Greece - Debt Crisis

Topics: European Union, Tax, United States public debt Pages: 3 (898 words) Published: August 18, 2010
Background on Greece’s Debt Crisis “You cannot spend more than (what) you earn…you should not borrow more than (what) you can afford.” This, according to an editorial published by the Greek newspaper Kathimerini, may be the lesson Greeks are now learning the hard way.1 Unrestrained spending of successive Greek governments over a long period may have driven the country’s budget and current account deficits.2 Greece borrowed heavily from international capital markets to finance public sector jobs, pensions and other social benefits.3 As deficits and the country’s debt burden grew, the governments just kept on borrowing. 4 When Greece joined the eurozone in 2001, it gained monetary stability and was able to borrow at lower interest rates – thus, encouraging the country’s habit of borrowing. However, while government spending and borrowing increased over time, tax revenues on the other hand, weakened due to widespread tax evasion.5 From 2001 to 2009, Greece reported an average budget deficit of 6.4% per year compared to a Eurozone average of 2.6%. Current account deficits, on the other hand, averaged 9.4% of GDP per year. In 2009, Greece had an estimated budget deficit of 13.6% of GDP, with an accumulated government debt of 115% of GDP. Both Greece’s budget deficit and debt levels are well above those permitted by the EU Stability and Growth Pact (Amsterdam, 1997). Under the rules of the SGP, the ratio of government deficit to GDP should be no more than 3% and the ratio of government debt to GDP should be no more than 60%.6 Greece’s reliance on external financing for funding budget and current account deficits left its economy highly vulnerable to shifts in investor confidence.7 Investor confidence had declined rapidly since late 2009 when the new socialist government of Prime Minister George Papandreou revised the 2009 budget deficit from 6.7% of GDP to 12.7% of GDP. Investors became more alarmed when the Greek authorities admitted that previous figures had been...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Sovereign Debt Restructuring Mechanism Essay
  • Essay on Impact of Foereign Debt on the Cameroon Economy
  • The Debt Crisis of Nigeria and Greece Essay
  • Greece Debt Crisis Analysis Essay
  • Solving the Greece Debt Crisis Essay
  • Greece Crisis Essay
  • European Debt Crisis Essay
  • Greece Financial Crisis Essay

Become a StudyMode Member

Sign Up - It's Free