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Introduction
# Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. The debt levels and deficits that exceeded limits set by the Eurozone were revealed & exposed. # In the first quarter of 2010, the national debt of Greece was put at 300 billion ($413.6 billion), which is bigger than the country's economy. The country's deficit (its expenditure in comparison to its revenue) is 12.7%.
Background
Important aspects of Greece during Financial Crisis # Economy of Greece # PIIGS: Greece has spread the risk to other weak and indebted Euro-area economies.
Terms used
Twin deficits hypothesis Balance of trade IMF Loans Sovereign Debt Crisis Euro (effect on other currencies, side-effect)
Euro
Printing Less efficient handling of sovereign risk Free market movement of Euro
Impact of Crisis
# Southeastern Europe Greeces foreign policy focus on the region and growing trade volumes between the countries, neighboring Serbia, Albania, Macedonia, Romania, Bulgaria and Turkey cannot remain indifferent to the magnitude of the crisis next door.
# Spill-over effect: Some spillover effects have already started to manifest themselves. As Greek 10-year bonds fall and yields continue to remain above 6%, sovereign debt issuance and the risk premium investors demand to hold securities emitted by Romania, Serbia, Bulgaria and Turkey have been adversely affected.
#Greece is already in major breach of Euro-zone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro.
# Impact on private individuals: The most obvious way would be through tax bills, as Europe agrees to ride to the rescue and help Greece deal with its mounting public and foreign debts. Any assistance to Greece will come at a cost that will ultimately have to be borne by taxpayers in the nations that contribute.
# Contagion Effect Greek crisis has made investors nervous about lending money to governments through buying government bonds. Everybody's interest rates are heading higher as governments are having to pay a greater risk premium to borrow money.
# Reduced wealth: Take-home pay is likely to fall as it is eroded by rising taxes and everyone will have to work longer before they retire - by which time they are likely to find that their pensions have shrunk.
# Slower recovery The crisis is also set to slow down the embryonic economic recovery.
# Germany and the Euro rescue plan # Germany's parliament has approved the country's contribution to a 750bn euro ($938bn, 651bn) rescue deal for the Euro-zone. # The German contribution is key to the plan, and would amount to up to 148bn Euros. Chancellor Angela Merkel warned that the Euro would be "in danger" without strong action.
# The role of Greece Greece has outlined plans to cut its budget deficit, or the amount its public spending exceeds taxation, to 8.7% of its GDP in 2010, and to less than 3% by 2012. # Just before the massive bail-out package was announced the Greek government pledged to make further spending cuts and tax increases totalling 30bn euros over three years - on top of austerity measures already taken.
Conclusion
# Greeces Debt Crisis has put the EU under the scope, & it has shifted the attention to the efficiency & the success of the Euro-zone. Its considered as probably the biggest test the EU (& the EMU-in particular) has gone through. How the EU & Greece are handling the crisis with the whole bail-out plan will reflect to what extent the EU is able to function on its own as a powerful economic entity. # Its too early yet to measure the effectiveness of the bail out plan.
References
http://en.wikipedia.org/wiki/Twin_deficits_hypothesis http://en.wikipedia.org/wiki/Balance_of_payments http://www.imf.org/external/np/exr/faq/greecefaqs.htm http://en.wikipedia.org/wiki/Sovereign_debt_crisis http://en.wikipedia.org/wiki/Credit_risk#Sovereign_risk http://en.wikipedia.org/wiki/Country_risk http://en.wikipedia.org/wiki/Current_account_balance http://en.wikipedia.org/wiki/PIGS_(economics)