Greek debt crisis

Eurozone creditors have reached what is being deemed a ‘historic’ deal on Greek debt relief. As a result, the Greek financial crisis, which has crippled the nation for eight years, has been declared to be over.

Background

The financial crisis in Greece called the Greek Depression occurred in the aftermath of the global economic collapse between 2007 and 2008. The genesis of the problem began in 2001 with the introduction of the Euro. It significantly reduced trade costs between Eurozone countries and consequentially Greece’s trade deficit increased. The country was consuming more than it was producing. By 2008-2009, its total deficit was 15%. Major European Union countries like Germany began to withhold money lent to Greece because it was considered “high risk”. As a result, Greece couldn’t finance its debts.

Generally, when faced with such a crisis, countries allow their currency to depreciate to attract investment. Greece couldn’t do that because it remained in the Euro. The unemployment rate rocketed to 25%.

In 2010, the European Commission, European Central Bank (ECB), and International Monetary Fund (IMF) (the Troika) launched a €110 billion bailout to address the problem. However, the crisis has persisted.

Initially, Eurozone members said they would return interests of loans taken by Greece back to the Greek central bank. This was done in the spirit of EU solidarity. In 2015, the pay-back operation was halted when a second bail-out was rolled out. Germany has refused to re-initiate it since that time.

A European media platform called Euractiv has published a report noting that Germany has profited €1.3 billion on account of interest.

What about Greek bonds?

A government bond is a debt security issued by a government to support government spending. Generally, these bonds are considered risk-free and are traded in highly liquid markets. In 2011, private bondholders of Greek bonds were hit with huge losses on Greek debt. In order to stem the crisis, European leaders announced a deal in which private investors would take a 50% write-down on the value of their holdings. However, by 2017, the market had rebounded to some extent. Greece was able to sell €3 billion ($3.5 billion) in five-year government bonds. Demand for the debt exceeded €6.5 billion and the nation had to turn away investors. This was considered a boost for the nation. However, experts state that the country is not in the clear yet. Much of most of Greece’s €300bn government debt is in the hands of international creditors.

Analysis

Eurozone ministers have declared the end of the Greek debt crisis, agreeing debt relief and a big cash payout for Greece. Greece is presently scheduled to leave its financial rescue on 20th August, 2018. As a result of it, finance ministers from the 19 countries that use the Euro as a currency, were under pressure to offer Athens a currency deal that left it strong in the eyes of the financial markets.

"The Greek crisis ends here," said EU Economic Affairs Commissioner Pierre Moscovici, after marathon talks in Luxembourg. "We finally got to the end of this path which was so long and difficult - it is a historic moment," the former French finance minister said.

In accordance to the new agreement, the repayment of Greece’s bailout loans, worth €96 bn, will be pushed by a decade. This is around 40% of what Greece has to pay the Eurozone in the coming years.

“Greece is turning the page,” said Euclid Tsakalotos, the country’s finance minister. “We have all the building blocks to leave the programme with confidence.”

The 10-year extension was a result of intense negotiations between all parties. “The negotiations were difficult,” Bruno Le Maire, France’s economy minister, said. “Discussions are always difficult when the stakes are high.”

The eurozone creditors also agreed to disburse €15 bn to help the economically strapped nation as it exits the programme. According to officials, Greece would now have a €24bn safety cushion to protect its economy. "We will ensure that the pressure to implement further reforms remains strong ... in the medium and long term," said Austrian Finance Minister Hartwig Loger.

Christine Lagarde, the head of the International Monetary Fund welcomed the debt relief noting, “In the medium-term analysis there is no doubt in our minds that Greece will be able to reaccess the markets.” However, she noted that some fears remain. "As far as the longer term is concerned we have concerns," she added.

Assessment

Our assessment is that the latest development ought to come as a relief to the Greek government which has struggled domestically as a result of the nation’s economic collapse. The country now has some time to recover. However, concerns remain on whether this would be a temporary relief. It would now be up to the government to implement sound and coherent economic policies that would keep the nation afloat. 

Read more - Germany benefits off Greek debt crisis