“In Greece the banks didn’t sink the country. The country sank the banks”. Discuss this view. Which are the main differences between the Greek crisis and the crisis in Ireland and Portugal?
The Greek crisis is basically a result of the inability of the government to balance the tax income with the public spending, to control effectively its expenditure and to enforce its tax collecting policies. The country has shown significant fiscal imbalances and at the same time, high levels of corruption in the political and economic sectors. Moreover, with the aim to be in line with the requirements of the European Union, Greece has been constantly misleading the public and the Eurostat through the false disclosure of statistical data concerning its true financial position.
When the actual situation was revealed, rating agencies proceeded to several downgrades to reflect the higher risk of default, a fact that turned Greek government bonds into “junk” and thus no longer eligible to be owned by many of the investors who already owned them. The resulting dumping of Greek bonds into the market removed Greece from the free financial markets. As it was expected, Greek banks were also downgraded, and consequently the public felt insecure about the safety of their money. This resulted in an increase in deposit outflows and non-performing loans along with the credit contraction. However it is worth noting that, virtually alone in the European region, Greek bankers acted more like old, slow moving commercial bankers and they did not invest in U.S. subprime-backed bonds or leverage themselves to extreme levels, or even pay themselves huge sums of money as bonuses. The biggest problem that the Greek banks faced was that they had bought roughly 30 billion Euros of Greek government bonds which were then degraded gradually to junk. As a result the Greek sovereign crisis has resulted in the Greek banking crisis and not the other way around.
Comparing Greece with other countries...
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