The Greek Debt Crisis - Assignment Example

The Greek Debt Crisis ID, Number of words The Greek foreign debt crisis is considered as the most controversial issue for discussion. The Greece economy has encountered several swings in the economy due to its debt crisis. The Greek debt crisis is considered as the most significant debt crisis in the world. It has lead to the situation of credit crunch in the economy. The rate of unemployment has increased and the gross domestic product has decreased. During the Euro zone crisis, Greece has faced the debt crisis severely as compared to the other countries. The government has focused on the measures that are required for the revival of the economy. Contents Abstract 2 Introduction 4 Analysis 4 Recovery of the crisis 9 Recommendations 10 Conclusion 11 References 12 Introduction This paper is inclined towards analyzing the debt crisis of Greek. The debt crisis is considered as an important point for discussion. The countries have to encounter various financial constraints due to the debt crisis. The main reason for the Greek crisis is the weakening of the economic assistance and support. The Greek debt crisis has captured the attention of the people across the world. The main cause of the sovereign Greek debt crisis is due to the failure of the government in repaying of the debt to other countries. Debt has become a burden for Greek. The increase in debt is not only due to the failure of the government in repaying of its debt but also due to the low interest rate that prevailed in the country. The crisis has adversely affected the economy with the decrease in the employment opportunities. The low rate of interest has risen the domestic spending and has increased the rate of inflation. The reliance on borrowing by the Greek government on the international market has led to the emergence of crisis. The crisis has impacted negatively. Since the failure to repay the debt has affected the confidence of the consumers to a large extent. As a result of which the investors will hesitate in investing in this countries and the countries of the world will restrict them from lending to Greece. The rate of debt has rose during the period of 2008 to 2009 as a result of which it has adversely affected the financial performance of the country. Analysis The financial debt crisis has affected the country in 2007 and the crisis has continued till the period of 2011. The Greek debt crisis is considered as one of the largest debt crisis of the world as compared to the debt crisis that is encountered by the other countries of the world. The debt crisis has affected all the sectors and segments of the economy to a large extent. The banking sector has been adversely affected (Bitzenis, 2014). Causes for the Greek Crisis The main reason behind the emergence of the crisis is huge borrowing by the government from other countries of the world and its inability to repay the debt to the other countries of the world. The low rate of interest and the increase in the risk spreads in the banking sector of the economy has adversely affected the growth and development of the economy and has led to the sovereign debt crisis in Greek in the long period of time. The increase in the household debt was ignored by the government prior to the crisis since the asset to debt ratio of the country was favorable and it expected to repay of its debt with the amount of assets available in the economy. The debt to GDP ratio of the country was very high and it almost exceeded 100% of the Gross domestic product. This ratio has adversely affected the growth and development of the economy and it has created several challenges in maintain fiscal policy (Perloff, 2012). Figure 1: Increase in debt (Woods, 2010) The above figure represents the consolidated debt that is encountered by the country. The government was largely dependent on the borrowings and the fund that it received from the other countries. The occurrence of debt was also due to the unfavorable political and economic condition of the country. The country has encountered several political pressures from the opposition parties and it also encountered pressure from US. The low rate of interest has increased the consumer credit. Greek encountered an increase in population which also affected the growth and development of the economy to a large extent (Collins, 2015). From the technological perspective the country is lagging behind the other countries of the world due to lack of expenditure and investment in the research and development sector of the country. The financial crisis was due to the administrative weakness, uncompetitive economy and tax evasion in the main sectors or segments of the country. With the failure of the economy in generating adequate return from the projects or the ventures, has led to the increase in debt as a result of which the government has switched towards borrowing fund from the international market in order to stabilize the economy (Arnold, 2008). But all the attempts of the government were turned to vain when the debt continued to increase significantly. The rapid increase in the debt has increased the financial burden of the country as a result of which the bonds and the shares prices decreased significantly thus creating a situation of credit crunch in the economy. The lack of easy access to new funds has created constraint for their government in repaying of the debt to the other countries. Greece is considered as the main country that has suffered from the debt crisis as compared to the other countries such as Portugal and Ireland due to its highest level of public debt and the budget deficits. Therefore the Greek debt is very high for the Greek government to repay off its debt and due to the investors specifically in an economy with low productivity and weak capacity to collect taxes. The end of the cheap credit has led to the increase in high deficit. This led to the situation in which the consumers and the governments will not be allowed to borrow money for paying off the expenses resulting in the increase in deficit and borrowing rates (The Washington Post, 2012). Figure 2: Long term interest rate (Minescu, 2011) Impact of the debt crisis The sovereign debt crisis severely affected Greece. The government, investors and the stakeholders were adversely affected. Various sectors of the country were negatively affected by the increase in debt during the period of financial crisis prevailing in the economy. The confidence of the investors was shaken during the period of 2009. The investors were worried about the increase in debt. The rise in debt has provoked the investors in demanding higher interest for holding and buying of the Greek bonds. The increasing rate of interest will compensate the investors for the high amount of risk that is associated with the bonds. Figure 3: Greek bonds spread (Nelson, 2011) The low level of saving and investment in Greece led to the weak financial position of the country. The increase in debt led to the decrease in the Gross Domestic Product of the country which created a problem in generating adequate revenue for repayment of the debt. The increase in debt led to the increase in the debt burden in the economy. The credibility of the economy was severely affected due to the financial crisis. The level of unemployment and the government spending increased significantly along with the increase in debt. Greece is facing a tough economic crisis and it affected various sectors of the economy and led to the emergence of social unrest and violation in the economy. The Greek debt crisis expanded in such a way that it affected the other economy of the world. The fluctuation of revenue in different segments or sectors of the economy led to the increase in concern for the fiscal situation in the country. The increase in debt has lead to the increase in the sovereign bonds spread in the euro areas especially in Greece. The impact of the banking crisis on the economy of the country adversely affected the growth and development of the country. The crisis indicated the vulnerability and the uncompetitive situation of the economy to a large extent. The increase in debt resulted in the decrease in the financial structure of the country. It has been observed that the risk has resulted in misallocation of the capital. The debt crisis in Greece is supported by the sovereign debt and private debt. The financial crisis has affected the political, economic, environmental and legal aspects of the economy. The current account deficits and the government deficits have also increased which is considered as the important source for generating revenue in the economy. The GDP budget deficit has increased from 7% in 2001 to 14.5% in 2008 (Monastiriotis, 2011). Recovery of the crisis The government adopted various measures for recovering the sovereign debt crisis of Greece. The Central bank played an important role in recovering the crisis. The government adopted several steps in reducing the debt of the economy. The lower cost of credit resulted in the increase in the spending of the consumer and the government. Therefore the government sold its bonds to provide funding for the projects such as the bridges and airports. The government received the benefit of borrowing from the other countries of the world at a cheaper rate. The higher price of the credit and increase in the debt GDP ratio led to the mounting of debt in the economy. The increase in debt led to the enactment of the monetary policies to repay of its debts that it has borrowed from the international market. The European Union initiated various steps in restricting the individual countries from any change or manipulation in the value of euro. The debt crisis encountered countries are required to focus on various measures for cutting down the cost and the expenditure. The government cut down the rate of spending and charging higher taxes in order to reduce the level of debt. The higher and the increase in the rate of unemployment imposed several problems in the economy. The government focused on the decrease in spending which resulted in the increase in the unemployment. Therefore the government has adopted adequate measures for reducing the debt. The austerity measures that adopted for reducing the debt are the combination of the increase in the indirect taxes, reform of personal income tax, introduction of direct taxes, and cut in the payment to the public sector. The squeeze in the fiscal deficit has squeezed the public services and social benefits. Recommendations Debt crisis affected the financial condition and performance of the country. The debt crisis occurred due to their increase in the public spending and large borrowing in the international market. Therefore it is can be suggested that the country should not rely on the borrowings and the funds from the international market. The revenue of the country is required to be increased in such a way that the fiscal deficit of the country can be reduced. The expenditure is required to be decreased and the interest rate is required to be increased. The central bank is required to intervene on a regular basis in order to maintain stability in the economy. Considering the financial perspective of the economy the country is required to strengthen its financial position by increasing its liquidity and solvency position for repaying of the debt. The concerned country is required to decrease its debt ratio and increase the gross domestic product for improving the financial structure and thus stabilizing the economy to a large extent. During the financial crisis the import exceeded the export therefore the concerned country is required to adopt adequate steps in increasing the export and decreasing the import. Conclusion The Greek debt crisis is considered as the most remarkable and biggest crisis in the economy. The Greek crisis affected severely all the sectors of the economy. The debt crisis occurred due to the lack of political stability in the economy and the overdependence of the government on the other countries of the world. The increase in debt ruined the financial structure of the country since the import exceeded more than the export and the inability to pay of the borrowings worsened the scenario of the economy. Therefore the government adopted several measures for renovating the economy. But it faced problem since the government preferred to cut the spending which resulted in the increase in unemployment in the economy. During the Euro zone crisis Greece was severely affected as compared to the other countries of the world. References Arnold, R.A. (2008). Macroeconomics. Mason: South Western Cengage Learning. Bitzenis, A. (2014). Reflections on the Greek Sovereign Debt Crisis, London: Cambridge Scholars Publishing. Collins, K. (2015). Exploring Business. New York: Flat World Education, Inc. Minescu, A.M. (2011). The Debt Crisis – causes and implications, Retrieved from: < http://www.upg-bulletin-se.ro/archive/2011-2/9.%20Minescu.pdf >. Monastiriotis, V. (2011). The Greek crisis in focus: austerity, recession and paths to recovery Retrieved from: < http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/pdf/GreeSE/GreeSE%20Special%20Issue.pdf >. Nelson,R.N. (2011). Greece’s Debt Crisis: overview, policy responses, and implications, Retrieved from: < https://www.fas.org/sgp/crs/row/R41167.pdf >. Perloff, J. M. (2012). Microeconomics: Global edition. Harlow: Pearson. The Washington Post. (2012). Steps of the euro crisis. Retrieved from: < http://www.washingtonpost.com/wp-srv/special/world/euro-crisis-primer/ >. Woods, S. (2010). The Greek sovereign debt crisis, Retrieved from: < http://jsis.washington.edu/hellenic/file/Shelby%20Woods%20Thesis%20copy.pdf >. Read More