Greece financial crisis – 1

Greece financial crisis - 1

We all know that Greece is going through a crisis which so bad that nobody really knows how long is it going to take for it to overcome this crisis.

A crisis of this magnitude does not occur overnight. It started in late 2009, after the housing-bubble or crisis of 2008. The major causes for the eruption of the debt crisis are:

 

  • From 1960-73, Greece has a budget surplus, but since then it has had a budget deficit. The global financial crisis and the long period budget deficit made the situation even more precarious causing the debt level to grow rapidly above the maximum sustainable level for Greece.

 

  • Greece ran a trade deficit, which essentially means that it imported more than it exported. So, it had to borrow to fund which is also known as foreign financial surplus. But the inflow of stopped during the 2008 crisis, so did the foreign financial surplus and Greece was forced to reduce its budget deficit substantially. A country facing such a situation would typically devalue its to resume capital inflow, but Greece was unable to do this since it was a part of the European Union (EU). As a consequence, it suffered a significant decline in GDP.

 

  • A persistent problem the Greece has suffered from is that of tax evasion. One of the major causes of this is corruption. Every year the level of government’s tax income is well below the expected level. According to a report, in 2010, the estimated tax evasion costs for the Greek government was well over $20 billion.

 

  • Greece was the only member state that had forged the reports and misreported the country’s official economic statistics for years and years with the help of big banks such as Goldman Sachs. This enabled Greece government to spend well beyond their means, while meeting the deficit targets set by EU and hiding the actual deficit from them. The actual government debt to GDP ratio was closer to 150% in 2010.

 

  • The European statistics agency, Eurostat, since 2004 had sent 10 delegations to Athens to improve the reliability of Greece national account, but apparently to no avail, until 2010, when it issued a report containing accusations of falsified data and political interference of parties in power since 2001. It was discovered that Greece had paid hundreds of millions of dollars in fees to Goldman Sachs and other banks to forge the reports and hid the actual amount of debt.

 

In 2010, when the actual data was revealed, the rating agencies downgraded the Greece economy to junk status. This froze the private capital of Greece leaving no other option but to wait for the international bailout loans to cover its needs to avoid sovereign default.

All these factors gave birth to and stimulated the crisis that Greece is going though today.

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