GOVERNMENT-DEBT CRISIS IN GREECE

Sohom Karmakar PGP/19/231

Causes of the Crisis

Large-scale Government spending- Irrational Exuberance? Huge budget deficits to finance military expenditure, public sector jobs, pensions and other

social benefits Owing to low interest rates in government bonds characteristic of the Eurozone borrowing

continues till the late 2000 ‘s financial crisis. A common Euro made currency devaluation impossible which in turn made it worse for the

Greek government to repay its loans

Misreported Statistics- Mischief Managed? To continue with its spending spree widespread misreports were made by the government to

keep itself within the deficit targets of the European Union Credits given to the governments disguised as swaps and not registered as debts as at that

time Eurostat ignored statistics involving financial derivatives Billions of Greek debts converted into yen and dollars at fictitious exchange rates thus masking

the true extent of the loans

Tax Evasion: A boomerang in disguise Widespread corruption causes government tax income to fall below the expected level Estimated amount of tax evasion by Greeks stored in Swiss banks around 80 billion Euros

Effects of the Crisis

Economic Effects GDP suffered the worst decline during the crisis clocking an annual growth rate of -6.9% More than a 100000 Greek companies went bankrupt which led to widespread unemployment Interest rates on Greek long-term debts rose to a record high of 10% in 2015. For scale, interest

rates on German bonds were less than 1% in 2015 As the number of Greek companies which went bankrupt increases youth unemployment

significantly worsened to a massive 54.9% in 2012 Greece defaulted on a $ 1.7 billion IMF payment becoming the first developed country to do so

Social Effects EU member states and the creditors asked Greece to adopt severe austerity measures as

means to curb the crisis Record lows in GDP and a rapid reduction in market demand coupled with lower productions led

to widespread dismissals and loss of thousands of jobs further amplifying recession Public health deteriorated due to reduced access to health care services; HIV infections showed

an increase of 52% from 2010 to 2011 Owing to mass public discontent, Greece, a country with a traditionally weak far-right, now has

one of the largest organized Neo-Nazi movements in Europe

Solutions: Pros and Cons

Exit from the Eurozone Pros:-

An exit from Eurozone would mean the introduction of a new national currency- the drachma A new currency would mean major devaluation which would help Greece to boost exports and

pay down its debts with cheaper currencyCons:- Membership to the Eurozone would no longer be considered irrevocable and countries with

increasing interest rates on their bonds may also be tempted to do so Greece’s creditors like Germany, the IMF and other Eurozone countries would suffer huge

losses if debts are paid with a devalued drachma Depreciation of the Euro relative to the dollar would mean cheap exports and costly imports for

Eurozone members. Exporters like the United States would suffer losses

Another bailout – More Austerity More aggressive tax collections, reduced spending increased tax rates selling of government

assets will help Greece to evade the crisis On the other hand severe public discontent against the austerity measures would mean severe

internal turmoil within the country

Thank You