Barred banks, capital controls, first IMF default by a developed nation, plans for a hastened referendum- the Greece drama seems to be getting more dramatic with each minute. In this article, we explain the entire Greece crisis.
How did Greece get here?
- When Greece joined the Euro zone in 2001, it didn’t actually qualify for such an entrance. To enter the Euro zone certain economic conditions have to be met and in 2004, Greece government admitted to under-reporting the country’s budget deficit figures between 2000 and 2003.
- By the end of 2009, Eurostat (the European Statistics agency) noted that the numbers for GDP growth, budget deficit and the public debt were all flawed and worse than originally anticipated. For 2009, the revised calculations showed that the deficit was 15% of the GDP and the government debt was 130% of the GDP.
- With the indications of a possible sovereign default, credit rating agencies downgraded the Greek government debt to junk bond status. The government bond yields increased excessively and the private capital lending market was no longer accessible as a source of funding for Greece.
- In May 2010, in order to avoid a sovereign default and cover Greece’s financial needs, the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF), together called the Troika, gave a €110 billion bailout loan to Greece. This was conditional on implementation of fiscal consolidation measures, also known as the austerity measures.
- The new austerity measures lead to massive protests and social unrest in the country.
- In 2011, with the country deep in recession, a second bailout worth €130 billion was agreed upon. This included a write-down on the value of Greek government bonds to lighten the country’s debt burden. At this stage, Greece had received two bailouts worth €240 billion. This was accompanied with an increasing number of austerity measures- deep budget cuts and steep tax increases.
- Due to a government structural surplus in 2013 and 2014, and return of a positive economic growth in 2014, Greece regained access to the private lending market, with the issue of €3 billion Eurobonds.
- This positive sentiment turned out to be pre-mature and the uncertain political environment set the stage for ensuing crisis. In December 2014, following a snap parliamentary election, the Syriza-led government was formed. New Prime Minister Alexis Tsipras vowed to end the tough austerity measures. In February 2015, Euro zone finance ministers approved a four-month bailout extension for Greece.
- Tortuous negotiations followed and on 30th June 2015, Greece’s international bailout expired and the country also effectively defaulted on a €1.5 billion debt repayment to the International Monetary Fund.
Though Greece has received billions in bailout, but still the country is in a crisis. This is because the money received from the bailouts mainly goes towards paying off Greece’s international loans, rather than making its way into the economy. The government still has a huge debt load that it cannot begin to pay unless a recovery takes hold.
Many economists, and many Greeks, blame the austerity measures for much of the country’s continuing problems. But the country’s exasperated creditors blame the government for failing to conduct the economic overhauls required under its bailout agreement.
What’s currently happening in Greece
- Capital controls – On 28th June, the European Central Bank (ECB) capped its emergency credit line for Greek banks at €89 billion. This means that ECB declined to increase the life support it had been feeding to the banks to keep them alive. In response, the Greek government had to impose temporary capital controls in order to keep the country’s financial system afloat.
Capital controls include any measures that keep money in the financial system- such as forced bank holidays, imposing a surcharge on transactions, and stopping people from making big withdrawals. Greece ordered closure of banks for about a week and restricted cash withdrawals from ATMs at 60 Euros per day.
- The Referendum– Greece’s creditors had asked for reforms in exchange for extending the country’s bailout deal until November. But when negotiations between the government and the creditors collapsed last week, the extension was refused and the bailout ended as scheduled on June 30. So technically, Greeks are being asked to vote on an offer which is no longer on the table. The government says the bailout terms are unacceptable but cannot simply be rejected without the Greek people having their say. They have been asked to vote “yes” or “no” on whether they support an EU bailout deal that would grant the country money in exchange for spending cuts and other reforms. The coalition government, led by the incumbent party Syriza are campaigning for a “no” vote.
Euro zone leaders are of the view that voting a “no” would mean an exit for Greece
(Grexit) from the EU but the Tsipras- led government insists a “no” vote would simply boost its negotiating hand.
- Whether Greece stays in the Euro or not, the country is effectively bankrupt. European finance ministers (Euro group) said that a new bailout could be discussed only after and on the basis of the outcome of the vote.
- After the referendum, the ECB will decide whether to increase help to Greece under its emergency liquidity assistance scheme.
- Greece owes the ECB a 3.5 billion euro payment, the deadline for which is end of July. If this deadline is missed, it would be catastrophic for the country since ECB would then freeze emergency liquidity to the Greek banks. Greece’s banking system is being kept alive by emergency money from the ECB.
- As for a possible Grexit, one view is that it wouldn’t be such a disaster, since Europe has put in place safeguards to limit any financial contagion to other countries. Greece is just a tiny part of the Eurozone economy and can regain financial autonomy by leaving. The other school of thought is that an exit is not so easy. The implications are not clear since nothing of this sort has ever happened before. There are no provisions for departure from the euro currency union.
The way things unfold now will decide Greece’s as well as the European Union’s future. It remains to be seen whether this Greek saga will ever reach a happy ending.
- Absolutely everything you need to know about Greece’s bailout crisis. (n.d.). Retrieved from Business Insider: http://www.businessinsider.in/Absolutely-everything-you-need-to-know-about-Greeces-bailout-crisis/articleshow/47863288.cms/
- Greece crisis: Eurozone rules out talks until after referendum. (n.d.). Retrieved from BBC News: http://www.bbc.com/news/world-europe-33357382/
- Greece crisis: What happens next? And how much money does Greece owe? (n.d.). Retrieved from The Telegraph: http://www.telegraph.co.uk/finance/economics/11705917/Greece-crisis-What-happens-next-And-how-much-money-does-Greece-owe.html/
- Greece’s Debt Crisis Explained. (n.d.). Retrieved from The New York Times: http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=0
- Greek government-debt crisis. (n.d.). Retrieved from Wikipedia: https://en.wikipedia.org/wiki/Greek_government-debt_crisis#Return_to_bond_market/
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