Top 10 Greek Debt Crisis Facts - WMNews Ep. 13
Top 10 Greek Debt Crisis Facts - WMNews Ep. 13

Top 10 Greek Debt Crisis Facts - WMNews Ep. 13

VOICE OVER: Rebecca Brayton
Script written by Angela Fafard

As an anti-austerity party takes power in Greece, a serious confrontation looms between the new government and its Eurozone creditors, throwing into question the stability of this troubled economic union. Welcome to WatchMojo News, the weekly series from that breaks down news stories that might be on your radar. In this instalment, we're counting down 10 crucial facts you should know about the Greek debt crisis.

Script written by Angela Fafard

Top 10 Greek Debt Crisis Facts

#10: When Did the Crisis Begin?
The Great Recession

The United States entered into a recession in 2007 after the collapse of its sub-prime mortgage industry, which prompted a worldwide economic downturn known as the Great Recession. Securities backed by these sub-prime mortgages had been traded worldwide and infected markets globally. European governments were forced to bailout their banking systems, which held a lot of these assets on their books. These bailouts, combined with existing high levels of government debt throughout Europe, sparked doubt among investors as to whether European governments could successfully refinance their debt loads, which ultimately led to the European Sovereign Debt Crisis. By 2009, it had become clear that some Eurozone countries would require assistance from external institutions in order to manage their debt, and one of these nations was Greece.

#9: What Were the Underlying Causes of the Crisis?
Government Debt & the Eurozone Economy

Since the mid-‘70s, the Greek government had been running a deficit funded by issuing government bonds. The introduction of the European common currency, the Euro, in 1999 created a situation in which all European bonds were considered the same, meaning Greece would pay significantly less interest on the bonds it issued. This encouraged Greece to continue disastrously excessive deficit spending, wit the country’s government even making arrangements with financial institutions like Goldman Sachs to conceal their true level of borrowing. At the same time, the Greek government consistently failed to collect all of the taxes that were owed to them. This, combined with a large public sector, kept Greek government spending high and pushed Greece’s debt-to-GDP ratio to 146% by 2010.

#8: How Did the Crisis Evolve?
The Credit Rating

The economic crisis in Greece was exacerbated in April 2010, when the credit rating agency Standard & Poor downgraded Greece’s credit rating to junk status, meaning it was not worthy of investment. This effectively closed off private capital markets to Greece as a source for borrowing money. International financial service agencies like Standard & Poor continuously monitor a country’s credit worthiness, which in turn determines what interest rate a country’s bonds should yield. By June 2011, Greece’s credit rating had dropped to CCC – the lowest credit rating in the world – and the country’s interest rates shot back up to pre-Euro rates. Greece earned this CCC rating due to the belief that it might actually default on its debt obligations, essentially meaning that the country would declare bankruptcy.

#7: What Was the Response to the Crisis?
The Troika & Economic Adjustment

Facing the prospect of default, by mid-2010 Greece entered into loan agreements with a group of creditors consisting of other Eurozone countries, the International Monetary Fund and the European Central Bank, which was nicknamed the “Troika.” The first loan package was agreed to on May 2nd, 2010 to the tune of 110 billion Euros. Due to extreme circumstances, the European Union met in July 2011 to structure a second loan package of 109 billion euros. Then, in October 2011, Eurozone leaders and the International Monetary Fund came to a joint agreement with banks in order to write off 50% of Greece’s debt over the next nine years, in a plan to reduce the country’s debt to 120% of GDP by 2020.

#6: What Were the Conditions of Greece’s Loans?
The Austerity

Greece was forced to implement severe austerity measures in return for receiving loans from the Troika. This included significant spending cuts, public sector salary and pension cuts, tax increases and the privatization of national industries. These measures were met with public resistance in the form of widespread protests and a general nationwide strike. Masked protesters clashed with police on the streets of major cities, hurling petrol bombs, with some confrontations leading to several deaths and hundreds of injuries. In 2012, the IMF admitted that they did not foresee the overall impact of the austerity measures, which actually worsened the Greek recession. Violent riots erupted in the Greek capital Athens throughout that year.

#5: What Were the Consequences of Austerity?
Unemployment & Social Calamity

The austerity measures held deep ramifications for Greece and severe consequences for its citizens. As of February 2015, unemployment hovered around 26%, and for those under the age of 25, that number peaked as high as 50%. About a third of the population had by that point sunk below the poverty line. Greece had the highest child poverty rate in Europe, with nearly 40.5% of children trapped in impoverished circumstances. Furthermore, a study found that after every new round of austerity measures was enforced, suicide rates in men and women increased by 12% to 36% and remained high. The conditions that the Troika requested in return for bailing out the Greek economy were so harsh that it prompted one United Nations official to speculate that they constituted human rights violations.

#4: How Has the Crisis Affected Europe?
The Default

Greece was set to receive a final batch of funding on February 28th, 2015. However, Greece’s recently elected left-wing government had proclaimed its desire to halt austerity and renegotiate the terms of its debt, even suggesting that a new round of debt forgiveness would be necessary. German Chancellor Angela Merkel signaled that more loans would not be extended to Greece nor would any more of its debt to be forgiven. By that point, it was likely that – if an agreement were not reached – Greece would default on its debt and exit the Eurozone. That theoretical event would likely cause a ripple effect that would see other indebted countries choosing to leave their debts and the Eurozone behind, causing the complete breakdown of the Eurozone with dire economic consequences for every European country.

#3: Who Is in Charge Now?
The Election

On January 25th, 2014, Alexis Tsipras, the leader of Greece’s leftist political party the Coalition of the Radical Left or “SYRIZA” as it is commonly known, became the new prime minister of Greece. Tsipras was part of the Greek Communist Youth organization in the 1980s, and in the ‘90s rose to political prominence as a leader of the student movement. Soon after the new government was formed, discussions began between Greece’s new finance minister Yanis Varoufakis, and Europe’s financial officials. Varoufakis toured Europe drumming up support for Syriza’s anti-austerity and debt renegotiation platform, upon which they had campaigned and won the support of the Greek electorate. Varoufakis managed to gain a sympathetic ear from many in Europe, most notably the French, but the Germans have remained steadfast in their refusal to entertain his proposals.

#2: What Is the New Government’s Vision?
The Strategy

The new Greek finance minister devised a plan to end the country’s austerity measures while also cutting Greece’s debt. Greece would swap the outstanding debt for new growth-linked bonds. This new plan came in the wake of his previously stated goal, which was to spearhead a write-off Greece’s foreign debt. This previous plan was unacceptable to Germany and other creditor countries due to the fact that it implied a loss to taxpayers in their countries. Varoufakis’ overarching message was that the original loans extended to Greece were completely irrational to begin with. His argument was that in 2010 Greece effectively became insolvent, and the Eurozone’s response was to “extend and pretend,” meaning they extended more loans to the country while pretending that there was a realistic possibility that they could be repaid.

#1: How Will the Greek People Move Forward?
The Deadline

Varoufakis, a former economics professor at the University of Athens, chose to play hardball with the European Union, making drastic proposals that he knew would attract a lot of media attention. His strategy was considered risky and it remains unclear if it will be effective. There was widespread recognition among economists that there was no real possibility of Greece ever repaying its entire debt. In order to keep the Eurozone intact, the European Union will likely reach a compromise that would involve extending the February deadline, while also extending the period when Greece’s debt payments would be due, and offering a lower or even zero percent interest rate. Syriza, for their part, will likely try to stay true to their vision of social justice, providing aid to those Greeks hit hardest by austerity measures.

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