Term paper completion 6

Introduction

Soon after the implosion of Wall Street in 2008, Greece became the focal point of Europe’s debt crisis. In 2009, Greece announced its deficit figures have been understated for years. This raised concerns across the globe regarding the financial state of Greece and eventually resulted in shutting Greece out of borrowing funds from the financial markets.

By the spring of 2010, Greece was veering toward bankruptcy, which threatened to set off a new financial crisis. The European Central Bank, The European Commission and the International Monetary Fund (IMF) issued a bailout of about 240 billion Euros to Greece.

The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.

The bailout funds were meant to buy some time to help Greece stabilize its finances and allay fears of the European Union breaking up. Though the funds helped to a certain extent, the Greek economy had shrunk by a quarter and unemployment had risen above 25 percent.

Many Greeks and economists, blame the austerity measures for much of the Greece’s continuing problems. While creditors such as Germany, blame Athens for failing to conduct the economic overhauls required under its bailout agreement. They do not want to change the rules for Greece

If Greece defaults, what will happen to the economy?

In the wake of becoming one of the first developed nations to default on their international financial obligations, Greek citizens are hoping that their government strikes a deal to help save them. What exactly is going on in Greece that would cause the country to default, one may ask? Over the past few years, Greece has not been performing well economically. They have experienced increasing levels of the unemployment rate, and their banks simply have not been able to endure the financial crisis. An already high national debt has continued to build up, to the point that the payments due by Greece are almost un-payable. At the very least, the inability to repay debt is a bad signal to all countries and business relationships that the Greeks were a part of. If a deal is not met to help the Greek economy with their creditors on actions to help prevent the debt from growing, as well as repayment, there can be serious consequences.

Greece could default without exiting the Euro. In this scenario, the European Central bank would have to decide on whether or not they want to continue bailing out Greek banks, or put a complete end to aiding the Greek economy. Greece could leave the Euro, and form its own currency. This undoubtedly would have even more adverse effects on the Greek economy. If leaving the Euro-zone is imminent, citizens would begin taking their Euros out of banks. This is currently taking place, as studies find deposits are at their lowest in a decade. To defend this, Greece has begun placing capital control measures on the amount a citizen can withdraw daily from banks and ATMs. Another combined scenario of a default could find the Greeks out of the Euro-zone and the European Union. Simply summarized, without the use of the Euro, Greece can be removed from the European Union.

What would happen to the European Economy?

A default by the Greek bank has the potential to scar many of its affiliate’s financial wellbeing. The potential effects of a default have been present in stock market fluctuations seen around the world, as the Greeks rush to find a deal suitable to creditors and the Greek citizens. Europe would feel the effects of such an event the most. French and German banks have done a lot to assist the Greek economy over the years leading to this point. According to a Bloomberg View news article, Germany has become the largest holder of Greece’s 313 billion Euros in sovereign debt. A Greek default would cause these banks to be in a position to have to absorb the monetary losses left by Greece’s inability to repay. This could lead to an overall feel that other weak markets in the Euro-zone could be faced with the same “bank runs” that happened in Greece.

Along with the financial breakdown this default may cause, there are political implications as well. The plans that promoted austerity to the citizens of Greece have failed. In the process, European lawmakers relied on bailouts to help the Greeks. Negotiations took place between a number of different parties, with different agendas, under enormous pressure and time constraints. Without devoting time to reviewing the issues discovered by this Greek fiasco, the Europeans face an event like this reoccurring.

Understandably, most of the efforts have been targeted at funding Greek debt and re-starting the Greek financial system. There is reason for concern that some officers could also be confusing their political rhetoric with reality. A number of the failures to allow robust early warning signals were attributed to the deceptive statistics made by Greek authorities.

Conclusion

By definition, developed countries are those that have a relatively high level of economic growth and security. Neither of which can be claimed by Greece’s current economic crisis. A number of early warning signals, after the 2008 Wall Street implosion, may have been overlooked that could potentially have helped avoid this situation. At the root of this economic crisis in Greece is a simple economic principle, loan repayment. The inability of Greece to repay its loans to their creditors increased its national debt to historical levels that are simply unattainable.

Throughout these rough times, The European Central Bank, The International Monetary Fund, and the European Commission all issued monetary bailouts to help support Greece. The bailouts came with substantial austerity terms that Greece had to follow. Even if economic and political pretensions are overlooked, a developed country without the financial capacity to sustain itself like what has been witnessed here can disrupt current and future global business opportunities.

The consequences of this potential bank default can be viewed from both, a Greek and global economic perspective. In the past decade, Greek citizens have been removing their monies from banks at an alarming rate. Banks runs like this can be slowed, if the European Central Bank agrees to a decision, giving the citizens a feel of hope. In a worst case scenario, the default can cause Greece to leave the Euro-zone, leaving the Greeks to form their own type of currency. That would also weaken the Euro-zone by losing a country. To prevent citizens from removing their money out of Greek banks, Greece lawmakers and officials have begun using capital control measures, limiting the amount of withdrawals from banks and ATMs.

In Europe, countries like France and Germany, have risked a lot to aid Greece. Banks in these countries have shouldered a lot of the financial burden to disrupt a potential Greek default. Germany is the largest holder of Greek sovereign debt. The potential default could have a domino effect on the entire Euro-zone, which could cause in fear to run across nations. Along with the pressure that would face European banks, their politics would be in as much disarray. The austerity measures used to guide, and hopefully correct, this fiasco have been publicly scrutinized since their conception. This has caused some of the citizens to not believe in the government.

Recommendations

Based on the conclusion of this topic, several obvious recommendations can be formed to help Greece’s situation.

(1) The government needs to agree to terms on a new bailout deal. This would help begin the recovery process for both, the banks and the citizens.

(2) Greece should form a concise financial team to continue investigation on the root cause of this historical moment in Greek financial history. The team should also have the capacity to inform the citizens with accurate information, as well as deter government officials from using this crisis for political gain, and help prevent this issue from reoccurring.

(3) Greek should reform its current financial outlook, from things like public spending to saving and pension plans.

References