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Financial Crisis in Greece (2010-2013) - Essay Example

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Name of of Professor Name of Course 16 December 2013 Financial Crisis in Greece (2010-2013) Background The Greek economy has been suffering due to a huge fiscal deficit and heavy government borrowing, in much greater proportion to the size of its economy…
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Financial Crisis in Greece (2010-2013)
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Download file to see previous pages Public borrowing was undertaken heavily but grossly underreported leading to a debt-to-GDP ratio much above the 3% target. By 2009-2010 it became clear to investors that Greece would not be able to pay its creditors because of a huge fiscal deficit and government debt. The ongoing global financial crisis worsened the economic outlook for the country and it appeared that the country would default on its loan payments. Causes of the Greek Financial Crisis According to Dellas and Tavlas (2013), one of the main causes of the Greek debt crisis was the absence of an adjusting mechanism between money growth and credit growth. Historically, Greece has been running high public debts compared to its GDP which went largely ignored by foreign investors. As a result, there was little incentive for the country to reduce current and fiscal account deficits. Dellas and Tavlas (2013) explain that part of the reason was the fact that Greece did not use the gold standard and its currency was pegged to the Euro. There was an over-reliance by investing and financing countries on the willingness and enthusiasm by Eurozone core countries including Germany to bailout the Greek economy in case of a debt crisis. Throughout this period, the Greek economy continued to charge low interest rates in order to stimulate investment in the economy. As a result, the public borrowing continued to increase pacing the way for a sovereign debt crisis. In a paper presented at the Bank of Greece workshop, Manessiotis (2011) explains that poor fiscal discipline and lack of competitiveness in the economy were major factors that contributed to the crisis. These aspects of the economy should have received urgent priority following Greece’s entry into the Eurozone. Fiscal deficit ran up to 5.3% of GDP after 2006 whereas the target was 3.0%. Moreover, in 2008 the situation worsened with revenue falling by 1.3% compared to GDP while expenditures exceeded GDP by 1.2%. These problems were further exacerbated by the international financial crisis that began in 2008. Conditions Imposed by IMF on Greece In 2010, it became nearly certain that Greece could not meet its sovereign debt payments and would inevitably default. The implications for the entire Eurozone region would have been severe. Hence, in May 2010, the Eurozone in collaboration with the International Monetary Fund (IMF) prepared a bailout package worth €110 billion of which the IMF was to contribute €30 billion to enable Greece to improve its economy and avoid defaulting on its debts (Financial Post, 2013). This bailout package was subject to certain conditions. Mainly, the conditions required Greece to improve its fiscal performance and make the economy more competitive and open. The first condition imposed by the IMF required Greece to implement austerity measures in order to control the fiscal deficit. It was required that Greece reduce its public spending in order to narrow the fiscal deficit. Secondly, the fiscal debt problem was to be controlled by a policy of privatization of public assets. This measure would prevent the government from incurring additional debts to finance public organizations. By the end of 2015, the IMF required €50 billion worth of public assets to be privatized. Finally, the IMF required Greece to implement structural reforms in the economy to make it more business-friendly and competitive. This would stimulate business activity and help to strengthen the economy. However, the conditions have not been met satisfactorily ...Download file to see next pagesRead More
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