisis? – ‘kya bawal macha he?’
Greek Debt Crisis refers to the present situation of Greece Government’s inability to payback its debt. The problem started in 2009 and is continuing till date.
How did Greece accumulate so much debt? – ‘aamdani atthani kharcha rupaiya’
For several years prior to 2009, Greek Government had been spending much more (by investing in unproductive public sector and lavish social welfare schemes for its people) as compared to what it earned (in form of taxes). This difference (deficit) was taken care of by borrowing from International Investors, Banks and Financial Institutions on a regular basis. Until 2009 the repayment of this debt along with interest was done by borrowing more and more money. Thanks to the favourble liquidity condition (availability of funds for borrowing and lending) in global market at that time, Greece comfortably managed to rollover its debt – ‘iski topi uske sar’.
How did the crisis start? – ‘End of Acche Din’
In 2008-09 Global liquidity crisis which was triggered by sub-prime crisis in United States, pushed whole world into recession. European financial markets too were severely affected by this crisis. Flow of funds dried up as investors across the world became extremely cautious to lend or invest money. Adding to the woes, the new Government in Greece which assumed power in 2009, revealed that earlier Government had done a bigtime ‘jhol jhaal’ in reporting the actual numbers of fiscal deficit – as per Eurozone criteria its member states should restrict the fiscal deficit up to 3% of GDP, however in case of Greece it was revealed to be at alarming 12.5%. As a result major ratings agencies viz. S&P, Moody’s & Fitch downgraded Greece’s credit ratings (ability to repay debts). The investor community was sure that Greece will not be able to repay its debt. Thus it became impossible for Greece to borrow new funds to pay its earlier debts and manage its current expenditure. This is how dramatic saga of Greek Debt Crisis started.
Greece shouts ‘Bachao Bachao’, Big Brothers come to rescue
In 2010 Greece Government formally requested for financial help (soft loan). Help was provided in the form of bailout package by European Commission, European Central Bank and International Monetary Fund (Troika – let’s call it ‘Tridev’). With First bailout package in May 2010 and second in February 2012, it was agreed to provide total 246 Billion Euro to Greece in phased manner.
Austerity Measures and Unrest in Greece – ‘Aam Aadmi ki vaat lag gai’
The bailout packages provided were in no ways ‘muft ka maal’ for Greece. Several conditions were attached to the bailout package which directed the Government to take austerity measures for cutting public expenses and narrowing the budget deficit. From 2010 till end of 2014 several austerity measures were passed by Greece Parliament. These included cutting Govt Jobs, increasing taxes, withdrawal of certain social welfare schemes, wage cuts etc. Common man of Greece was at the receiving end of these measures. Moreover the unemployment levels crossed +20%. Riots, protests and public demonstrations became a regular scene on the streets of Greece since then. The general consensus had developed against austerity measures and as a result, the Syriza party (having anti-austerity stand) was voted to power in January 2015 Legislative elections.
First Default and the Current Standoff
On 5th June 2015, Greece was supposed to pay a loan installment to IMF, which was postponed till 30th June. Without a fresh bailout package this payment was not possible and a fresh bailout package would only be made available if Greece agreed for more austerity. The Syriza Government which came to power on grounds of anti austerity movement was now in a ‘dharam sankat’. Thus owing to indecision, on 30th June 2015 Greece became the first developed nation to default. On 5th July 2015 a referendum was held in Greece for accepting new austerity measures in lieu of fresh bailout. The result was an emphatic ‘NO’ from the Greece voters. However it did not imply that they want to continue defaulting on loans and want to exit Eurozone. All that Greece population wants is liberal austerity measures. As this article is being written, Greece has applied for fresh bailout, on which the Troika will take a final decision by 12th July 2015.
Why has Greece been rescued till now? – ‘Izzat ka sawal’
For any curious mind, question may arise that why Greece has been rescued till now? Why it was not left to default in 2010 itself? The answer has financial as well as political dimensions. In financial terms, the creditors of Greece in 2010 were mainly private investors, banks and institutions across Europe. Thus in case of default, these entities would have faced a massive loss and in turn would have triggered panic among general public in Europe. Moreover, other weaker European economies viz. Portugal, Ireland, Italy and Spain too were having trouble with fiscal deficits. In such scenario Greek default would have made the matters worse for these economies which are much larger in size and had American financial exposure as well. Collapsing of these economies would have meant the collapse of Eurozone, not because of financial losses but because of fear sentiment, panic and loss of credibility. Moreover Eurozone project has always been less of a financial union and more of a political Union aimed at creating deeper integration and collaboration of European nations with aspirations of being a super power.
Speculations about disintegration of Eurozone – ‘So far, So good’
Right from the inception of EURO currency, specific lobby of economics and foreign policy experts have been calling it a ‘doomed to fail project’. The Greek crisis was a perfect opportunity for these experts to do ‘chance pe dance’ and shouting out loud ‘dekho mene kaha tha na’. Some of them even termed Greek debt crisis as beginning of an end for EURO. However the European leaders have so far done a ‘kaabil e taarif’ job in containing the crisis. In 2009 what began as Eurozone Debt Crisis has now just been restricted as ‘Greek Debt Crisis’. Moreover through the bailout packages the financial exposure has been shifted from private investors and institutions to European Stability Mechanism (European Financial Rescue Fund). Thus, Greek default or even Greek exit will have a manageable impact on the European financial landscape. From a strategic and geo-political perspective United States will stand to lose more rather than gain from disintegration of Eurozone. Moreover in recent years China has diversified much of its Foreign Exchange reserves by switching from US Dollar to EURO. Thus US and China the two major powers have a strategic interest in continuation of Eurozone as of now.
Road Ahead for Greece – ‘Picture abhi baki he mere dost……’
Only time will tell whether Greece will manage to stay in the Eurozone or will exit. However although General consensus in Greece is against austerity, exiting the Eurozone does not have many buyers. Exiting Eurozone will have its own set of financial and operational challenges for Greece. Speculating about what will happen and what should happen as a result is beyond the scope of this article. The only thing certain is that, it is gonna be a tough and long ride for Greeks before they finally emerge out from this Crisis.
Team – Entrancegeek