The Greek Government Debt-Crises
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.
According to Bloomberg Business week, after five straight years of recession, the Eurozones weakest link moves into 2013 with an economy set to further contract, with the worst still yet to come. These fears developed among investors in late 2009 about the countrys inability to meet its debt obligations due to strong increase in government debt levels. Years of unrestrained spending, cheap lending and a failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. As the dust is settling, it shows that Greece is teetering on the brink of default as it faces debts of about $500 billion, while becoming reliant on the International Monetary Fund to supply not only one, but two multi-billion loans, and another bailout on the table, because the crisis is showing no signs of abating.
According to the article, European banks have spent the past two years increasing capital buffers and writing down Greek bonds, in anticipation of some disastrous event such as a Greek withdrawal from the euro. This potential exit reflects badly on the credibility of the Euro and could knock the whole Eurozone into the red, affecting the global economy. If European countries continue to resort to rescue packages involving bodies such as the IMF, this would further damage the euro’s reputation and could lead to a substantial fall against other key currencies, especially the U.S. dollar.
The eurozone’s leading economy Germany has been at war with the rest of Europe over how Greece should repay its spiraling debt. Germany has been pushing for a “soft restructuring” of Greece’s loans – a move that would make private investors share the burden – but the European Central Bank has warned any compulsory restructuring could lead to a broader crisis.
The article referenced that some key financial advisors and investment analysts believe that early indications about the future are favorable, while others are doubtful. What is certain is that if Greece is unsuccessful at pulling itself out of this debt crisis, eventually, the whole Eurozone could be pushed to the brink, generating financial shockwaves across the world that will herald a new global economic slump.
What if no deal is reached?
The doomsday scenario sees a dramatic slide in confidence as investors retreat from European financial markets. This pushes up the cost of borrowing across the region, triggering new fears about the threat of debt crises in Spain and Italy.
This begins to drag on countries with debt exposure to Spain and Italy. Eventually, the whole eurozone could be pushed the brink, generating financial shockwaves across the world that will herald a new global economic slump.
What is Greece doing to help itself?
To be fair, Greece isn’t standing idly by. It has already imposed hugely unpopular austerity measures against an explosive backdrop of public discontent. It is also taking drastic steps to ease its debt burden by selling off numerous assets.
It is looking at an extensive privatization program that could see it unload prized assets including stakes in banks, railways, utility firms, ports and the postal service.
There is also a plan to offload Hellenikon, Athens’ former international airport. Other measures include floating Olympic and tourism property assets on the stock exchange and issuing gaming licenses. The target is to raise about $71 billion by 2015.
Should Greece return to the drachma, its currency probably would suffer an immediate devaluation of as much as 75 percent against the euro, spurring widespread defaults on foreign loans, economists at UBS (UBS) say. If European leaders couldnt make a credible argument that Greece was an isolated case, depositors in other nations might decide to withdraw euros from banks or shift them to countries seen as safer. The more policy makers continue to openly discuss an exit, the more likely that people in Spain, Ireland, and Portugal pull money out of their local banks, says Andrew Stimpson, an analyst at Keefe, Bruyette ; Woods (KBW) in London. Frances Socit Gnrale estimates that a Greek exit could mean more than $1.1 trillion in loan and currency losses in the U.S. and Europe.
Banks in Greece, Ireland, Italy, Portugal, and Spain saw a decline of 81 billion ($103 billion), or 3.2 percent, in household and corporate deposits in the 15 months through March, according to the European Central Bank. On March 30, Greece had 160 billion of bank deposits, down almost 75 billion from the peak in 2009, central bank data show. Lenders in Germany and France saw an increase in deposits of 217 billion, or 6.3 percent, in the same period.
UBS has told its wealthy clients that theres a 20 percent chance of Greece leaving the euro within six months. To prevent contagion, countries in the euro zone would have to form a full-fledged political and fiscal union immediately and implement uniform guarantees on bank deposits throughout the area, UBS says. The chances of that happening? Effectively nil. A Greek exit could trigger a chain reaction of bank runs and soaring risk premiums on government bonds of weaker countries, and that ultimately breaks up the entire euro zone, UBS economists Thomas Wacker and Jrg de Spindler wrote in a note to investors.
Citigroup (C) analysts in May said the likelihood of Greece abandoning the euro over the next 18 months stands at 50 percent to 75 percent. Banks risk-management departments have probably taken into account a Greek exit and most would likely have a plan, says Robert Liljequist, a fixed income strategist at Swedbank. The big problem is that nobody really knows what would happen in the markets if the country leaves the currency.
The ECBs unprecedented provision of 1 trillion in three-year loans to financial institutions in December and February helped calm financial markets in the first quarter by removing concern that banks, unwilling to lend to one another, would run out of cash. Lenders in Spain and Italy also used the funds to buy sovereign debt, reducing government borrowing costs.
The rebound was short-lived as doubts about the health of Spains banks and questions over Greeces future returned. In May the Euro Stoxx Banks index fell below its March 2009 levels, and the euro is at its lowest against the dollar since mid-January.
With Spain in a recession and unemployment at more than 24 percent, bad loans in the country jumped to 8.4 percent of total lending in March, the highest since 1994, the Bank of Spain reports. The government has embarked on its fourth effort in less than three years to rebuild confidence in the financial industry. On May 9 the state took control of Bankia (BKIA), the lender with the most Spanish assets, and on May 11 it ordered banks to set aside an additional 30 billion as a cushion against losses on property loans.
ECB President Mario Draghi on May 16 acknowledged that Greece might leave the euro area and signaled that policymakers wont compromise on their key principles to prevent an exit. Hes not alone in contemplating what was once unthinkable. German Minister of Finance Wolfgang Schuble has indicated that a departure would be manageable, and Bank of France Governor Christian Noyer has said whatever happens in Greece wont place any French financial institution in difficulty. A year ago, Schuble said a Greek exit would create an exceptionally difficult situation that would be hard to control, while Noyer called the possibility of a Greek default a catastrophe.
Whats changed is that banks in Germany, France, and the U.K. have insulated their southern European units against losses. They have cut holdings of sovereign debt issued by weaker countries, and they have used ECB money to replace their own funds backing subsidiaries in the region. Deutsche Bank (DB) tapped what it called a small amount of ECB cash to help fund corporate and retail business in continental Europe. Barclays (BCS) took 8.2 billion in three-year loans from the central bank to provide funding stability for its units in Spain and Portugal. BNP Paribas (BNP) used ECB money to shore up its Italian unit. Lloyds Banking Group (LYG) says its using central bank money to ring-fence its Spanish operation. If youre a U.K. lender and youve lent 10 billion to your Spanish subsidiary and Spain exits, youre suddenly only going to get paid back in 50 percent-devalued pesetas, says Philippe Bodereau, head of European credit research at Pimco. And youre on the hook for 5 billion.
The bottom line: A Greek exit from the euro could trigger a run on European banks, which are sitting on more than $1.2 trillion in loans to southern Europe.
