In economics, austerity describes policies used by governments to reduce budget deficits during adverse economic conditions. These policies can include spending cuts, tax increases, or a mixture of the two. Austerity policies demonstrate governments' liquidity to their creditors and credit rating agencies by bringing fiscal income closer to expenditure. European Central Bank (ECB)
One of the seven institutions of the European Union (EU) listed in the Treaty on European Union (TEU). It is the central bank for the euro and administers the monetary policy of the 17 EU member states which constitute the Eurozone, one of the largest currency areas in the world. Financial contagion
It refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission of a medical disease. Financial contagion happens at both the international level and the domestic level Eurozone
An economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender
Greek Public Debt Crisis
Since late 2009 Greece has earned itself a place among the countries dubbed ‘the sick men of Europe’ in terms of public Debt Management.Although the Public Debt problems heightened between late 2009 and 2010,Greece’s debt percentage had always been higher than the average debt percentage of the Eurozone (an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender) for more than a decade prior to the crisis that forced the state to as for assistance from other countries and International financialorganizations.
Figure 1: Comparison of Greece’s against the Eurozone’s average percentage public debt The Greek government-debt crisis is one of a number of current European sovereign-debt crises and is believed to have been caused by a combination of structural weaknesses of the Greek economy coupled with the incomplete economic, tax and banking unification of the European Monetary Union. In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads(difference between the quoted rates of return on two different investments, usually of different credit quality) and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany. The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets practically were no longer available for Greece as a funding source. On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points: 1. Implementation of austerity measures, to restore the fiscal balance. 2. Privatization of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable. 3. Implementation of outlined structural reforms, to improve competitiveness and growth prospects. The payment of the bailout was scheduled to happen in several disbursements from May 2010 until June 2013. Due to a worsened recession and the fact that Greece had worked slower than expected to comply with point 2 and 3 above, there was a need one year later to offer Greece both more time and money in the attempt to restore the economy. In October 2011, Eurozone leaders consequently agreed to offer a second €130 billion bailout loan for Greece,...