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What went wrong in Greece?
Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.
Former European Central Bank vice-president Lucas Papademos has been named as Greece's interim prime minister, following days of negotiations. He will head an interim government being formed to make sure the debtstrapped country gets its latest bailout payment. His administration will also have to approve a new 130bn-euro ($177bn; £111bn) international rescue package from the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). The three-point plan includes expanding the single currency's bailout fund to 1tn euros, banks being forced to raise more capital to protect themselves against losses resulting from any future defaults, and banks accepting a loss of 50% on money they have lent Greece. Greece and its huge debts have weighed on the eurozone for more than a year. The country has been bailed out twice - and investors still fear a default. Why is Greece in trouble? Greece has been living beyond its means since even before it joined the euro, and its rising level of debt has placed a huge strain on the country's economy. The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro. Public spending soared and public sector wages practically doubled in the past decade. It has more than 340bn euros of debt - for a country of 11 million people, about 31,000 euros per person.
Another summit was called in October in Brussels to solve the crisis once and for all. Both Portugal and the Irish Republic needed a bailout too because of their own debts. then all of its lenders may be able to demand that the borrower immediately repay them.leading to fears that their huge economies will need to be bailed out too. eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent. nowhere near big enough to deal with that scenario. When the global financial downturn hit. whilst money has flowed out of the government's coffers. Lenders may also be required to write off their losses on the loans they have made. Glossary in full How did we get to this point? The aim of the original Greece bailout was to contain the crisis. But that still was not considered enough.the European Financial Stability Facility . The eurozone rescue fund . such as bankruptcy or a debt restructuring. A default can have a number of important implications. If a borrower is in default on any one debt. The term is also loosely used to mean any situation that makes clear that a borrower can no longer repay its debts in full. Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: Default Default Strictly speaking. for example if a borrower misses a payment. a default occurs when a borrower has broken the terms of a loan or other debt. it was earmarked to receive another 109bn euros.and then in July 2011. But bond yields continued to rise on Spanish and Italian debt . . That did not happen. Then Greece needed a second bailout. its income has been hit by widespread tax evasion. It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis .was 440bn euros.French and German banks are large holders of Greek debt. worth 109bn euros. The failure of Franco-Belgian lender Dexia also added to woes . Greece was ill-prepared to cope. In July this year.However.
Nor can they devalue their currencies to regain a competitive edge. to declare that Athens would not receive its next tranche of emergency aid until the referendum had passed. That led the leaders of Germany and France.government debts as well as household mortgage debts . Moreover. Now the bust has come. What would happen if Greece defaulted? . which leads to higher unemployment. compounding their financial problems. Why did the crisis not end with the Greek bailout? Although Greece's troubles are the most extreme. and therefore less income tax revenue and more benefit payments for the governments. and he has since made way for a new cross-party unity government that is expected finally to pass the latest bailout deal. Many other southern European countries ran up huge debts . Because they are inside the euro. they highlight problems in the eurozone that also apply to other economies. in October.And so. Meanwhile they are having to push through very painful spending cuts and tax rises to get their borrowing under control.to lend them the money.the ECB . the question of Greece leaving the euro was raised for the first time by angry eurozone leaders. for example. the eurozone agreed to expand the EFSF to 1tn euros and got banks to agree to a 50% "haircut" on their Greek holdings.during the past 10 years. it is very hard for them to repay the debts. They also enjoyed rapidly rising wage levels. But this is just pushing their economies into recession. as well as the IMF. these governments cannot rely on their central bank . That forced Mr Papandreou to back down over the referendum. And the high wage levels leave their economies uncompetitive compared with. But then Greece's Prime Minister George Papandreou shocked European leaders by calling a referendum on the bailout package. Germany.
much bigger eurozone countries may ultimately follow Greece's example. and the losses should be manageable for its lenders. the Greek economy is only a small part of the eurozone. as well as the German and French leaders at the end of October. Nonetheless.There has been much public opposition to the austerity programme Europe's banks are big holders of Greek debt. Greek banks are exposed to the sovereign debts of their country. and it is likely some would need nationalising. . which sparked a global financial crisis that pushed Europe and the US into deep recessions. What's more. with perhaps $50bn-$60bn outstanding.something that was explicitly acknowledged as a possibility by the outgoing Greek Prime Minister. as investors fear that other. Either way.ever. Such a move might be a repeat of the collapse of Lehman Brothers. A crisis of confidence could spark a run on the banks as people withdrew their money. making the problem worse. This effect could be even worse if Greece also leaves the euro . A "disorderly" default could mean much of this debt not being repaid . The real risk is that a unilateral default by Greece could lead to a financial panic. it would be extremely painful for banks and bondholders. An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. They would need new capital. George Papandreou.
UK banks hold a relatively small $3. and France. The UK government's direct contribution to any Greek bailout is limited to its participation as an IMF member. However.insisted on by Germany . those figures rise to $14. which hold $15bn. which is larger. which hold $22.the UK's main trading partner .6bn.6bn for the UK. compared with banks in Germany. such as lending to private banks. This is supposed to stop them accumulating too much debt. And if it led to a major financial crisis. as well as a deep recession in the eurozone .the damage to the UK economy would be substantial • • The eurozone has agreed a new "fiscal compact" Eurozone leaders have agreed to a tough set of rules . $34bn for Germany and $56. and make sure there won't be another financial crisis.4bn worth of Greek sovereign debt. .7bn for France. When you add in other forms of Greek debt.What does all this mean to the UK? According to figures from the Bank for International Settlements. any knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt.that will limit their governments' borrowing each year to just 3% of their economies' output.
. no. • . Its waywardness was uncovered two years ago.companies and mortgage borrowers . Actually Germany is the "safe haven" markets have been willing to lend to it at historically low interest rates since the crisis began. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. which allowed it to get into the euro in the first place. That meant Germany was earning a lot of surplus cash on its exports. by the way. So what gives? • • So what really caused the crisis? There was a big build-up of debts in Spain and Italy before 2008..along with Italy . when the euro was being set up. • • Good news for Germany. Spain on the other hand is seen by markets as almost as risky as Italy. After that. Instead it was the private sector . only Spain kept its nose clear until the 2008 financial crisis.most of that cash ended up being lent to southern Europe.of the four. They agreed to exactly the same 3% borrowing limit back in 1997. while Spain should be reaping the rewards of its virtue? Well. And that encouraged a debt-fuelled boom. France followed. • • • • • • 3/9 Italy Worst offender 5/9 Germany First to break rules 6/9 France Offender 9/9 Spain Top of the Class But the markets have other ideas So surely Germany. Greece. And guess what . but manipulated its borrowing statistics to look good.. The "stability and growth pact" was insisted on by German finance minister Theo Waigel What happened? • • Italy was the worst offender. Meanwhile.• • But didn't they already agree to this back in the '90s? Hang on a minute.was the first big country to break the 3% rule. the Madrid government stayed within the 3% limit every year from the euro's creation in 1999 until 2007.bad news for southern Europe . France and Italy should be in trouble with all that reckless borrowing. is in a class of its own. Italy and even France. Of the big economies.. but it had nothing to do with governments. Spain's government also has the smallest debts relative to the size of its economy. But actually Germany . All that debt helped finance more and more imports by Spain.who were taking out loans. It never stuck to the 3% target. Germany became an export power-house after the eurozone was set up in 1999. It regularly broke the 3% annual borrowing limit. Not only that . selling far more to the rest of the world (including southern Europeans) than it was buying as imports.
wages rose and rose in the south (and in France).whose borrowing has exploded since the 2008 financial crisis savaged their economies have agreed to drastically cut their spending back as well. government borrowing . And if they won't lend to you.. Spain and Italy are now facing nasty recessions. Exports are uncompetitive...and you risk a financial collapse. this loss of competitiveness is the main reason why southern Europeans have been finding it so much harder to export than Germany. • • . that won't necessarily stop a similar crisis from happening all over again.• But debts are only part of the problem in Italy and Spain. But German unions agreed to hold their wages steady. Companies and mortgage borrowers are too busy repaying their debts to spend more. But. But your economy looks to be chronically uncompetitive within the euro.. Even so.and you are pretty sure to deepen the recession. That probably means even more unemployment (already over 20% in Spain). if all of your European export markets are in recession too. and the European Central Bank says its mandate doesn't allow it to. And now governments . other European governments may not have enough money to bail you out. In any case. Indeed. you can probably expect more strikes and protests. .. • • Don't cut spending. • • Cut spending.though history suggests this is very hard to do. and more nervousness in financial markets about whether you really will stay in the euro.which has ballooned since the 2008 global financial crisis had very little to do with creating the current eurozone crisis in the first place. which may push wages down to more competitive levels . meaning they are likely to cut their own spending even more.and a nasty dilemma So to recap.. lower wages will just make people's debts even harder to repay. The amount you borrow each year has exploded since 2008 due to economic stagnation and high unemployment. because no-one wants to spend.. So markets are liable to lose confidence in you .. why would anyone else? • .. Meanwhile. especially in Spain (Greece's government is the big exception here).they may fear your economy is simply too weak to support your ballooning debtload.. So Italian and Spanish workers now face a huge competitive price disadvantage.. During the boom years. . or stop repaying their debts.. So even if governments don't break the borrowing rules this time. And lower wages may not even lead to a quick rise in exports.