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GOVERNMENT-DEBT

CRISIS IN GREECE
Sohom
Karmakar
PGP/19/231

Causes of the Crisis


Large-scale Government spending- Irrational Exuberance?
Huge budget deficits to finance military expenditure, public sector jobs, pensions and other
social benefits
Owing to low interest rates in government bonds characteristic of the Eurozone borrowing
continues till the late 2000 s financial crisis.
A common Euro made currency devaluation impossible which in turn made it worse for the
Greek government to repay its loans

Misreported Statistics- Mischief Managed?


To continue with its spending spree widespread misreports were made by the government to
keep itself within the deficit targets of the European Union
Credits given to the governments disguised as swaps and not registered as debts as at that
time Eurostat ignored statistics involving financial derivatives
Billions of Greek debts converted into yen and dollars at fictitious exchange rates thus masking
the true extent of the loans

Tax Evasion: A boomerang in disguise


Widespread corruption causes government tax income to fall below the expected level

Effects of the Crisis


Economic Effects
GDP suffered the worst decline during the crisis clocking an annual growth rate of -6.9%
More than a 100000 Greek companies went bankrupt which led to widespread unemployment
Interest rates on Greek long-term debts rose to a record high of 10% in 2015. For scale, interest
rates on German bonds were less than 1% in 2015
As the number of Greek companies which went bankrupt increases youth unemployment
significantly worsened to a massive 54.9% in 2012
Greece defaulted on a $ 1.7 billion IMF payment becoming the first developed country to do so

Social Effects
EU member states and the creditors asked Greece to adopt severe austerity measures as means
to curb the crisis
Record lows in GDP and a rapid reduction in market demand coupled with lower productions led
to widespread dismissals and loss of thousands of jobs further amplifying recession
Public health deteriorated due to reduced access to health care services; HIV infections showed
an increase of 52% from 2010 to 2011
Owing to mass public discontent, Greece, a country with a traditionally weak far-right, now has
one of the largest organized Neo-Nazi movements in Europe

Solutions: Pros and Cons


Exit from the Eurozone
Pros: An exit from Eurozone would mean the introduction of a new national currency- the drachma
A new currency would mean major devaluation which would help Greece to boost exports and pay
down its debts with cheaper currency
Cons: Membership to the Eurozone would no longer be considered irrevocable and countries with
increasing interest rates on their bonds may also be tempted to do so
Greeces creditors like Germany, the IMF and other Eurozone countries would suffer huge losses if
debts are paid with a devalued drachma
Depreciation of the Euro relative to the dollar would mean cheap exports and costly imports for
Eurozone members. Exporters like the United States would suffer losses

Another bailout More Austerity


More aggressive tax collections, reduced spending increased tax rates selling of government assets
will help Greece to evade the crisis
On the other hand severe public discontent against the austerity measures would mean severe
internal turmoil within the country

Thank
You