Finance, Forex and Investments

Times Topic Debt crisis in Greece

Summary: Last Updated 5 May 2010 Over the last decade Greece went on a debt binge that came crashing to an end in 2010 provoking the biggest crisis yet seen in the move toward European integration that began more than half a century ago In December 2009 Prime Minister George A Papandreou announced that his predecessor had disguised the size of the country ballooning deficit After rounds of deep budget cuts and months of vague pledges of support from the rest of Europe failed to stop the steady rise of the interest rates Mr Papandreou in April 2010 formally requested a promised $60 billion aid package calling his country economy sinking ship 39 But global investors who had seen Greece bonds downgraded to junk status were not reassured forcing the the International Monetary Fund and Greece European partners to hastily prepare a far larger package The new plan announced May 2 calls for 110 billion euros or $146 billion in loans over the next three years to avoid a debt default In exchange Greece had to accept deep cuts that will lead to years of sacrifice Mr Papandreou the scion of a Socialist dynasty whose father helped erect the sprawling Greek welfare state when he was prime minister in the 1980s sought to prepare Greeks for proposed cost cutting measures which included freezing public sector salaries raising taxes and slashing pensions Thetough new austerity measures met angry resistance in a country where one out of three people is employed in the civil service which until now has guaranteed jobs for life The shake up of Greece public sector represents one of the biggest overhauls of the country welfare state in a generation Demonstrations claimed their first fatalities on May 5 with three people reported to have died inside a bank building set ablaze by protesters as workers across Greece went on strike Analysts said the strikes could signal the beginning of protracted social unrest which could paralyze the economy and push the country into deeper recession Overview of the Debt Crisis The roots of the crisis go back to the strong euro and rock bottom interest rates that prevailed for much of the past decade Greece took advantage of this easy money to drive up borrowing by the country consumers and its government which built up $400 billion in debt When the global economy crumpled those chickens came home to roost The trigger for the crisis was Greece admission in late 2009 that its government deficit would be 12 7 percent of its gross domestic product not the 3 7 percent the previous government had forecast earlier Investors were stunned In early 2010 fears over a potential default grew into a full fledged financial panic as investors questioned whether Greece Socialist government could push through the tough measures it has promised to reduce its budget deficit As the fear spread to Portugal and Spain leaders of Europe more affluent countries like Germany and France worried about lasting damage to the euro stepped in with a pledge to defend the currency but stopped short of an outright bailout for Greece As part of an austerity plan the Greek government in early March 2010 approved a round of tax increases and pay cuts for public employees The steps were met with a series of angry but peaceful protests by civil servants and others that seemed to suggest a limit to the extent to which the country could cut its way out of the crisis After months of fractious debate in late March the 16 countries that use the euro agreed on a financial safety net for Greece combining bilateral loans from those European nations with cash from the International Monetary Fund But the vague assurances were not enough by themselves to reassure the bond markets where investors steadily raised the interest rate on money they were willing to lend Greece On April 11 European leaders announced that they would make $30 billion available to Athens along with up to $15 billion from the I M F in the form of loans with an interest rate of 5 percent lower than the 7 5 percent Greece had been paying but high enough that German officials could insist that it did not constitute a subsidy or bailout But the markets remained skeptical and investors pushed interest rates on Greek bonds above those of emerging countries like India and the Philippines leading to talk of a potential default years of stagnant growth and to Mr Papandreou decision to request the delivery of the promised aid Tensions in the Euro Zone For Greece and for Spain Italy Ireland and Portugal the financial crisis has highlighted the constraints of euro membership Unable to devalue their currencies to regain competitiveness and forced by E U fiscal agreements to control spending they are facing austerity measures just when their economies need extra spending Other economies like Germany the Netherlands and Austria have kept deficits down while retaining an edge in global markets by restraining domestic wage increases France lies somewhere between the two camps The chief difficulty in working out a package to support Greece was the popular sentiment in Germany deeply concerned about becoming the answer to the debt problems of all of Europe endangered economies that Greece should pay a penalty for its former profligacy Since the euro inception in 1999 no member has sought support from the I M F which typically comes to the rescue of emerging market economies rather than developed countries Beside unsettling the markets Greece troubles have undermined the common currency it and 15 and other European nations share Meanwhile questions were widely raised about the role played by banks including Goldman Sachs in constructing elaborate financial deals that helped the previous government hide the extent of its deficit At the same time some of those same banks were using credit default swaps to bet on the likelihood of a fault trades that had the effect of making it harder for Greece to borrow thereby pushing it closer to a financial cliff Three Year Package Faced with the prospect of economic contagion spreading to the wobbly economies of Spain and Portugal and the potentially devastating effect of a Greek default on French and German banks which hold billions in Greek debt the I M F and the euro zone countries quickly worked out the larger aid package In return for assistance in meeting debt deadlines over the next three years Greece agreed to austerity measures that are likely to cut its budget deficit sharply and may well produce a new round of recession The finance minister George Papaconstantinou said Greece had agreed to raise its value added tax to 23 percent from 21 percent to freeze civil servants wages and to eliminate public sector annual bonuses amounting to two months pay In addition members of parliament would no longer receive bonuses He said special rules allowing for early retirement of civil servants would be tightened and the government intended to increase taxes on fuel tobacco and alcohol by about 10 percent Reference Material on Greece Columbia Encyclopedia Greece Gr Hellas or Ellas officially Hellenic Republic republic 2005 est pop 10 668 000 50 944 sq mi 131 945 sq km SE Europe It occupies the southernmost part of the Balkan Peninsula and borders on the Ionian Sea in the west on the Mediterranean Sea in the south on the Aegean Sea in the east on Turkey and Bulgaria in the northeast on Macedonia in the north and on Albania in the northwest Athens is its capital and largest city Europe Web of Debt Banks and governments in these five shaky economies owe each other many billions of euros converted here to dollars and have even larger debts to Britain France and Germany Arrow widths are proportional to debt amounts Last Updated 5 May 2010 Over the last decade Greece went on a debt binge that came crashing to an end in 2010 provoking the biggest crisis yet seen in the move toward European integration that began more than half a century ago In December 2009 Prime Minister George A Papandreou announced that his predecessor had disguised the size of the country ballooning deficit After rounds of deep budget cuts and months of vague pledges of support from the rest of Europe failed to stop the steady rise of the interest rates Mr Papandreou in April 2010 formally requested a promised $60 billion aid package calling his country economy sinking ship 39 But global investors who had seen Greece bonds downgraded to junk status were not reassured forcing the the International Monetary Fund and Greece European partners to hastily prepare a far larger package The new plan announced May 2 calls for 110 billion euros or $146 billion in loans over the next three years to avoid a debt default In exchange Greece had to accept deep cuts that will lead to years of sacrifice Mr Papandreou the scion of a Socialist dynasty whose father helped erect the sprawling Greek welfare state when he was prime minister in the 1980s sought to prepare Greeks for proposed cost cutting measures which included freezing public sector salaries raising taxes and slashing pensions Thetough new austerity measures met angry resistance in a country where one out of three people is employed in the civil service which until now has guaranteed jobs for life The shake up of Greece public sector represents one of the biggest overhauls of the country welfare state in a generation Demonstrations claimed their first fatalities on May 5 with three people reported to have died inside a bank building set ablaze by protesters as workers across Greece went on strike Analysts said the strikes could signal the beginning of protracted social unrest which could paralyze the economy and push the country into deeper recession Overview of the Debt Crisis The roots of the crisis go back to the strong euro and rock bottom interest rates that prevailed for much of the past decade Greece took advantage of this easy money to drive up borrowing by the country consumers and its government which built up $400 billion in debt When the global economy crumpled those chickens came home to roost The trigger for the crisis was Greece admission in late 2009 that its government deficit would be 12 7 percent of its gross domestic product not the 3 7 percent the previous government had forecast earlier Investors were stunned In early 2010 fears over a potential default grew into a full fledged financial panic as investors questioned whether Greece Socialist government could push through the tough measures it has promised to reduce its budget deficit As the fear spread to Portugal and Spain leaders of Europe more affluent countries like Germany and France worried about lasting damage to the euro stepped in with a pledge to defend the currency but stopped short of an outright bailout for Greece As part of an austerity plan the Greek government in early March 2010 approved a round of tax increases and pay cuts for public employees The steps were met with a series of angry but peaceful protests by civil servants and others that seemed to suggest a limit to the extent to which the country could cut its way out of the crisis After months of fractious debate in late March the 16 countries that use the euro agreed on a financial safety net for Greece combining bilateral loans from those European nations with cash from the International Monetary Fund But the vague assurances were not enough by themselves to reassure the bond markets where investors steadily raised the interest rate on money they were willing to lend Greece On April 11 European leaders announced that they would make $30 billion available to Athens along with up to $15 billion from the I M F in the form of loans with an interest rate of 5 percent lower than the 7 5 percent Greece had been paying but high enough that German officials could insist that it did not constitute a subsidy or bailout But the markets remained skeptical and investors pushed interest rates on Greek bonds above those of emerging countries like India and the Philippines leading to talk of a potential default years of stagnant growth and to Mr Papandreou decision to request the delivery of the promised aid Tensions in the Euro Zone For Greece and for Spain Italy Ireland and Portugal the financial crisis has highlighted the constraints of euro membership Unable to devalue their currencies to regain competitiveness and forced by E U fiscal agreements to control spending they are facing austerity measures just when their economies need extra spending Other economies like Germany the Netherlands and Austria have kept deficits down while retaining an edge in global markets by restraining domestic wage increases France lies somewhere between the two camps The chief difficulty in working out a package to support Greece was the popular sentiment in Germany deeply concerned about becoming the answer to the debt problems of all of Europe endangered economies that Greece should pay a penalty for its former profligacy Since the euro inception in 1999 no member has sought support from the I M F which typically comes to the rescue of emerging market economies rather than developed countries Beside unsettling the markets Greece troubles have undermined the common currency it and 15 and other European nations share Meanwhile questions were widely raised about the role played by banks including Goldman Sachs in constructing elaborate financial deals that helped the previous government hide the extent of its deficit At the same time some of those same banks were using credit default swaps to bet on the likelihood of a fault trades that had the effect of making it harder for Greece to borrow thereby pushing it closer to a financial cliff Three Year Package Faced with the prospect of economic contagion spreading to the wobbly economies of Spain and Portugal and the potentially devastating effect of a Greek default on French and German banks which hold billions in Greek debt the I M F and the euro zone countries quickly worked out the larger aid package In return for assistance in meeting debt deadlines over the next three years Greece agreed to austerity measures that are likely to cut its budget deficit sharply and may well produce a new round of recession The finance minister George Papaconstantinou said Greece had agreed to raise its value added tax to 23 percent from 21 percent to freeze civil servants wages and to eliminate public sector annual bonuses amounting to two months pay In addition members of parliament would no longer receive bonuses He said special rules allowing for early retirement of civil servants would be tightened and the government intended to increase taxes on fuel tobacco and alcohol by about 10 percent Reference Material on Greece Columbia Encyclopedia Greece Gr Hellas or Ellas officially Hellenic Republic republic 2005 est pop 10 668 000 50 944 sq mi 131 945 sq km SE Europe It occupies the southernmost part of the Balkan Peninsula and borders on the Ionian Sea in the west on the Mediterranean Sea in the south on the Aegean Sea in the east on Turkey and Bulgaria in the northeast on Macedonia in the north and on Albania in the northwest Athens is its capital and largest city Europe Web of Debt Banks and governments in these five shaky economies owe each other many billions of euros converted here to dollars and have even larger debts to Britain France and Germany Arrow widths are proportional to debt amounts

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