1 - What are the major causes of Greek debt crisis?

The Greek financial crisis was a series of debt crises that started with the global financial crisis of 2008. Its causes were largely endogenous in nature, however, because its source originated in mismanagement of the Greek economy and of government finances rather than exogenous international factors. Furthermore, Greece’s membership in the Eurozone prevented it from exercising full control over its monetary policy, which meant that interest rates were kept too low for too long relative to the inflationary pressures that were building up in the Greek economy. Monetary policy was out of sync with a booming economy and easy access to credit.

The Greek financial crisis had two primary causes. First, Greece was undermined by government economic mismanagement, including widespread fraud and an absence of public accountability. Second, Greece’s membership in the Eurozone imposed on it an economic straitjacket that was ill suited to and inconsistent with its political and financial goals.

Despite Greece being beset by economic mismanagement and misreporting of economic performance by successive governments, investors failed to pick up or act on a growing collection of warning signs:

• unsustainable debt levels,
• excessive public spending,
• high wage growth not supported by productivity growth, which led to a decline in Greece’s competitiveness,
• a surge in credit growth, and
• massive tax evasion.

In addition, the lack of accountability and proper oversight in so many aspects of Greek public finances compounded the problems. At the height of the global financial crisis in the closing months of 2009, however, investors’ minds were distracted by the banking crisis in the rest of the world, so the spotlight was not fully focused on the specific issues in Greece.

The Eurozone, established for political purposes as a next step on the path to closer economic and monetary union within the European Union, gave rise to a flawed economic structure, and Greece’s inclusion in the Eurozone made Greece’s crisis inevitable.

From the late 1990s onward, Greece’s impending membership in the Eurozone encouraged investors to play a convergence game—buying up large amounts of Greek government debt and driving interest rates down as spreads tightened relative to core Eurozone countries. Low interest rates fueled an economic boom, which was sustained also by large inflows of foreign direct investment. The private-sector credit bubble that emerged was one symptom of unsustainable growth. Yet, in the years leading up to the global financial crisis, the Greek government itself chose to binge on increased spending, bringing about a significant increase in the budget deficit and overall government debt levels.

As Greece’s fiscal deficits surged in 2008–2010, interest rates on government and private debt in Greece shot up significantly. Handcuffed by the European Central Bank (ECB), however, Greece was unable to reduce interest rates or devalue its currency to stimulate economic growth. Greece was, in short, unable to implement its own monetary policy to match its fiscal and political needs.

Three bailouts, totaling EUR246 billion, coupled with draconian austerity measures, partially stabilized the situation but at a tremendous human cost in terms of generating chronically high unemployment, widespread poverty, and plummeting incomes. Real GDP contracted by approximately one-fourth between 2009 and 2015.

Investors allowed the strong economic upswing and convergence of the Greek economy with its Eurozone partners to distract them from closer scrutiny of Greece’s fundamental financial and economic problems. Smart investors would have learned not to take government statistics or public pronouncements at face value; smart investors do their own research and trust their own instincts about a situation.

Kindreich, A. (2017, July 20). The Greek Financial Crisis (2009-2016). Retrieved from https://www.econcrises.org/2017/07/20/the-greek-financial-crisis-2009-2016/

2 - Who were vulnerable to the Greek debt crisis in 2010-2011?

     1) The Greek (Greece citizens)

Austerity measure

Between 2010 and 2011 there were five austerity packages that had been launched by Greece parliament. Each package involves the policies that were severely affect the Greek lives. For example, poverty.

First austerity package is includes a freeze in the salaries of all government employees, a 10% cut in bonuses, and cuts in overtime workers.

Second austerity package includes a freeze in pensions; an increase in VAT from 19% to 21%; rises in taxes on fuel, cigarettes, and alcohol; rises in taxes on luxury goods; and cuts in public sector pay.

As we can see, the Greek were truly suffered from these measures because they needed to pay more tax and the good prices was continually rises. However, Greece is indeed need austerity measure for two main reason. First, its aim is to reestablish Greece strength and recover their debt. Second, it was the condition from EU and IMF of the request for bailout that Greece made.

Protests

A consequence of these austerity packages led to a struggle in Greek lives and contribute to number of harshly protests. On 5 May 2010 there was a 48-hour nationwide strike and demonstrations in two major cities. Three people were killed when a group of masked people throw petrol bombs in a Marfin Egnatia Bank branch on Stadiou street.

This trend continued in 2011 as there were daily protests outside the parliament building stated on May. At first, it was peacefully but the protestors finally ended up in a clash with the police as the fourth austerity packages was passed by the parliament. These protests killed lives and made a bad perspective for Greece.

      2) Investor

Credit rating

Greece credit rating was chronologically downgraded by credit ratings agencies between 2010-2011. Finally, in April 2010, Greece credit rating was downgraded to ‘Junk Bond’ status. This fall in rating directly causes the expected rate of return for investor to decline.

Haircut

In 2011, there was a haircut of 50% on Greek debt. This means the creditors are losing a large amount of money that they supposed to receive. However, Mr. Trichet of the European Central Bank was against this idea, "fearing that it could undermine the vulnerable European banking system".

3 - Why were the markets unprepared for the crisis?

Everythings that happen is unexpected and the Greece government want to hide the problems.

Greece adopts the euro

Greece approves the euro in 2001, becoming among the first wave of countries to adopt the new multinational currency.

2001: Greece became the 12th -- and last -- country to join the eurozone before the launch of the euro at the beginning of 2002.

To join, a country had to demonstrate it had achieved "economic convergence" with the other eurozone members -- a requirement meant to ensure that different countries would not jeopardize the common currency.

When Greece was accepted, Finance Minister Yannos Papantoniou described it as a day that would place Greece firmly at the heart of Europe.

But warnings were sounded. The president of the European Central Bank, Wim Duisenberg, said Greece had much to do in terms of improving its economy and controlling inflation.

... but bogus figures hide the true extent of its deficit.

Greek Finance Minister Evangelos Venizelos announces in 2011 his country would miss its deficit targets.

2002: Everyone now agrees that Greece cooked its books.

One of the economic convergence requirements was that a country not have a budget deficit of more than 3% of its gross domestic product.

It was a requirement imposed on all countries, but one not followed over the years by all eurozone countries -- not even that advocate of strict discipline, Germany.

Yet the extent to which Greece hid its economic problems from fellow eurozone members would prove staggering.

March 2004: New government discovers the true figures that the budget deficit was not 1.5%, as reported, but 8.3% -- 5½ times higher than thought but says nothing as the Olympics approach.

The government decided to say nothing as the Olympics approach.

Then the global financial crisis hits and Greece is slammed harder than many other countries.

Melvin, D. (2015, July 13). Between rock, hard place, Greece picks austerity. How did it get into this mess? Retrieved from https://edition.cnn.com/2015/07/13/europe/how-greece-reached-this-point/index.html

4 - What options do other countries have to push its economy out of recession?

France

French President Francois Hollande says he wants Greece to stay in the euro but it needs to "make serious, credible proposals".

Italy

The Italian government is likely to join France in a push for compromise. Like Greece, Italy has large levels of public debt.

Spain

Spain was also badly hit by the financial crisis and imposed austerity measures to tackle a shrinking economy and soaring unemployment.

Portugal

Portugal called on the will of the Greek people to be respected after Sunday's referendum, but urged the government to come up with an alternative, viable proposal "that would be acceptable to all".

Greek debt crisis: Where do other eurozone countries stand? (2015, July 8). Retrieved from http://www.bbc.com/news/world-europe-33408466

5 - What options do Greece have to push its economy out of recession?

1.Default officially.

Greek bonds have been trading at huge discounts for months now, and negotiations to reduce the Greek government's debts have been running non-stop behind the scenes. Puzzlingly, however, the government has continued to payall the interest owed to select groups of creditors. An official default would allow Greece to go through a more orderly sort of bankruptcy process, determining the "seniority" of various claims — basically, which ones get paid first — and then negotiating with creditors while payments remained frozen.

Afterward, Greece would have a hard time borrowing from global credit markets for some time, perhaps several years. Its leaders would have to form a durable government, which in turn would have to demonstrate the ability to spend responsibly in order to win back the markets' confidence.

Sounds tough — but by no means impossible. Many countries in Latin America managed to return to global credit markets within a few years of defaults in the 1980s and 1990s. Others have taken their time.

Argentina has had a rocky relationship with its creditors since defaulting on its debts in 2001, and recent discussions about returning to the markets have been soured by the renationalization of energy company YPF and fears about inflation and budget deficits. Of course, Argentina's commodity wealth has allowed the country to grow quickly without the markets' help for a decade since the crisis; resource-poor Greece might not be so lucky.

2.Drop the euro.

The euro is a huge obstacle to Greece's return to fiscal health. In a country with its own currency, a government can use inflation to reduce the value of its debts relative to its tax revenue. Issuing more currency makes prices and wages rise, but the amount owed to debtors stays the same. The Greek government can't issue more euros, however; only the European Central Bank can. Nor can the Greek government depress the value of its currency to help its exports, a common strategy for hastening an economic recovery.

A return to the drachma would put the tools of monetary policy back in Greek hands. It would almost certainly lead to a default, too, since the government would have a hard time putting together enough depreciated drachmas to pay its euro-denominated debts. But after an initial scare, the country would be well equipped for future growth. Tourism and other exports would undoubtedly benefit from having a flexible currency, as would purchases of Greek assets by foreigners.

3.Raise taxes.

At the moment, the Greek government's revenue is about 42 percent of GDP. That's a middling-to-low figure for the euro area, where the IMF predicts that Belgium, Finland, and France will all top 50 percent this year. Raising tax rates and improving tax collection could bring the government's revenue more in line with its spending and eventually balance the budget.

Fans of the Laffer Curve might argue that raising tax rates wouldn't necessarily result in higher revenue. But, experienced and skilled as the Greeks appear to be in avoiding taxes, there's evidence that the country is still on the left-hand side of the Laffer curve. In fact, a recent study suggests that Greece could enhance its revenue by up to 5.6 percentage points of GDP before the curve started to slope downward.

4.Cut spending.

The Greek government has come under enormous pressure to cut spending in exchange for EU and IMF bailouts. Right now, the budget deficit is still about 7 percent of GDP and on track to stay around 5 percent in the long term. That's already a lot lower than the 11/10 percent figures of two years ago. Like them or not, more cuts would finish the job.

Of course, cuts could also hamper the Greek economy's recovery by doing away with government jobs and spending in other areas. With such little confidence in Greece amongst investors and corporate managers, it's hard to believe the private sector would instantly fill the gap. Cuts would end the fiscal crisis, but not the broader economic one; stagnation in Greece could drag on for several more years as a result.

Altman, D. (2012, May 18). Foreign Policy: 5 Easy Solutions To The Greek Crisis. Retrieved from https://www.npr.org/2012/05/18/152990481/foreign-policy-5-easy-solutions-to-the-greek-crisis

6 - Why does Greece need multiple bailouts?

Greece became the center of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances.

Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.

To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than €240 billion.

The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.

Greece’s 3 Bailouts Timeline

2 May 2010

The IMF, Greek Prime Minister Papandreou, and other eurozone leaders agree to the First bailout package for €110 billion ($143 billion) over 3 years. The Third austerity package is announced by the Greek government.

21 February 2012

The Second bailout package is finalized. It brings the total amount of eurozone and IMF bailouts to €246 billion by 2016, which is 135% of Greece's GDP in 2013.

14 August 2015

Greek parliament approves the package of measures for the third bailout package.

Why does Greece need multiple bailouts?

The money was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems have not gone away. The economy has shrunk by a quarter in five years, and unemployment is about 25 percent.

The bailout money mainly goes toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold.

The government will now need to continue putting in place deep economic overhauls required by the bailout deal Prime Minister Alexis Tsipras brokered in August, as well as the unwinding of capital controls introduced after political upheaval prompted a run on Greek banks.

Greece’s relations with Europe are in a fragile state, and several of its leaders are showing impatience, unlikely to tolerate the foot-dragging of past administrations. Under the terms of the bailout, Greece must continue to pass deep-reaching overhauls, many of them measures that were supposed to have been passed years ago.

Explaining Greece's Debt Crisis. (2016, June 17). Retrieved from https://www.nytimes.com/interactive/2016/business/international/greece-debt-crisis-euro.html

Greek government-debt crisis timeline. (2017, December 23). Retrieved from https://en.wikipedia.org/wiki/Greek_government-debt_crisis_timeline

7 - Timeline

1974 - Greek Democracy Restored

The ruling military junta, which seized power from Greece’s democratically elected government in 1967, collapses. The Turkish invasion of northern Cyprus three days prior has undermined the Greek government and created divisions in the military establishment. The military calls on exiled former Prime Minister Constantine Karamanlis to return to Greece and lead the transition back to democratic rule.

1981 - Greece Joins the European Economic Community

Under the leadership of center-right Prime Minister Constantine Karamanlis, Greece becomes the tenth member of the European Economic Community. The ECC, established by the 1957 Treaty of Rome as a free trade area known as the Common Market, is the forerunner to the European Union.

1992 - European Union Established

The twelve member states of the European Economic Community sign the Treaty of Maastricht, which establishes the EU. In addition to a shared foreign policy and judicial cooperation, the treaty also launches the Economic and Monetary Union (EMU), paving the way for the introduction of the euro. The EMU lays out fiscal convergence criteria for EU countries that plan to adopt the single currency.

1999 - Euro Currency Launched

The euro is introduced as an accounting currency in eleven EU countries. (Euro banknotes and coins begin circulating three years later.) Greece, however, is unable to adopt the euro because it fails to meet the fiscal criteria—inflation below 1.5 percent, a budget deficit below 3 percent, and a debt-to-GDP ratio below 60 percent—outlined by Maastricht.

2001 - Greece Joins the Eurozone

Greece belatedly adopts the euro currency. However, the country misrepresents its finances to join the eurozone, with a budget deficit well over 3 percent and a debt level above 100 percent of GDP. It is subsequently made public that U.S. investment bank Goldman Sachs helped Greece conceal part of its debt in 2001 through complex credit-swap transactions.

2004 - Greece Hosts Olympic Games

Greece hosts the 2004 summer Olympic Games, which costs the state in excess of 9 billion euros ($11.6 billion). The resultant public borrowing contributes to a rising deficit (6.1 percent) and debt-to-GDP ratio (110.6 percent) for 2004. Greece’s unsustainable finances prompt the European Commission to place the country under fiscal monitoring in 2005.

2007 - Onset of Global Financial Crisis

The U.S. subprime mortgage market collapses after the housing bubble burst the year prior. The U.S. crisis ultimately triggers a global banking crisis and credit crunch that lasts through 2009, felling global financial behemoth Lehman Brothers and prompting government bailouts of banks in the United States and Europe. As borrowing costs rise and financing dries up, Greece is unable to service its mounting debt.

2009 - Papandreou's Revelation

Pasok (Socialist) leader George Papandreou wins national elections, becoming prime minister. Within weeks, Papandreou reveals that Greece’s budget deficit will exceed 12 percent of GDP, nearly double the original estimates. The figure is later revised upward to 15.4 percent. Greece’s borrowing costs spike as credit-rating agencies downgrade the country’s sovereign debt to junk status in early 2010.

2010 - First Bailout for Greece

To avoid default, the International Monetary Fund and EU agree to provide Greece with 110 billion euros ($146 billion) in loans over three years. Germany provides the largest sum, about 22 billion euros, of the EU’s 80 billion euro portion. In exchange, Prime Minister Papandreou commits to austerity measures, including 30 billion euros in spending cuts and tax increases.

- ECB Bond Buying and 750 Billion Euro Rescue Package

The European Central Bank (ECB) launches its unprecedented Securities Market Program. The program allows the ECB to purchase government bonds of struggling sovereigns, like Greece, on the secondary market in order to boost market confidence and prevent further sovereign debt contagion throughout the eurozone. Finance ministers also agree on rescue measures worth 750 billion euros, or nearly $1 trillion, for struggling eurozone economies.

2011 - Papandreou Proposes Referendum on Bailout

Amid public anger over austerity, Prime Minister Papandreou calls for a national referendum on a second bailout agreement under negotiation. However, Papandreou calls off the referendum after the center-right opposition agrees to back the revamped EU-IMF deal. Papandreou is forced to step down, and economist Lucas Papademos is appointed to head a unity government tasked with implementing further austerity and structural reforms.

2012 - EU Agrees to New Greek Bailout

Finance ministers approve a second EU-IMF bailout for Greece, worth 130 billion euros ($172 billion). The deal includes a 53.5 percent debt write-down—or “haircut"—for private Greek bondholders. In exchange, Greece must reduce its debt-to-GDP ratio from 160 percent to 120.5 percent by 2020. Greece and its private creditors complete the debt restructuring on March 9, the largest such restructuring in history.

- EU Adopts Fiscal Compact

In a step toward European fiscal integration, twenty-five EU member states—all but the UK and the Czech Republic—sign a Fiscal Compact treaty mandating stricter budget discipline throughout the union. The agreement includes a balanced budget rule requiring governments to keep deficits below 0.5 percent of GDP and an undefined “automatic correction mechanism" for countries that miss the target.

- An Emerging Fringe

In a rebuke of the mainstream New Democracy (conservative) and Pasok (socialist) parties, a majority of Greeks vote for fringe parties opposed to the EU-IMF bailout program and further austerity. New elections are called for June, in which the center-right triumphs with 30 percent of the vote, allowing Antonis Samaras to form a coalition. Samaras signals Greece’s continued commitment to the bailout plan.

- ECB Unveils Unlimited Bond-Buying Plan

ECB President Mario Draghi announces an open-ended program to buy the government bonds of struggling eurozone states on the secondary market. The policy shift, coming weeks after Draghi’s vow to “do whatever it takes to preserve the euro," is aimed at calming volatile markets, and the ECB’s strong show of commitment succeeds in bringing down borrowing costs for indebted periphery countries.

- Eurozone Revises Greek Bailout

Eurozone finance ministers and the IMF agree to a revised aid deal for Greece, including lower interest rates on Greek bailout loans and a debt-buyback program. The new plan allows Greece to cut its debt-to-GDP ratio to 124 percent by 2020, rather than 120 percent, while committing it to bringing its debt levels “substantially below" 110 percent by 2022.

2013 - Greek Parliament Approves Austerity Measures

Greece’s Parliament approves unpopular new austerity measures, agreed to as a condition of the ongoing EU-IMF bailout. The legislation include layoffs of some twenty-five thousand public servants, as well as wage cuts, tax reforms, and other budget cuts. The approval opens the way for a new tranche of bailout funds worth nearly 7 billion euros ($9 billion), while labor unions call a general strike in protest.

2014 - Greece Returns to International Bond Market

Greece returns to international financial markets with its first issue of Eurobonds in four years. Despite an early morning bomb blast, the government raises 3 billion euros in five year bonds, with an initial yield of under 5 percent—a low rate seen as a mark of a return to economic normalcy. In another sign of renewed investor confidence, the offer raises 1 billion euros more than expected.

2015 - ECB Announces Quantitative Easing

Faced with deflation and economic stagnation in the eurozone, the ECB announces a 1.1 trillion euro (more than $1.2 trillion) program of quantitative easing (QE) to spur inflation and growth. Under the program, the ECB will purchase 60 billion euros in financial assets, including sovereign government bonds, each month. Under ECB rules, however, Greek bonds are not eligible.

- Syriza Wins Snap Elections

The left-wing, anti-austerity Syriza party wins a resounding victory in snap elections, breaking more than forty years of two-party rule. Incoming Prime Minister Alexis Tsipras says he will push for a renegotiation of bailout terms, debt cancellation, and renewed public sector spending—setting up a showdown with international creditors that threatens Greek default and potential exit from the monetary union.

- Greek Bailout Expires

The Greek government misses its 1.6 billion euro ($1.7 billion) payment to the IMF when its bailout expires on June 30, making it the first developed country to effectively default to the Fund. Negotiations between the Syriza leadership and its official creditors fell apart days before, when Prime Minister Tsipras proposed a referendum on the EU proposals. To stem capital flight, Tsipras had previously announced emergency capital controls, limiting bank withdrawals to 60 euros ($67) per day and calling a bank holiday after the ECB capped its support.

- Greek Parliament Supports New Deal

Prime Minister Tsipras bends to European creditors and presses parliament to approve new austerity measures, despite a July 5 referendum in which Greeks overwhelmingly rejected these terms. The agreement comes after a weekend of talks in which a Greek eurozone exit was only narrowly averted and opens the way to a possible third bailout program worth up to 86 billion euros ($94 billion). The ECB resumes some support for Greek banks, but the compromise splits the ruling Syriza party and sets the stage for new elections in the coming months.

- Third Bailout Approved

The Greek parliament adopts a suite of economic reforms as part of a new rescue package from the EU, the country’s third since 2010. In exchange for the 86 billion euro bailout, which is to be distributed through 2018, EU creditors require Greece to implement tax reforms, cut public spending, privatize state assets, and reform labor laws, among other measures. While the IMF participated in the previous bailouts, the organization refuses to contribute additional funds until the creditors provide Greece “significant debt relief.”

2017 - Greece’s Creditors Tussle Over Debt Relief

Tensions over Greece’s third bailout grow as the IMF warns that the country’s debt is unsustainable and that budget cuts EU creditors demand of Athens will hamper Greece’s ability to grow. To forestall a crisis that could put the 86 billion euro program in jeopardy, EU representatives agree to more lenient budget targets, but they decline to consider any debt relief. Meanwhile, Prime Minister Tsipras agrees to implement deeper tax and pension reforms even as he faces domestic pressure over a weakening economy and rising poverty.

Ruccio, D. (2015, July 3). Greek debt crisis-by the numbers - 7 charts *****. Retrieved from https://rwer.wordpress.com/2015/07/03/greek-debt-crisis-by-the-numbers-7-charts/

Greek government-debt crisis timeline (2017, December 23). Retrieved from https://en.wikipedia.org/wiki/Greek_government-debt_crisis_timeline

Allen, K. (2015, August 20). Greece crisis timeline: the rocky road to another bailout. Retrieved from https://www.theguardian.com/business/2015/aug/20/greece-crisis-timeline-rocky-road-another-bailout

Gonzalo Camiña Ceballos. (2015, July 4). Greek mess: the debt crisis untangled. Retrieved from https://www.linkedin.com/pulse/greek-mess-debt-crisis-untangled-gonzalo-cami%C3%B1a-ceballos