The Crisis
In the first weeks of 2010, there were renewed anxieties about excessive national debt. Some politicians, notably German Chancellor Angela Merkel, have sought to attribute some of the blame for the crisis to hedge funds and other speculators stating that “institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere”.
Although some financial institutions clearly profited from the growing Greek government debt in the short run, there was a long lead up to the crisis. EU politicians in Brussels turned a blind eye and gave Greece a fairly clean bill of health even as the reality of economics suggested the Euro was in danger. Investors assumed they were implicitly lending to a strong Berlin when they bought euro-bonds from weaker Athens – as Dynastic politics rewarding social groupings increased the economy’s corruption and dysfunction. Historic enmity to Turkey led to high defense spending, and fuelled public deficits – financed primarily by German and French banks.
On 23 April 2010, the Greek government requested that the EU/IMF bailout package, made of relatively high-interest loans, be activated. The IMF had said it was “prepared to move expeditiously on this request”. The initial size of the loan package was €45 billion and its first installment covered €8.5 billion of Greek bonds that became due for repayment.
On 27 April 2010, Standard & Poor’s cut Greece’s sovereign debt rating to BB+ or “junk” status amid fears of default. The yield of the Greek two-year bond reached 15.3% in the secondary market. Standard & Poor’s estimates that in the event of a default, investors would lose 30–50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement.
On 1 May, a series of austerity measures was proposed. The proposal helped persuaded Germany, the last remaining holdout, to sign on to a larger €110 billion EU/IMF loan package over three years for Greece (retaining a relatively high interest of 5% for the main part of the loans, provided by the EU). On 5 May, a national strike that turned violent was held in protest to the planned spending cuts and tax increases. The November 2010 revisions of 2009 deficit and debt levels made accomplishment of the 2010 targets even harder, and indications signal to a worse recession than originally feared.
Japan, Italy and Belgium’s creditors are mainly domestic institutions, but Greece and Portugal have a higher percent of their debt in the hands of foreign creditors, which is seen by certain analysts as more difficult to sustain. Greece, Portugal, and Spain have a ‘credibility problem’, because they lack the ability to repay adequately due to their low growth rate, high deficit, less Foreign Direct Investment, etc.
On a poll published on 18 May 2011, 62% of the people questioned felt that the IMF memorandum which Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Georgoe Papakonstantinou, to handle the crisis. Evangelos Venizelos replaced Mr. Papakonstantinou on 17 June. 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece’s economy. 64% felt that the possibility of bankruptcy is likely, and when asked about their fears for the near future, polls showed a fear of: unemployment (97%), poverty (93%) and the closure of businesses (92%).
On 13 June 2011, Standard and Poor’s downgraded Greece’s sovereign debt rating to CCC, the lowest in the world, following the findings of a bilateral EU-IMF audit which called for further austerity measures. After the major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuffled cabinet, and asked for a vote of confidence in the parliament. The crisis sent ripples around the world, with major stock exchanges exhibiting losses.
Some experts argue the best option for Greece and the rest of the EU should be to engineer an “orderly default” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.
Andrew Michael Teo 
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