After joining the European Union in 2001, Greece has been more capable to borrow money and has been recklessly increasing its public spending ever since. The outcome of this was a major debt deficit which later transformed into a risk of sovereign default. This could possibly result in major consequences for the global economy if a default was to occur. This essay will be structured by firstly examining the development of the Greek debt crisis and the response to the crisis. Thereafter the possible implications will be discussed. Finally, the solutions to this crisis will be considered and to provide a conclusion. The Development of the Greek Debt Crisis
In 2001, Greece was able to join the European Union by falsely reporting its debt levels; membership of the European Union meant that borrowing money became more capable. To take advantage of this trait, Greece increased its borrowing, public spending and focused on projects such as the 2004 Olympics, causing them to widen their deficit (BBC, 2010). In 2008, the world experienced the financial crisis which had a major impact on the global economy. Greece experienced a decrease in real GDP growth of 2% in 2008 compared to 4.5% in the two previous years (Ministry of Finance, 2010). In October 2009, George Papandreou was elected as the new Prime Minister and discovered that Greece has been understating its public debts for years. Due to the occurrence of the financial crisis and its increasing debt deficit, Greece was close to default which caused the investors to demand a higher yield on Greek bonds. The cost of borrowing for Greece increased dramatically and the financial position of Greece worsened. If Greece was to default, a negative multiplier effect may be unleashed and cause the global economy to suffer. Despite its financial position, the Government stated that it would not turn to the International Monetary Fund for financial aid and ensured its citizens that it had money for its economy (Dedes, Lampridis and Paris, 2001). However, Greece did not attempt to reduce the gap in the deficit but instead expanded it. In 2009, the Greek economy went into recession; government debt percentage of GDP reached a colossal figure of 142.8% in 2010 (Dedes, Lampridis and Paris, 2001). The Prime Minister announced that there was corruption among the country and there was serious risk of bankruptcy. Furthermore, based on the actions of its government in relation with the statement, confidence rapidly decreased in the international markets for Greece. In addition, credit rating agencies such as Fitch and Standards and Poors downgraded the creditworthiness of Greece which aggravated its interest rates causing its ability to borrow problematic (Dedes, Lampridis and Paris, 2001). The financial position of Greece was close to default and a response was needed to combat this debt crisis and its weak economic position. The Response to the Greek Debt
In response to its debt, the Greek government designed and implemented a fiscal consolidation programme in order to stabilise and reform its economy; this was known as the “Greek Stability and Growth Programme”. It was submitted to the European Commission on January 15, 2010 (Kouretas, 2010). According to this programme, it involved actions to improve tax collection, to prevent tax evasion, to implement a special levy on profitable companies and to increase indirect taxes (Kouretas, 2010). Furthermore, there will be a recruitment freeze in the public sector for the year 2010 and a 10% cut in general government expenditure on salary allowances (Kouretas, 2010). Despite the effort, the programme was not able to stabilise the economy; it was not capable to restore the market’s confidence. The Greek government had no choice but to resort to the International Monetary Fund.
Due to the inability to borrow in the financial market, Greece began negotiating with the...