FIXED INCOME SECURITIES

Essay assignment
Greek sovereign debt crisis

Submitted by: Nageeta

Submitted to: Dr. Mujeeb Ur Rehman
Section A
DATE:24/12/2020
 Greek sovereign debt crisis

Introduction
History reveals that financial crisis has been followed instability in government regulations,
mismanagement in fiscal and monetary policies. when government spend more and save
less therefore country default and unable to pay their debt obligation. ultimately, this brings
downturn in economy, declining in GDP growth, sometimes twin deficit in economy. Crisis in
one country does not affect only on its economy but it reflects towards globally.

1. Reasons of Greek crisis

Greek government has faced a lot of problems in default since independence from ottomon
empire in 1832. It somehow maintains its growth but after some time, oil shock did hit its
economy. Greek has been centered of eurozone crisis. It has highest level of debt and
budget deficit. Its debt to GDP ratio was high. Greek wanted to include in European union
therefore government was following strict rules and regulations according to criteria to get
entrance in European union commission. Finally, in 1981 it become part of European union
at same year government of Greek changed and set expansionary fiscal policies government
spending more than tax revenue, again government changed but it did not change fiscal
policies and increase debt over debt which ultimately created budget deficit.at that time
government want to join eurozone therefore it did not disclose its report of deficit. when
Greece adopted euro as a national currency its borrowing cost reduced so it took advantage
and borrow amount, but this debt did not use in productive investment which could not
bring growth in economy as borrowed funds are unable to repay because of
mismanagement in fiscal policies. Government spends more as compared to less collection
of tax revenues. As Greek was become member of eurozone to maintain its sustainable
growth by borrowing amount at low interest rate and in same currency. Greek came into
sovereign debt crisis due to two factors domestically and internationally. Domestical factor:
Greek government was instable it did not follow appropriate fiscal policies its debt to GDP
ratio was high despite of this government was taking loan and used as current
consumptions in increasing wages, pension funds, health maintenance. Between 2001 to
2007 past data shows that Greece annual GDP rate was 4.3%compared to eurozone average
3.1%. growth in rate was due to high amount of borrowing and used in private
consumptions. Outbreak of global financial crisis in 2008led to liquidity crisis many
developed countries. Greek was already in crisis, but it will impact more on economic down
tun in Greece. In 2009 Geek government misreported budget deficit, but newly made
government in same year reported as doubling of 6.7% to 12.7% of GDP. This report was
followed by rating agencies and rated as downgrade to Greek long-term bonds, and it
created nervousness in investors, and they demanded high interest rate due to high risk in
repayment. before crisis yield on 10 year Greek bond was 40 to 50 basis points as compared
to German bonds. After crisis, government bond yield spread increases to 400 basis points

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which decline investors interest in German bonds. So, in this way Greek crisis hits overall
economy.

2. Spread of crisis and assistance to Greek

In 2009 as Greek Government misreported and new Government should not handle
financial system, so, they asked European central bank to support Greek. Greek crises effect
whole eurozone due to same monetary policy single currency unit euro. Member Countries
have same exchange rate, and many countries borrow from each other. due to more
borrowing and less repayment bond market crashed therefore currency depreciated.
Therefore, ECB thought that it will negative impact on overall economy because already
global recession declined growth rate in overall. But if furthermore recession arrived it will
not be controlled by all countries. Therefore, European central bank and eurozone members
were contributing help to Greece because they want that euro remains stable and it may
not affect to other countries as well as in future. Between May 2010 to 2011 European bank
announced to go to secondary market to purchase European bonds to increase investors’
interest and slow down pressure of spread in bonds of eurozone. European central bank
mostly purchased about $65 Greek bonds and support other countries and provided
liquidity support to eurozone members. eurozone finance minister and IMF decided to
announce $145 package to support Greek. European central bank also pressurizes other
investors to cut down face value of bonds as debt level reduced in Greece. Germany was
providing large amount of loan $29 billion followed by France who as providing $22billion.
Many countries Portugal Spain Ireland were facing same finance crisis as Greece due to high
amount of borrowing and move towards ECB to bailout. Therefore, it is difficult to assist
Greece from member countries and many member countries argue to provide loan they
reported as why we bailout that country who has already high amount of borrowing and
inappropriate fiscal policies. Germany also argue to provide support they mentioned that
Greece should it self-come out from crisis by selling it islands or other part of country to pay
back its debt due to these arguments from countries Greece bailout delayed, but pressure
among countries to bailout Greece as to maintain euro, support Greece.

3. Origin of problems
Eurozone crisis originated when many European countries default, high Government debt,
collapse in financial institutions, and highly increase in bond yield spreads in Government
bonds. after global financial crisis in 2008, banking system collapse it spreads to many
European countries Portugal Ireland Spain and it had loss to all European economy.
International Rating agency downgrade many eurozone states Greece reported as junk
status a poorly financial management state. Germany was providing loan to Greece also
European central bank purchased Greek bonds due to mismanagement in financial
institution and in fiscal policies in Greece countries loss confidence because of worse
condition in Greece it will hit to these countries by not repayment.

4. Euro is optimal currency or not

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It is clear from analysis that euro is not an optimal currency because it defaulted in
international crisis. It only considers monetary policies help in trade and strengthen
currency in financial markets. but it does not focus on fiscal and political system in
countries. Several other factors were under considerations such as wage rate, labor
mobility, inflation rate, financial integration of a country. Many countries were at budget
deficit. Financial and economic crisis mismatched because each country has different fiscal
policies, and different economic considerations some prefer to utilize on personal
consumptions and some on investments therefore, euro did not work for all countries to
grow.

5. solutions
it is now time to transformation, to progress in financial markets and economic growth.
eurozone should define common policies, make a mechanism system of European
authorities and central body who regulate and coordinate among other member countries,
which ensure financial and economic position of countries. Maintain neutral policies which
considers monetary as well as fiscal policies for all countries. There must be periodically
check and balance system in countries by European authorities as it will define situation and
policies of countries if country will be in severe condition then authority will try to rescue it
properly s soon possible before damaging to other countries or before hitting to currency.it
must take long term same austerity measures for all member countries. To avoid moral
hazard problem interest rate should be practical.

Conclusion
Conclusively, point is that it is not necessary how much currency is used to maintain
financial or economic positions, but regulation of government is necessary as in Germany
case as I already mentioned the main reason of crisis is debt to GDP ratio was high due to
unstable government fiscal considerations which spent borrowing more on consumptions
rather than on saving to repayment and future growth.in order to maintain growth fiscal
and monetary consideration with political integration is necessary.

References
..\Downloads\CRS - Greece Debt Crisis.pdf
..\Downloads\R41167.pdf
. .\Downloads\1-s2.0-S1877042812035100-main (1).pdf

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