A Dummies Guide to the Greek Financial Crisis

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What's going in in Greece and how does it effect us? Juliet Dowey breaks it down

Europe Wrestles With Debt Crisis

What’s going on?

In 2010, investors around the world realised that the Greek government would not be able to pay its debts. Five years later, despite three enormous bailouts and unprecedented austerity measures, there’s still no sign of recovery. Now, Prime Minister Alexis Tsipras has created even more uncertainty by calling a “snap” general election for the 20 September.

Why has Tsipras resigned?

Alexis Tsipras

Tsipras, who leads the left-wing Syriza party, was elected as prime minister in January 2015 largely because of his promise to end what he called the “vicious cycle of austerity measures”. However, in July this year he was forced to agree to still harsher measures in order to secure a third bailout for Greece. This decision was widely criticised even within Syriza, so Tsipras now feels he needs a new mandate from the Greek people.

How did Greece’s problems start?

Greek money

On the 19th June 2000, Greece adopted the euro as its currency. At the time, this seemed like a great idea, since it was hoped that, if Greece did run into problems, richer Eurozone countries such as France and Germany would come to its aid. In fact, lenders were so confident in this ‘insurance policy’ that they rushed to buy Greek government bonds. In other words, they gave huge amounts of money to the Greek government in return for a promise that they would pay it back, with interest, later. Eight years later, the global economy collapsed. When the banks examined Greek’s national debt, they discovered that even if everyone in Greece gave all their money to the government, it would still take over a year to pay off its debts. Panic ensued.

What happened next?

The problem was that, when Greece joined the Eurozone, its government lost the power to pay its debts simply by printing more money for itself. So all they could do when they realised, was ask for money from other countries. Luckily for Greece, in May 2010, members of the Eurozone and the International Monetary Fund (which acts as a bank of last resort for struggling governments) agreed to give it 110 billion euros over the next three years. However, in return, they forced the Greek government to cut its spending and increase taxes.

Did that solve the problem?

No. The government increased taxes, as they’d been told to, but this just led to a vicious cycle:

greece diagram

 

So, with debt spiralling out of control, the Greek government asked for more money. In March 2012, Eurozone countries and the IMF lent 130 billion euros to Greece in exchange for further “austerity measures” (higher taxes and lower spending). They also ordered some of Greece’s creditors to “write off” some debt. However, this means that almost nobody is now prepared to lend Greece money except at extremely high interest rates (which the Greek government can’t afford).

 

Did that solve the problem?

Once again, no.  By July this year, it was clear that the Greek government wasn’t going to be able to keep up its repayments. Once again, there was widespread panic. Eventually, after several missed deadlines, on August 14th world leaders agreed to lend Greece another €86 billion. If they hadn’t Greece may well have been forced to leave the euro (a so-called Grexit) and might even have been declared bankrupt.

Why do the other Eurozone leaders keep giving Greece money?

bank-of-greece-police-getty-1024x640

Because they’re desperate to stop Greece from becoming the first developed country ever to fail to pay back loans from the IMF and therefore risk being declared bankrupt. This would be a disaster not only for Greece, but also for the rest of the Eurozone and indeed the world because it would almost certainly lead to Greece being forced to leave the EU and return to using the drachma, which would jeopardise the euro’s status as a  ’stable’ currency.

Why does all this matter?

Firstly, the impact on Greek people has been catastrophic. A shocking 25% of Greeks are unemployed, including 52% of 16-24 year olds. The average income of a Greek person has reduced by 24% since 2009. And the average pension has reduced by 27%.

 

Can any of this affect us in the UK?

Greece and the UK

Yes. The UK, like most developed countries, is a member of the IMF, so if Greece fails to repay its debts the UK government will lose money. Even more importantly, the Greek crisis has led to fears about the financial stability of other countries, which has caused people to invest less money in stock markets across Europe. And when the European economy suffers, the UK economy suffers, because around half the money invested in businesses in the UK comes from the EU and around 3.5 million UK jobs rely on trade with the EU.

What’s next for Greece?

On September 20, Greeks will go to the polls to decide who will lead their next government. Candidates include Alexis Tsipras, the current Prime Minister, Yanis Varoufakis, his former finance minister, who defected to form a more radical anti-austerity party, and Evangelos Meimarakis, leader of the centre-right, pro-austerity New Democracy Party. Until the results are announced, it’s hard to know what will happen next. However, although one estimate has suggested that Greece’s economy has grown very slightly in the last three months, the road to recovery will certainly be a long one.

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