Fixed Income Securities: Essay Assignment

Greek Sovereign Debt Crises: Shaking the Foundations of Eurocurrency and the
Economic Union

Introduction
The Unfolding of Greek Sovereign Debt Crises
The roots of the Greek Sovereign Debt crises emerge from the heavy government spending
and the subsequent problems due to the economic setbacks. The 1980’s time, when Greece
newly joined the EU, the finances as well as the economy were in sound position, however,
the next thirty years or so made the real difference. This period is identified as the wasteful
and the excessive expenditures causing financial deficits and exploding the debt levels.
Therefore, these crises are the longest recession to date in any capitalist economy that
overtakes the Great Depression.
Underlying Reasons
The crises are the result of dangerous amount of foreign Greece debt owed to the EU in
between 2008 and 2018. The prime factor is the government fiscal policies including the
excessive spending. Until 2008, higher spending and huge debt loads conjoined the growth,
however, during the 2007-08 crises, the debt became too big to handle. These crises, hence,
are the emergence of the aftermath of the 2007-08 global recession resulted from the
excessive amount of the debt that is owed to Greece from the entities such as the EU and the
banks.

Body
Effects of Greek Sovereign Debt Crises on the Eurozone
The Greek Sovereign Debt Crises, also known as The Greek Crises, or simply, The Crises,
initiated in 2009 and as a member of the Eurozone it exposed the structural weaknesses and
lacking the monetary policy flexibility. In 2010 Greece faced the threat of debt viability of
the Eurozone. It included that the already existing and prevailing data of the financial
functions has been underrated by the Greece government resulting in the mismatch in debt
levels of government. The said mismatch, that was created by the seeming fraud or the
deliberate change in the numbers. It resulted in the major setback of trust in the Greek
economy from the investors, shown by the widening of the bond yield spreads and the
expanding cost of the risk insurance of the default credit swaps compared to the other
Eurozone countries, especially Germany. The government increased the taxes twelve times in
the years between 2010 and 2016 causing the sheer anger and subsequently riots across the
country. As a result, it also required multiple loans in the said years.
The ECB [European Central Bank] Response
The banks in the Greece could have faced huge problems of bankruptcy had the ECB not
played its role. It rescued them in the shape of the loans provided to them in the times of
need. The loans were used to make the repayments, or the further enhancement of the overall
economy of the existing crises state of the country. Since the efforts were not sufficient, the
country required loans from different organizations and countries including the Eurogroup,
International Monetary Fund [IMF] and the European Central Bank [ECB]. It was very fact
that the European banks had the largest holdings of the Greek debt. Apart from the individual
supporters like Germany, the trio of IMF and ECB owed 32 Billion Euros and 20 Billion
Euros, respectively.
Other Euro Countries’ Response
The countries from Eurozone, or the Euro countries, owned 52.9 billion Euros in addition to
the 131 billion euros owned by the EFSF; to say the euro governments. Greece had been
Eurozone member since 1981 and it all went well like all other Eurozone countries and
Greece likely gained the benefit of being the member of this elite Eurozone. It also lowered
interest rates and was able to bring the investment into the country. The 2004 fiasco, in which
the Greece lied that it had Maastricht Criteria, but the EU responded in no sanctions because
of the three reasons. Here, the allowed hands freedom from the EU was not so called free,
because the EU understood the reasons behind doing so, and it did so because of the known
consequences. It had in mind the results for the particular action, or in some case not acting,
and Greece, being a member of the EU had the privileges of doing so. There were two other
countries, form Eurozone, who were spending above the limit at that time—the France and
Germany. So, it would have been hypocrite behavior to ban the Greece only in this situation.
As a result, the Greek debt continued to rise. Germany and the banks were the greatest
lenders to the Greece and overcame the austerity measures from changing how Greece
handled the public financials, modernizing how Greece determined their financial status and
reporting, and finally, reforming the Greece pension policy system.
The Initiation of Problems in the Eurozone
The European Union leaders had a tough problem agreeing on a solution. The Greece wanted
that EU forgave the money but certainly, it was not in the minds of the central EU authorities.
The EU and IMF collectively paid in 240 billion dollars to Greece as an emergency loans in
compensation for the austerity measures. But these were for Greece only to pay the interest
charges and keeping its banks well capitalized. The interest was also the greater in amounts
when it comes to the low-income economy. Also, when it is the low-income, it is in dire need
to be in the state that its banks are well capitalized. In this case, EU had no other choice but to
stand by its member to fund a bailout. The other ways round consequences could have been
Greece out of the EU or more importantly, defaulting.
The question arising here is: Why EU was so strict in this regard with its own member? The
EU and the agencies of bond rating wanted the assurance in reference to Greece that it does
not use the new debt to pay off the older one. Portugal, Poland, Czech Republic, Germany
and Ireland had already used the austerity measures in order to strengthen their own
economies. The collective organizations, such as the example of the EU are the one whose
countries are the responsible act players of any member state. Because directly, or indirectly,
even if they are being paid back, as an organization they need to assist the member in need in
order to bail out that. This is evident that these were the countries paying for the bailout in the
EU, they wanted it confirmed that the Greece follow them in terms of the austerity measures.
Is Eurozone an Optimal Currency Area—Why, Why Not
The optimal currency area is the area in which the one currency stands out with the greatest
economic benefit to the respective economy. In this regard the Eurozone countries were like
much of the Mundell’s criteria for the effective monetary union inculcating the basis for the
common currency. The common currency area also has some other benefits ranging from the
wide arena of the economic, the social as well as the political gains. But in addition to the
common currency benefits, Eurozone has had multiple hindrances like these Greek Debt
crises. Thus, the longer-term consideration of the Eurozone as an optimal currency area is yet
debatable.

Conclusion
Longer-term Solutions to the Sovereign Debt Crises—In Context of Economic Block
[E.g. Eurozone]
Looking at the results of the Greek Debt crises are rather mixed ones. Considering 2017,
Greece ran a budget surplus of 0.8% and economy grew 1.4 percent, unemployment at the
rate of 22%, the ratio of the Greece population living under the poverty line was one third and
finally, the debt to the GDP ratio was 182%. Hence, in these cases, solutions range from the
following measures.
First are the boosting alternatives to borrowing because the lower income countries face
major public financing shortfalls for the mere meeting of the basic public necessities. Most of
the low-income countries can apply the option of increasing the tax measures in order to
lessen the borrowing net. It also ranges from the failings in the international systems, tackling
the use of offshore finances of the countries and intra-company operations. Second, managing
the borrowing and lending in a better way. Because, if we look at the overall picture, it is the
general borrowing and the lending of a country that makes the difference. This implies that
all the workouts of the nation are being done via this tool, for which the nation is still the
low-income or the under developed nation. This encompasses the careful management of the
opportunities existing and the costs as well as the risks of different sources of borrowing is
important for the consideration of the low-income countries. Then, to increase the
accountability in order to improve the behavior of both the borrowers and the lenders. There
exist major concerns over the country’s accountability systems and the transparency
accompanying so that the common citizens and the subsequent improvement in the use, and
the management. Finally, introduction of the better ways to manage the crises being faced
and the shocks being born. Since the low income countries are very vulnerable to the shocks
and the crises due to multiple reasons, a higher part of their debt is in the foreign currency
and the respective economies are small and really vulnerable to the prices change and
availability of cost of the borrowing.