Hi friends. Hope all you Northeast readers are staying warm in this crazy weather! At the very least, I hope you’re warmer than I am right now – my heat decided to stop working, so I’m writing from under three layers of blankets.
You might have noticed Greece popping up in the news recently. A few years ago, Greece was on the brink of bankruptcy, only to be saved by a bailout from its guardians in the European Union. But the situation is now a mess thanks to Greece’s new, very left wing government. It’s quite the assortment of characters and economic terms, and frankly a little hard to make sense of what’s going on. I thought it would be helpful to give a simple primer on the Greek crisis.
The Very Short Story
Greece almost went bankrupt in 2009, and was bailed out by the rest of the European Union in 2010 in exchange for “austerity measures” (higher taxes and budget cuts). In January, Greece’s new Prime Minister decided he didn’t need to play by the rules anymore, and wants out of the austerity measures. Small issue is, if Greece doesn’t agree to austerity, it likely doesn’t get more bailout money. That means Greece running out of money and leaving the Euro. Aka, potential crisis may ensue.
And for those who want a few more details…
Greece has always been the ugly stepchild of the Euro. It got left out when the Euro was first adopted in 1999, but was granted entry 2 years later. Issue was that in 2004, it came out that Greece fudged a few of the numbers it used to qualify for acceptance. Whoops. A year later, Greece adopted austerity measures to get its budget back on track after splashing out on the Olympics.
Things were looking up for Greece until the recession in 2008. Most countries had it tough, but for Greece, things really hit the fan. The Greek economy contracted and national debt skyrocketed, up to €262 billion in the fall of 2009. This incited a Greek debt panic, which saw Greek’s bond ratings slashed and cost of borrowing skyrocket. To make matters worse, Greek workers went on strike to protest the government’s cutbacks.
At this point, other countries were seriously worried that Greece was just going to default on its debt (basically, go bankrupt as a country). In spring 2010 Greece got €45bn in bailout funds from the Eurozone and the IMF, except it still wasn’t enough. Standard & Poor downgraded Greece’s credit rating to junk. With Greece’s economy on the verge of collapse, the Eurozone and the IMF agreed to a €110 billion, three year bailout deal.
But the deal came with a catch. In return for the loans, Greece had to make major austerity cuts, including further tax rises and deeper cuts in pensions and public service pay.
Though it took some time, things looked like they were stabilizing for Greece. Then Greece got a little cocky. In January, Greece elected the left-wing Prime Minister, Alexis Tsipras and leftist party Syriza. The new government has forgotten the whole “beggars can’t be choosers” thing, and decided they don’t like the austerity measures that came with the bailout money. The new Prime Minister has been vocal in his desire to lift restrictions and halt privatization plans.
Last night, Greece threw down the gauntlet and flat-out rejected a plan from the EU to extend its current €240 billion bailout. The finance minister claims he is prepared to reach a deal under different conditions that don’t involve “blackmail.”
Problem is, Greece’s current bailout expires on Feb. 28. Greece is likely to run out of money and will need to start using its own currency instead of the Euro if it doesn’t reach a deal before then.
The Market Impact
Things could get very bad if Greece leaves the Euro. If Greece leaves the Eurozone, the entire currency could come under pressure, since other countries in this bloc might decide to pull out as well. That has a chance to seriously shake the European markets, and possibly the US ones by extension.
Luckily, the markets have held strong today even after the bailout talk breakdowns. It seems most investors expect the Eurozone to come through with another bailout in the clutch.
I’m not so sure if we can count on cooperation from Greece though. Now, the Greek Prime Minister has called for parliament to vote on social reform bills that go against the austerity measures. In his words, “We are not in a hurry and we will not compromise.”
Hate to break it to you Alexis, but you only have a couple weeks.
For now it’s a waiting game to see what happens to Greece and the Euro. I’ll be sure to keep you posted on upcoming events. (Although in full disclosure, I have to note that selfishly I’m voting for a Euro drop since I’m headed to Italy in March!)