Greek crisis explained : causes, development and consequences

Greek crisis explained : causes, development and consequences

The reasons for the crisis in Greece have brought the country to the brink of the precipice so today economists are talking about default on debt, bankruptcy and Grexit.

The country keeps on fighting with European creditors who want more and more austerity in exchange for a rescue plan. If the country goes bankrupt or decides to leave the Eurozone, the situation could create instability and contagion not only in the Region but also globally.

Greece and the European Union struggle for about 7 years to find a solution to the Greek crisis. During this time, Greece’s crisis triggered a debt crisis in the Eurozone and fueled fears of a global financial crisis.

 

The causes of the crisis in Greece

In 2009, Greece started the crisis announcing its budget deficit. Rating agencies have cut the rating of Greece, frightening investors and increasing the cost of future loans.

This has made it increasingly difficult for Greece to find the funds to repay its state bonds.In 2010, Greece announced austerity package but four months later, Greece warned it would go in default. The EU and the IMF provided € 240 billion in emergency funds in exchange for further austerity measures. This gave Greece enough money only to pay interest on its existing debt and keep capitalized banks.Austerity measures have further slowed down the Greek economy by reducing the tax revenue needed to repay the debt.In 2011, the European Financial Stability Facility (EFSF), another loan instrument funded by EU countries, added another EUR 190 billion to the rescue plan.

 

Consequences: EU faults

The seeds of the Greek crisis were planted in 2001, when Greece adopted the euro as a currency. Greece was a member of the European Union since 1981, but could not enter the Eurozone. Its budget deficit had been too high for Maastricht’s criteria.

Everything went well for the first few years.

Like other eurozone countries, Greece benefited from the power of the single currency, which allowed lower interest rates and an influx of investment capital and loans. But Greek debt continued to grow until the crisis broke out in 2009. Now, the EU must stay behind Greece.

Otherwise, it will have to deal with the consequences of Grexit. Importance of agreements to settle economic situation Greece needs an agreement to continue to pay its creditors and to finance government operations. Athens seems convinced that its creditors will want to reach a compromise to avoid the problems that might arise in the event of default or Grexit, that is, Greece’s exit from the single currency block.If Greece goes default on debt and leaves the Eurozone, it could create a global financial shock even greater than the collapse of Lehman Brothers.

 

 

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