Inadequate Response of Greece to International Credit Crisis - Term Paper Example

Greece’s inadequate response to the International Credit Crisis Date: Greece’s inadequate response to the International Credit Crisis Introduction The financial crisis witnessed between 2007 and 2008, also referred to as the world’s financial crisis is regarded by several economists as the most horrible financial crisis coming after the Great Depression experienced in the 1930s (Shannon, 2014). This crisis was a real threat that would have seen a massive collapse of world’s largest financial institutions but was prevented, following the bailout of banks and some other financial institutions by the national governments. However, despite this intervention, stock markets across the world dropped immensely. In several areas housing markets suffered heavily, something that led to foreclosures, evictions and prolonged cases of unemployment among several industries. During that time, the crisis is said to have been responsible for the failure and closure of several key businesses (Laskos, & Tsakalotos, 2013), massive drops in consumer wealth, which had been estimated to range in trillions of American dollars. Similarly, the situation caused a huge downturn in economic activities, leading to the global recession of 2008-2012, thus resulting in another crisis, the European sovereign-debt (Shannon, 2014). It is believed that the most active part of the particular crisis that manifested itself in the form of liquidity crisis can actually be traced from 9th of August 2007 (Shannon, 2014). During this time, BNP Paribas is believed to have ended completely all withdrawals from the three main hedge funds because of a total evaporation of the much needed liquidity. This paper examines the concept of the international credit crisis as it happened, focusing on the strategies that Greece use in response towards the crisis including the United States and other European nations. The cause of the Crisis The real cause of the crisis has been a subject of discussion, with different experts giving different opinions and perspectives as to the real causes. The Levin-Coburn’s report from the U.S senate explained that the crisis was brought about by those complex and high risk financial products, failure from the side of regulators, diverse conflicts of interest, agencies in charge of credit rating as well as the market itself, which wanted to rein beyond the Wall Street excesses (Laskos, & Tsakalotos, 2013). On the other hand, the conclusions by the commission of inquiry into the crisis argued that the crisis would have been avoided, had the financial regulators taken effective steps in good time. In this case, they explained that the crisis was to be blamed on financial supervision and regulation as well as the dramatic failures by risks management and corporate management in many of the financial institutions that were regarded as having strategic importance in the world’s financial industry. Additionally, the report pointed out activities like risky investments, excessive borrowing and an acute shortage of transparency from these financial institutions are also other important causes of the crisis. All these activities are believed to have prompted a widespread breakdown in ethics and accountability as well inconsistent actions by governments, something that added impetus to the occurrence of the financial credit crisis. Due to the crisis, many people lost jobs with businesses suffering from reduced spending by people. The failure of business and other economic activities woke governments from their slumber in order to save their ailing economies (Laskos, & Tsakalotos, 2013). Different countries responded differently towards the crisis in a bid to save people’s faith in financial institutions and the stock markets, which they thought had failed them deliberately. Greece’s government’s response to the crisis Towards the end of 2009, fears began spreading the sovereign debt crisis that had established among investors over the inability by the Greece government to fulfill its particular debt obligations (Laskos, & Tsakalotos, 2013). This was because of the sharp rise in the government’s level of debts, which came alongside great structural deficits. This development prompted reduced confidence in the government’s financial position something that was indicated by spreads in bond yields and the costs of risk insurance relating to swaps in credit defaults in comparison to other countries in Europe, especially Germany. In 2010, it was reported that the Greek government was in another serious financial crisis. These response of these news by the credit rating agencies prompted urgent interventions in order to save the ailing economy; this led to downgrading of the government’s debt to the status of junk bonds, which meant that it was actually way below the investment grade. Following this move, the traded bond yields went up higher forcing the private capital markets to move away from the country, citing an unfavorable business environment. The effect of this move was that the Greece government lacked any major source of funding, something that greatly affected its economic recovery, growth and development. In 2010, the European Central bank, Eurozone countries as well as the IMF took a step in order to save Greece. The introduced a about € 110 billion as a bailout loan in order to save Greece from the sovereign default and also cover some of its critical financial needs (Shannon, 2014). The condition was that the government was expected to ratify austerity measures, privatize some of its government held assets and implement some structural reforms. One year down the line, the Greece government was in a worsening recession because of its delay in implementing the conditions agreed in the first bailout. The worsening recession prompted the need for another bailout loan. Like in the initial case, the government received € 130 billion, which included € 48 billion that was to take care of bank capitalization (Laursen, 2013). In this second bailout, it was agreed that private creditors that held government bonds were expected to sign deals that would see them accept extended maturities, reduced interest rates as well as a loss on the face value of about 53.5% (Laursen, 2013). Finally, in 2012, all parties signed the agreement, which later saw an extension of the first programme. This meant that about € 240 billion was to be transferred at regular intervals from 2010 all the way to the end of 2014 (Gola & Spadafora, 2009). Because of the delayed implementation of the prior conditions by the Greece government and a worsened economic recession, the Eurozone, IMF and the European Central Bank extended their support with an additional loan of € 8.2 billion, which was also to be transferred between 2015 and 2016 (Laursen, 2013). The response of the U.S and other European countries From the start of the economic crisis, the EU has continually shown that it is an active and reliable player when it comes to responding to such financial crisis and shaping the financial architecture of the world. European leaders have pointed out that in the past; they have experienced great achievements as far as social justice is concerned, something that has cemented its position on the global stage. The position of the European Union as far as the financial crisis is concerned included creating an effective commitment towards strengthening financial regulation and supervision among the member countries. This also includes different kinds of support going towards improving the process of monitoring by the different credit rating agencies available. Additionally the EU advocates for establishment of effective regulatory standards in order to terminate banking secrecy as well as tax heavens (Laursen, 2013). The Union has also shown support for new reliable accounting norms and practices by placing the bonuses under proper guardianship. It should be understood that while most of these measures have been accepted by many countries in Europe and beyond, they do not reflect full commitment towards changing the world’s global architecture. Instead, they reflect an effective determination towards retaining the current structures and approaches while restoring stability in financial institutions through better financial and economic models (Gola & Spadafora, 2009). It aims at ensuring that control of any kind of changes is rested with the economic actors across the globe, which also includes Europe. On the other hand, the response of the United States towards the crisis was also deemed effective and much better compared to that of the Greece government. From the foregone discussion, it is evident that the policies and approaches used by the Greece government were very ineffective (Gola & Spadafora, 2009); something that placed the government in increasing foreign debt, creating an environment that scared away both the local and foreign investors. In such an environment, purchasing Greek securities meant great loses for private investors because the government had ratified the conditions placed by the IMF, European Central Bank as well as the Eurozone in getting the bailout loan (Shannon, 2014). In this case, the reduced interest rate meant that companies that had bought these securities endured the reduced profits and heavy financial loses. In as much as the response by the federal government in the United States is open to various criticisms, it aimed at calming and creating an environment that would offer liquidity to the widespread financial cub-markets in the United States, instead of targeting certain institutions like the case of Greece (Laursen, 2013). In this approach, different facilities that were established with qualification criteria deemed far more liberal. Conclusion In conclusion, it is evident that following the effects of the crisis, no country in the world would wish to have a repeat of the same. This is the reason why analysts and policy experts have been careful to implement reforms that can ensure financial stability across the world. Financial institutions and stock markets have created effective operational approaches and strategies that ensure they monitor their progress effectively in order to stay on the right path of financial growth and development. References Gola, C., & Spadafora, F. (2009). Financial sector surveillance and the IMF. Washington, D.C.: International Monetary Fund. Laskos, C., & Tsakalotos, E. (2013). Crucible of resistance: Greece, the Eurozone and the world economic crisis. London: PlutoPress. Laursen, F. (2013). The EU and the Eurozone crisis policy challenges and strategic choices. Farnham, Surrey: Ashgate. Shannon, D. (2014). The end of the world as we know it?: Crisis, resistance, and the age of austerity. Edinburgh, Scotland: AK Press. Read More