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BUS700 Economics 2

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  • Course Code: BUS700
  • University: Kings Own Institute
  • Country: Australia

Question:

The assignment should discuss the credit crisis of Greece and its impact on Greece households and government, Europe and the global economy and how the government tried to resolve this issue, the paper should contain graphs explaining essential numbers related to the subject.

 

Answer:

Introduction

The credit crisis which is faced by Greece is also the sovereign debt crisis in the aftermath of the financial crisis of 2007-2008. The Greece crisis have started in the late 2009. There are both external as well as internal factors which is known to the formation of crisis in Greece. The Greek crisis had been triggered as the result of Great Recession which is known to lead the budget deficit of various western nations for reaching or exceeding 10 percent of Gross domestic product. High budget deficit in Greece was coupled with high amount of public debt.

Unsustainable growth

Unsustainable growth in Greece led to a steep price which is in the form of rising deficits and huge amount of debt load. In the year 2000, the debt to gross domestic product ratio known to reach 103 percent in the year 2000 which was above the permitted level of 60 percent.  The fiscal deficit of Greece which is the proportion of GDP was also above 3 percent in the year 2000. Despite the huge amount of budget deficit in Greece, the borrowing rates of Greece have always been high in nature.  By the year 2010, the country was unable to borrow from the market. However, in the year 2009, the Greek government revealed that e fiscal deficit had been 12.7 percent. According to the to the report published by the Greek Ministry of Finance, it has found out that the five main causes which lead to the formation of crisis are the poor growth of the gross domestic product, government debt, budget compliance, data creditability and budget deficits.  The other causes are the excess of government spending, current account deficits and avoidance of tax.

Huge amount of government spending

The economy of Greece had been one of the fastest goring Eurozone from 2000 to 2007 when the foreign capital has flooded in. The capital inflow then coincided with a huge amount of budget deficit. Greece have known to be the second biggest defines spending after the US. The global financial crisis known to lead a negative impact on the growth rate of the GDP.

When the economy of Greece contracted after the crisis, the debt to GDP ratio known to have skyrocketed which rose to 100 percent in the year 2011.

 

Government debt

The government debt known to have increased in 2009 as a result of higher than expected government deficit along with high cost of debt services.  According to the Greek government the structural economic reforms would require huge amount of loan which lead to a huge level of loan. One of the main causes of the crisis in Greece was mainly due to large amount of government debt.  The root cause of the economic Greece due to the structural economic inefficiencies which were borne out of the 1980s depression which the country suffered through.

Corruption and tax evasion

Greece had been one of the worst performers during the evolution of the crisis. According to the Transparency International which stated that in 2012, corruption have known to play a major role in causing the financial crisis in Greece.  Since the debt crisis began in 2010 in Greece, the most international banks and the foreign investors have sold their Greek bonds and other holdings. The reason is that they are no longer vulnerable to what happens in Greece. The global financial crisis has resulted a considerable economic slowdown in most of the developed countries which comprise of UK, France, Germany and USA. Both the United States of America and the United Kingdom face the greatest financial crisis.  The global financial crisis has resulted to a huge amount of economic slowdown in the developed countries which are UK, Germany, USA and France. USA and UK have faced the greatest financial crisis. The global financial crisis is known to affect various countries in many ways. It can affect the stock markets in emerging markets of various. The tax evasion was also described as the national sport in Greece were more than €30 billion per year remains uncollected in the form of tax. Maximum amount of tax had been uncollected due to fraud and smuggling. Political corruption was quite usual in Greece. Before the crisis took place, Greece had been one of the worst performers of the European Union according to the Transparency International’ corruption Perception Index. By the year 2017, the Greece ranked last in the European Union and had been the worst performer. Greek had also been termed as the shadow economy or the underground economy from which no tax had been collected.

The Greek economy had known to fare quite well in the 20h century with high amount of growth rates along with low amount of public debt.  Greece was very badly during the credit crisis since its shipping and tourism industries ad been quite sensitive to the changes in the business cycle. The government is known to spend heavily in order to keep the economy functioning leading to the increase in the debt of the country. Despite the huge amount of budget deficit in the year 2009, the government still kept on borrowing which rose slowly.  When the government was unable to borrow from the market, the government of Greek requested for a loan of €45 billion from the International Monetary Fund in order to cover its financial needs.

The debt crisis has impacted the whole world and the crisis have also affected the European economy at a large scale. The debt crises known to have originated from the fiscal profligacy of the Greece.  When Greece known to became the tenth member of the European community, both the economy as well as the finances both were known to be in quite good shape. At that time the debt to GDP ratio had been near about 30 percent and the budget deficit were known to be below 3 percent of the gross domestic product. However, the situation has dramatically changed over the next few years. Because of the low productivity, eroding competitiveness, and rampant tax evasion, the government of Greece had to resort to a huge amount of debt binge in order to keep the country going.  The admission of Greece into the Eurozone in the year 2001 and its adoption od the euro had made quite easier for the government of Greece to borrow. The reason was that the Greek bond rates and also the rate of interest have known to decrease at a huge rate. They are then known to converge with the strong European union. One of the members of the strong European union was Germany. The economy of Greece was also known to have bloomed where the real gross domestic product growth averaged to 4 percent in the year 2008. It was also known as the second fastest to achieve that rate after Ireland. However, the growth came at the cost of steep price with huge rise in the deficits in the year 200, although the debt to gross domestic product ratio in Greece was 103 percent.

 

Impact on the household

The economic crisis experienced by Greece have been quite deep and long lasting in nature. The crisis have affected the families of Greece in various ways which includes reduction of income and job losses along with business closures.  During the year 2010, a large of families have been impacted through wages or pension cuts and also many people have lost jobs.  More than 40 percent of the Greek households have experienced cut in their wages and their pensions were also reduced. They had to resort to variety of strategies in order to cope with the consequences of the crisis. Or discontinuing the subscriptions to various services.  One such strategy is known to be the passive strategies which includes reduction in the buying of luxurious good. Bigger families and ethnic minorities living in the mainland of Greece have been also affected by the crisis. The impact of crisis in Crete is known to be highly affected due to suspension of wages and reduction in the number of working hours compared to the other countries. The crisis has not only affected the consumption level of household but also deceased their general satisfaction with life and also their confidence on the political institutions. Around 80 percent of them experienced a negative income shock as a result of the financial crisis.

Conclusion

One of the root causes of the economic crisis in Greece is mainly due to the structural economic inefficiencies which took place during the 1980s.  the credit crisis in Greece also resulted due to the great depression which have affected the country few years ago.  Since, Greece have known to come out from the brutal fascist military rule, the country which is embarked on a public sector have led economic boom which has known to sow the seeds of the crisis which the country known to have faced today. However, most of the economist blame the membership of the eurozone for the current debt crisis. Although, the membership of eurozone have provided a lot of funding in order to spur the economic development of Greece. It was also believed that that the membership with the eurozone caused artificially low borrowing costs which allowed the governments for continuing the expansionary public sector policies. In exchange of the European funding, Greece had been forced for imposition of strict fiscal austerity. Some of the economist of the US have also known to criticize the EU for being too late for helping Greece. The European Banks had been the largest holdings of the Greek debt. However, this have shifted to troika which were ECB, European government sponsored funds and the International Monetary Fund. The largest contributor to the fund in order to help the economy of Greece had been Germany.  The international Monetary Fund known to have owed €32bn and the European central bank known to have owed €20bn.

 

Impact on the global economy

The Greece economy have also negatively impacted the world economy which lead to billions in loss for the European banks as well as government. Although the debt crisis will be hurting the short term growth prospects

Reduction in the domestic lending

The financial institutions in many countries can be negatively affected as the result of financial crisis on the extent to which they hold assets which are already contaminated by the subprime mortgages. The financial Sector is largely controlled by the government are exposed to the subprime mortgages of the US. The financial flows from the rest of world will also reduce.  The foreign direct investment, trade credits and the flow of remittances are known to be negatively affected by the crisis.

Global financial system

Since the debt crisis began in 2010 in Greece, the most international banks and the foreign investors have sold their Greek bonds and other holdings. The reason is that they are no longer vulnerable to what happens in Greece. The global financial crisis has resulted a considerable economic slowdown in most of the developed countries which comprise of UK, France, Germany and USA. Both the United States of America and the United Kingdom face the greatest financial crisis.  The global financial crisis has resulted to a huge amount of economic slowdown in the developed countries which are UK, Germany, USA and France. USA and UK have faced the greatest financial crisis. The global financial crisis is known to affect various countries in many ways. It can affect the stock markets in emerging markets of various

Effect of the credit crisis in Greece

In the year 2011, the gross domestic product of Greece has known to face the worst decline which was about -6.9 percent in the year 2011.  At that point of time, more than 100,000 companies of Greece went bankrupt. As a result, the rate of unemployment has grown from 7 percent to more than 20 percent. The youth unemployment has also grown from 22 percent to kore than 50 percent.  The gross domestic product of Greece declined from € 200 billion to €179 billion in the year 2014. The government debt known to have increased in 2009 as a result of higher than expected government deficit along with high cost of debt services.  According to the Greek government the structural economic reforms would require huge amount of loan which lead to a huge level of loan. One of the main causes of the crisis in Greece was mainly due to large amount of government debt.  The root cause of the economic Greece due to the structural economic inefficiencies which were borne out of the 1980s depression which the country suffered through Greece was also known to be facing recession for more than five years.  This particular fall in the gross domestic product of Greece have increased in Debt to GDP ratio 2hich have also worsened the debt crisis of Greece. The GDP per capita fell from a peak of €22,500 in 2007 to €17,000 in 2014, a 24% decline. He International Monetary Fund have reported in the year 2015, that Greece were unsustainable as a result of the high debt level and significant changes in the policies which took place since 2014. The report also stated that debt reduction can be needed if the package of reforms under the consideration known o have weakened further.

 

Bailout programmes

There are various bailout programmes which the government took in order to save Greece from the credit crisis. The first bailout programme took place in the year 2010. In the year 2010, the government of Greece have taken a series of austerity measures.  The IMF along with the Eurozone countries known to have agreed to a three-year loan of €110 billion.  The credit rating agencies are known to downgrade the governmental bonds of Greece to even a lower status. This was however met with anger by the public of Greece leading to riots, social unrest as well as protests. The second adjustment however took place during March 2012.  During that particular period of time, the Euro area leaders known to extend the Greek loan repayment periods to a 15-year period and it will be also cutting the interest rates to 3.5 percent.  They also known to approve an additional loan of €109 billion in order to help them.  However, after some time, both the IMF and the leaders of the Eurozone known to settle an agreement with banks where they are known to accept a 50 percent write off the debt of Greece. With the help of the support, Greece is known to decline its primary deficit from €25 billion to €5 billion.  The unemployment rate however grew from 7 percent to 20 percent in November. The Greek government debt crisis is known to be one of the current European sovereign debt crises.

The government have also taken many steps to fight against tax evasion as well as corruption. In the year 2009, the size of the black market in Greece had been around €65 billion which more than twenty percent of the gross domestic product of Greece.  According to a report it has been found out that most of the self employed earners in Greece under reported their earnings. The state is also known to have lost more than €11.2 billion in tax revenues. The ship owners are also known to benefit a huge amount as a result of the tax exemptions.  In the year of 2010, the government have known to implemented a tax reform. In January 2012, Athens was considering the establishment of a 100-strong unit to go after wealthy tax evaders.  There was also an introduction of the duty of non cash payments for amount of over 1500 euros. Germany has also known to offer experts from its financial management as well as people from tax investigation office in order to build a better efficient tax administration.

The government have taken various anti corruption measures for fighting against the financial crisis or the credit crisis in Greece. According to the report published by the Transparency International, it has been found out that, more than 15 percent of Greeks have known to paid the bribes.  It has also found out that €1 billion was paid by companies in the term of bribes for avoiding the payment of bribes in order to attain benefits. While calculating all sorts of corruption in Greece, the total amount has been estimated to be around €3.5 billion per year. The government who was elected in the year 2009, is known to fight against corruption. The inspector of the public administration has also started an online census of the civil servants. According to the latest reports it has been found out that Greece was among the top ten economies of the world which is known to be the largest improvement of the business climate.

 

References

Artavanis, N., Morse, A. and Tsoutsoura, M., 2015. Tax evasion across industries: soft credit evidence from Greece (No. w21552). National Bureau of Economic Research.

Artavanis, N., Morse, A. and Tsoutsoura, M., 2015. Tax evasion across industries: soft credit evidence from Greece (No. w21552). National Bureau of Economic Research.

Artavanis, N., Morse, A. and Tsoutsoura, M., 2016. Measuring income tax evasion using bank credit: Evidence from Greece. The Quarterly Journal of Economics, 131(2), pp.739-798.

Baum, C.F., Schäfer, D. and Stephan, A., 2016. Credit rating agency downgrades and the Eurozone sovereign debt crises. Journal of Financial Stability, 24, pp.117-131.

Bratis, T., Laopodis, N.T. and Kouretas, G.P., 2015. Creditor moral hazard during the EMU debt crisis. Journal of International Financial Markets, Institutions and Money, 39, pp.122-135.

Camba-Méndez, G. and Serwa, D., 2016. Market perception of sovereign credit risk in the euro area during the financial crisis. The North American Journal of Economics and Finance, 37, pp.168-189.

Davis, J.S., Mack, A., Phoa, W. and Vandenabeele, A., 2016. Credit booms, banking crises, and the current account. Journal of International Money and Finance, 60, pp.360-377.

Gogstad, M., Kutan, A.M. and Muradoglu, Y.G., 2018. Do international institutions affect financial markets?: evidence from the Greek Sovereign Debt Crisis. The European Journal of Finance, 24(7-8), pp.584-605.

Gourinchas, P.O., Philippon, T. and Vayanos, D., 2017. The analytics of the Greek crisis. NBER macroeconomics Annual, 31(1), pp.1-81.

Karafolas, S. ed., 2016. Credit cooperative institutions in European countries. Berlin: Springer.

Lütz, S. and Hilgers, S., 2018. When Overlapping Organisations Play Two-Level Games: IMF–EU Interaction in Credit Lending to Latvia and Greece. New Political Economy, pp.1-14.

O’Keeffe, C. and Gallagher, L.A., 2017. The winner-loser anomaly: recent evidence from Greece. Applied Economics, 49(47), pp.4718-4728.

Papastamou, S., Valentim, J.P., Mari, S. and Marchand, P., 2018. Socio-cognitive elaborations and reactions to economic crisis: Insights from Social Psychology. International Review of Social Psychology, 31(1).

Potrafke, N. and Reischmann, M., 2016. How to Handle the Crisis in Greece? Empirical Evidence Based on a Survey of Economics Experts.

Santos, T., 2015. Credit booms: implications for the public and the private sector.

Thalassinos, E.I., Stamatopoulos, T. and Thalassinos, P.E., 2016. The European sovereign debt crisis and the role of credit swaps. In THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS (pp. 605-639).

Vouldis, A.T., 2015. Credit market disequilibrium in Greece (2003-2011)-a Bayesian approach.

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