Greece's Debt Crisis: A Historic Rescue From Bankruptcy - Research Paper

Introduction

The debt crisis in Greece is a bad sovereign debt that it owed the European Union between 2008 and 2018 (Ahmed,2019). Its attempt to default its debt in 2010 that threatened the viability of the Eurozone was avoided by the European Union that loaned it enough to continue making its payments. That was the country's most significant financial rescue from bankruptcy in history. The EU required Greece to adopt austerity measures in return for the loan. These measures were aimed at strengthening Greece's government and financial structures. Besides that, they mired Greece to a recession that ended in 2017. Greece has only repaid 41.6 billion euros as of January 2019, and the scheduled debt payment is beyond 2060 (Ahman,2019). Greece, therefore, is still facing debt crises and is unable to finance the debt repayments owing to its low economic output and its budget deficit that exceeds its gross domestic product.

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Discussion

Greece's debt crisis began in 2010, owing to the nearly 320 billion euros loan that it received from private investors and various European authorities. Many issues had paralyzed its economy before it was accepted into Eurozone in 2001. Its government's pursuit of monetary policies and expansionary fiscal aimed at strengthening its economy in the 1980s had failed. It had sored inflation rates, high fiscal, more exchange rate crises, low growth rates, and trade deficits instead. It is for this reason that it opted to join the European Monetary Union (EMU). It hoped that if the union were backed by European Central Bank (ECB), inflation rates would be dampened, and the nominal interest rates would be lowered. That, they hoped that would encourage private investment and spur economic growth. They believed that the single currency would remove several transaction costs, leaving money for the deficit and debt reduction.

Current Situation in Greece's Debt Problem

In spite of the assumed macroeconomic assumptions underpinning the fiscal adjustment program proving practical and realistic, Greece's sovereign debt remains unviable, and the public sector's financial situation valid. That is due to its long and difficult road that is yet to follow (Vousinas, 2016). Greek's GDP is currently below 10% below its natural level. Its financial crises and sovereign debt defaults have grown worse by the day (Beker, 2014). By 2015, the country was at a crossroads of choosing between furthering their failed macroeconomic adjustments imposed by their creditor or making changes to break their debt chains. The country has remained deeply cemented in economic, social, democratic and ecological crisis.

How Greece's Problem Accumulated

Greece's road to debt began in the 1980s during the PanHellenic Socialist Movement (PASOK).In a bid to keep their voters happy, it lavished in liberal welfare policies and created a protectionist economy. That resulted in low productivity, erosion of competitiveness, and rampant evasion of tax, thereby making the government resort to debt to keep the party going. Its admission into the Eurozone in 2001 and the adoption of euro made it easier for its government to borrow. That resulted in its economy booming and growth in GDP per year, with an average of 3.9% between 2001 and 2008 (Beker,2014). However, this growth became stagnated due to the burgeoning debt loan and rising deficits. The fact that those measures had already exceeded the EU's Growth and Stability Pact limits also deteriorated it. By 2000, the country's fiscal deficit GDP proportion was 3.7% above the Euro's limit of 3% (Beker, 2014). After the financial crises of 2008-09, the jig rose up as investors and creditors channeled focus to US and Europe large sovereign debt loads. Due to a possibility of default, investors demanded more yields for sovereign debts issued by PIIGS (Portugal, Ireland, Italy, Greece, and Spain) as added risk compensation. By 2012, the debit spread between 10 years Greek and German bonds had widened by 33600 relationships (Federal Reserve Research Bank OF St. Louise Research).In the aftermath of the crisis, its economy contracted, as its debt-GDP ratio rose to a peak of 180% in 2011. It is then that its government revealed that the fiscal deficit was 12.7% more than twice the price of the previous figure (Beker, 2014).

Proposed Steps to Deal With Greece's Debt Situation

Greece's crisis is a danger to the country and a world economy tragedy. The International Monetary Fund has noted that Greece is broke, yet there is consideration of a way out of the mess and retaining the country in Eurozone. The European Green Party recommends the following steps to deal with the situation. It urges the governments of the European Monetary Movement (EMU) to work resolutely to help Greece since its governments have to borrow billions in the next months. It also urges the EMU member states to avoid toleration of the massive speculation against Greece by shutting down the affected submarkets like credit default swaps on Greek government bonds (Robbins, 2015). The EGD also proposes that the Euro group countries should guarantee Greek government bonds. That would help it evade its vicious circle of constant interest increment and surcharges risks.

Possible Solutions to Greece’s Debt Crisis

Currently, the European authorities have allowed handling of 7.5 billion euros in bailout aid to Greece that will enable the country to keep paying its bills in the coming months. Additionally, it has won pledges of debt relief, thereby easing concerns of another crisis. That is because Europe is currently dealing with migrants' influx and terrorist threats and would not risk another disaster. That is for Greece to meet its budget goals, which according to the I.M.F., it cannot achieve unless it eases its debts. A compromise has been reached with Greece creditors committed to debt relief, although the country continues to carry out charges painfully. The budget cuts should also have minimal harm on the weaker populace and concentrate on minimizing wasteful spending like cutting down the unnecessary high expenditures on the military. The EU should help to solve the ongoing war between Greece and Turkey and the European States to minimize the exportation of weapons to Greece and Turkey (Beker, 2014). There should also be reforms on the taxation system geared and the introduction of green taxes like taxing non-sustainable tourism, pollution, and raising the tax rates.aThe country should also consider a wealth levy to insure profit contribution from tax fraud and widespread corruption.

Prospects of a Mutually Beneficial Solution to Greece’s Debt Crisis

A more in-depth inspection indicates that the sovereign debt crisis is a story of pride, punishment, power, subordination, and a tool of shame and not a tale of economic weakness. It has rallied on economic and political alignment, which implies adhering to the rules set or risk punishment for insubordination. Greece will have to relinquish its sovereignty in exchange for more favorable credit conditions, the creation of a conducive business environment, in appearing stronger in the global stage, and in improving its economic growth (Robbins, 2015). The European Union has advocated for a fiscal conservatism led by the German's rule on inflation. They believe that it is not only an indicator of economic instability but also an ineffective debt reduction policy

Conclusion

In spite of the bailing, Greek is still in financial crisis as the government spending is by far more than the amount of the EU's bailout (Robbins, 2015). The government's centralized decision-making process is slow and has unclear property rights and legal obstacles. That has rendered it difficult to sell euros worth its state. It will, therefore, be a quiet road of recovery.

References

Ahmed, K. (2019, June). Greek Debt Crisis Explained: Understanding the Debt Crisis in 5minutes. Europe World Economy. Retrieved from https://www.thebalance.com

Beker, V.A. (2014).The European Debt Crisis: Causes and Consequences. Journal of Stock andForex Trading. DOI:10.4172/2163-9458.1000115

Robbins, P. (2015).The Greek Debt Crisis: The Need for Heroic Policy Reforms in the EuropeanEconomic and Monetary Union. Indiana Journal of Legal Studies. 22(1), 175-199. DOI:10.2979/indjglolegstu.22.1.175