Final Exam

Posted: November 26th, 2013

Final Exam

Introduction:

Greece is a country that contributes 2.5 % of the joint economy of the 16 European Union members that use the euro collectively as their national currency. Although the effects of its financial crisis might be restricted to the 16 countries using the euro, this effect might spill over to the other members of the European Union. During the global economic down turn, the Greece economy plunged into a financial crisis owing to its unrestrained public spending, failure of financial reforms implementation and cheap lending (Chaulia 1). The crisis encompasses deficits and debt levels exceeding the euro zone set limits. In 2009, the Greece National Debt amounted to €300 billion or $413.6 billion, which exceeded the country’s economy. The country’s deficit amounts to 12.7 % as it spends more as compared to what it takes in. In this case, the credit rating of Greece has been downgraded, which has damaged its prospects for acquiring foreign investors and the country has been left to struggle with the payment of its bills while the interest rates on its current debts increase considerably.

How did Greece get its current crisis situation?

The beginning of the Greek financial crisis can be attributed to the year 2001, when the spend thrift country decided to work with some top Wall Street financial firms such as Goldman Sachs and JPMorgan, who offered the complex instruments that could be applied in hiding its outstanding debts. The country engaged in this practice with the aim of satisfying the currency union deficit limits’ rules for entering into the Euro zone. In this case, Goldman Sachs introduced a currency trade deal that could aid Greece to hide billions of additional public borrowing dollars such that it could not appear as debt (Elliot 2). In 2005, Goldman Sachs introduced the interest rate swap to the National Bank of Greece, a derivative that would further aid the country to hide its debt levels. As part of the agreement with Goldman Sachs, Greece was to mortgage such revenue generating assets like highways, airports and the national lottery. In November 2009, the same company came up with additional derivatives that could aid the country to hide continually its debt levels but this time Greece was more informed and turned down the offer.

Though Greece had turned down the offer, damage had already been done on its economy in regards to the hidden but spiraling foreign debt. Due to the complex debt hiding incentives introduced into Greece by the Wall Street financial companies, the Greek government did not find any point in implementing the long due and needed financial reforms that would aid it to reduce its unrestrained spending. Additionally, Greece took advantage of the economic boom to increase its foreign debt to increase the pay of its public workers as well as to finance the 2004 Olympics (Rose 2). When the global market was subjected into an economic recession, the country had accumulated large amounts of debts such that many banks viewed it as a country that would not be able to manage its money. To acquire loans from the banks, Greece had to pay more interest on the money borrowed, which increased the financial strain considerably. The high deficits and foreign debt that the country has incurred since 2001 have been the main reasons behind its current financial crisis.

What remedies are offered to the Greek government for solving its financial problem?

Different remedies have been offered to the Greek Government with the aim of eliminating or reducing its financial predicament. The first remedy encompasses £95bn loan from the European countries and the IMF for the covering of its outstanding foreign debt but under the condition that it would considerably reduce its budget deficits, an act that has sparked a large number of riots in Athens from the dismayed and angered public (Stelzer 1). Financial analysts posited that Greece could raise money from its bondholders by purchasing the securities that had been initially sold at low prices. For this reason, the loan will be utilized by Greece to pay its foreign bondholders who had purchased its securities at a very low price. The other part will be used to compensate the parties at the losing end of the euro-swaps. The second measure is linked to the fist measure as it includes the application of the austerity measures to cut down on the budget deficits.

It is a precursor of the first remedy because for the Greek government to be provided with the loan, it has to reduce its budget deficit to a certain level. The austerity measures are inclusive of cuts on the pay of civil servants by a 30% cut on their Easter and Christmas bonuses as well as cuts on Medicare and other types of public spending (Story et al 2). The third remedy available for the Greek government encompasses an increase in taxes, which has sparked hot protests from the public and the opposition’s parties. These taxes are inclusive of a rise in the 19% VAT taxes with a percentage amounting to 2%. In this case, the public will be subjected to a VAT tax of 21%. Additionally, higher taxes will have to be charged on tobacco, alcohol and such luxury goods as yachts and cars. Inherently, the state will be forced to freeze the state-funded pensions to reduce on the budget deficits as the country’s debt amounts to 120% of the economy’s GDP.

What are the socio- economic and political implication of the so- called “austerity measure” being implemented in Greece?

George Papandreou and his supporters in the political arena have faced many political down falls so far with the opposition acquiring the support of the masses. Many Greeks are not willing to understand the fact that though Papandreou has managed to deliver his election promises, he has to take extreme measures to save the country from bankruptcy. Papandreou inherited part of the financial crisis from his predecessors and most of the financial decisions that he has made were inclined to reduce the financial strain for the country (Smith 2). When he announced the additional austerity, measures of reducing the civil servants Christmas and Easter bonuses, higher taxes and freezing of the state-funded pensions, he was met by high political resistance from the opposition, with the KKE communist party calling on the Greeks to go on strike. This implies that the austerity measures will have adverse political implications on Papandreou and his supporters and the government might be overruled by the opposition, which has garnered the support of the masses after the announcement of the austerity measures.

In terms of the social-economic implications of the Austerity measures, the reduction of the public-owned companies from 6000 to 2000 would convert the Greece market into a free market where trade could be conducted with minimal government control. This would encourage more foreign investment into the country. Increased foreign investment translates to increased government revenue that could be directed into covering the countries foreign debt. In terms of the social implications of the austerity measures, the country was plugged into a number of public riots in May 2010 with many people expressing the displeasure with the set austerity measures (Smith 1). This is because the people felt that they would lose economically with the increase in taxes and the reduction in the state-funded pensions. State-wide strikes by many workers culminate to huge economic loses for the government. For this reason, the Greek government lost a lot during the strikes even though it is working hard to cover its foreign debt that exceeds its GDP.

How is this similar to what is now happening in the other European states facing fiscal crisis?
            Monetary unity is the main focus in the Euro zone even though there exist no political unity between the members of the Euro zone. Monetary unity that lacks political unity can have long-term adverse effects on its members that are the reason why when one country from the Euro zone is affected by a financial crisis, other members of the Euro zone are bound to be affected by the financial crisis. This is the reason why the crisis that is facing Greece has really affected the European Union and the IMF to such an extent that they have come up with a remedy to bail the country out of its debt with an aim of protecting the other members of the Euro zone. This has culminated into the application of the austerity measures to cut down on the budget deficits of the country (Elliot 1). The austerity measures adopted in Greece are similar to those adopted in Spain in regards to their financial crisis. While trade unions in Greece bridled over the announcement that the fuel prices would go up, workers had to be forced to work longer for the attainment of their pension and the civil servants would be subjected to a 10% pay cut. In Spain, the trade unions were bridled over a similar pronouncement.

The trade unions in Spain clashed with the government because of the plans to add to the number of years that workers had to work for the attainment of their state funded pensions. All the weak Euro zone countries with the example of Italy, Portugal, Spain and Greece have been subjected to cuts in their budget owing to the weakness of a single currency policy (Rose 1). These countries have to adhere to similar austerity measures that will not only change the economic status of the countries but will also have social and political diverse implications. The reason for the similar cuts is based on the restrictions that come with the loans provided by the European Union and the IMF with the aim of saving the countries from their financial crisis. If these measures are not put in place, the countries cannot be able to access the needed loans to extricate themselves from the foreign debts they incurred before the economic recession.

Conclusion

The financial crisis that has been facing Greece culminated from the spiraling of its foreign debt that it had incurred substantially with the help of the Wall Street Financial companies. These companies introduced complex tools that would hide the debts incurred from public borrowing with the aim of enabling the country to acquire the requirements of joining the Euro Zone. Regardless of the huge debts incurred by the country, it did not halt its high spending, cheap lending and did not engage in the implementation of financial reforms. The accumulated debt for Greece amounts to €300 billion that is 120% of the countries GDP. The European countries as well as the IMF promised to aid the country through the provision of £95bn loan but under the condition of using austerity measures to enhance budget deficit cuts (Smith 2). These have had adverse economic, social and political implications on Greece but the government is determined to extricate the country from its debts and deficits. The austerity measures adopted by Greece are similar to those adopted by the weaker members of the Euro Zone, the likes of Spain, Portugal and Italy. In conclusion, all countries should learn from the financial crisis of Greece to ensure that they do not make the same mistakes that could lead to their subjection to adverse austerity measures.

Poem

When the cart is full, he sells the wares.

When the wares are sold, he sells the Cart,

The highest bidder gets the cart, and walks

Home, his pockets heavy

Ready to be invested in another venture,

 

And at home by candles light in December cold

Plans for the new wares,

For next he will move to another country,

To purchase another Cart for his wares,

For sale to the highest bidder,

To acquire benefits and move to another country.

 

 

 

 

 

 

 

 

 

 

 

Works Cited:

Chaulia, Sreeram. Dateline Greece: Goldman, Just Pay Up. The Globalist 02 March. 2010. Print.

Elliot, Larry. Greece’s Financial Crisis Puts the Future of the Euro in Question. Guardian 07 February 2010. Print.

Lesova, Polya. Three Dead in Athens Fire Amid Anti-Government protests: German Official Warns of ‘Grave Contagion Effects’ as Merkel Boosts Greece Aid. MarketWatch 5 May 2010. Print.

Rose, Adam. Greek Financial Crisis: It’s Not About Greece Any More. The Huffington Post 6 May 2010. Print.

Smith, Helen. Greece Unveils Radical Austerity Package. Guardian 3 March 2010. Print

Stelzer, Irwin. Greece’s Financial Crisis: Tragedy or farce? The Magazine 27 February 2010. Print.

Story, Louise., Thomas, Landon., and Schwartz, Nelson. Wall St. Helped to Mask Debt Fueling Europe’s Crisis. The New York Times 13 February 2010. Print.

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