ORIGIN OF THE GREEK FINANCIAL CRISIS

The Greek government-debt crisis (also known as the Greek Depression) is the sovereign debt

crisis faced by Greece in the aftermath of the financial crisis of 2007–2008. Widely known in the country

as The Crisis, it reached the populace as a series of sudden reforms and austerity measures that led to

impoverishment and loss of income and property, as well as a small-scale crisis. In all, the Greek

economy suffered the longest recession of any advanced capitalist economy to date, overtaking the

US Great Depression. As a result, the Greek political system has been upended, social exclusion

increased with hundreds of thousands of well-educated Greeks leaving the country.

From 2007 to 2008, much of the world was faced with what is now referred to as a “global

financial crisis.” Many economists even classify this event to be on par with the Great Depression from

the 1930’s and there certainly hadn’t been a financial crisis that even came close to it until the events of

2007 and 2008 started to unfold. The origins of this crisis occurred when the housing bubble that began

around 2004 completely burst, which devalued the real estate securities those investors from all over the

world had a stake in. After the securities had devalued, global financial institutions as well as the

countries associated with them started to falter.

Background of the Greek Economic Crisis

Greece was one of those countries that were affected by this global economic event. However,

Greece’s economic difficulties weren’t just tied into this single event. They can actually be traced to

2001 when Greece adopted the Euro, because when that happened, overall trade volume throughout

the Eurozone increased considerably. As a result, the cost of labor increased in countries such as

Greece relative to countries like Germany. Because of this, it created a trade deficit within Greece,

which essentially means that starting shortly after 2001; Greece began to consume more than it

produced. Over time, this took a toll on the economy.

The 2001 introduction of the euro reduced trade costs among Eurozone countries, increasing overall

trade volume. Labor costs increased more (from a lower base) in peripheral countries such as Greece
relative to core countries such as Germany, eroding Greece's competitive edge. As a result,

Greece's current account (trade) deficit rose significantly.

A trade deficit means that a country is consuming more than it produces, which requires

borrowing/direct investment from other countries. Both the Greek trade deficit and budget deficit rose

from below 5% of GDP in 1999 to peak around 15% of GDP in the 2008–2009 periods. One driver of the

investment inflow was Greece's membership in the EU and the Eurozone. Greece was perceived as a

higher credit risk alone than it was as a member of the Eurozone, which implied that investors felt the EU

would bring discipline to its finances and support Greece in the event of problems.

As the Great Recession spread to Europe, the amount of funds lent from the European core

countries (e.g. Germany) to the peripheral countries such as Greece began to decline. Reports in 2009

of Greek fiscal mismanagement and deception increased borrowing costs; the combination meant

Greece could no longer borrow to finance its trade and budget deficits at an affordable cost.

A country facing a "sudden stop" in private investment and a high (local currency) debt load

typically allows its currency to depreciate to encourage investment and to pay back the debt in

cheaper currency. This was not possible while Greece remained on the Euro. Instead, to become more

competitive, Greek wages fell nearly 20% from mid-2010 to 2014, a form of deflation. This significantly

reduced income and GDP, resulting in a severe recession, decline in tax receipts and a significant rise in

the debt-to-GDP ratio. Unemployment reached nearly 25%, from below 10% in 2003. Significant

government spending cuts helped the Greek government return to a primary budget surplus by 2014

(collecting more revenue than it paid out, excluding interest).

The Economic Crisis Begins in 2009

Between the trade deficit and the global financial crisis, the Greek economy began to fall apart.

Because Greece had been experiencing a trade deficit for many years, the country needed to either

borrow money or receive direct investments from other countries. In 1999, both the trade deficit and

budget deficits were below 5% of the Gross Domestic Product. In between 2008 and 2009, both the

trade deficit and budget deficits peaked to 15% of the Gross Domestic Product. By 2009, investors who
had a stake in Greece started to become concerned that the country would have a difficult time

meeting its debt obligations, and it thus created a “crisis in confidence”.

Greece and the First Bailout in 2010

By 2010, the economic situation began to escalate as people realized that yes, Greece really

was having a difficult time meeting its debt obligations. In January of 2010, the Greek Ministry of Finance

published a paper titled, Stability and Growth Program 2010. In it, they outlined several reasons why the

Greek economy was struggling including GDP growth, government deficit, government debt, budget

compliance, data credibility, government spending, and tax evasion. On May 3, 2010, the Greek

government signed a memorandum of understanding that secured the government’s first round of

bailout funds totaling 107.3 billion euros.

Since then, the government has taken part in two additional bailout programs and each

of them have been accompanied by austerity measures that have been required of them by the

international creditors. These measures are controversial because they have caused the Greek people

some discomfort. However, the international creditors believe that these reforms are what the country

needs in order to rebound and enter into a period of growth.

Sources:

https://en.wikipedia.org/wiki/Greek_government-

debt_crisis#First_Economic_Adjustment_Programme_(May_2010_%E2%80%93_February_2012)

https://www.visualcapitalist.com/company-spotlight/

http://origins.osu.edu/article/alpha-and-omega-greek-debt-crisis-IMF-Eurozone-EU-Grexit/page/0/1