Effects of the Financial Crisis in the Greek Context - Case Study Example

The Financial Crisis Name: Lecturer: Course: Date: Introduction The recent 2007-2009 financial crisis is undoubtedly the most severe impediment to the economy of the world ever since the great depression. The origin of the crisis was linked to the United States. According to financial analysts, what began in the United States as a credit crunch extended to almost all nations of the world causing severe implications to many economies. For instance, European countries such as Greece could barely survive. Although the crisis is over, its effects can still be felt. This paper seeks to examine the how the recent financial crisis affected the economy of Greece. The scope of the analysis will also be grounded on the possible reasons why interest rates have remained so low over the years. How the recent financial crisis affected the economy of Greece Greece hit global headlines essentially in the year 2009 when the crisis developed into a sovereign debt crisis, which eventually metamorphosed into a recession that was full blown. One of the key impacts of the crisis on Greece is that banks become hostage to the crisis. Ewing, (2011) discloses the fact that banks in Greece were trapped in the middle of the turmoil that was taking place in the country. In contrast to the government, banks in Greece were well managed and prudent before the crisis. Nevertheless, the banks become victims of the debt woes of their government. One of the implications is that banks were subjected to dependence on the European Central Bank. This was due to the requirement that they were only allowed to borrow from the ECB. Many banks therefore complained that the E.C.B was pressing them to lower their dependence on funding from the central banks. Such a move affected not only the banks but also customers and businesses who found it difficult to access credit (Ewing, 2011). Operations in the banking sector essentially in commercial banks were also greatly affected by the crisis. Historically, Greece commercial banks have had a relatively small and increasingly saturated domestic market; as a result, many Greek commercial banks expanded their operations to regions such as South- East Europe through establishing branches and acquiring subsidiaries. Big commercial banks in Greece such as; EFG, Eurobanks, Alpha and Piraeus had greatly expanded their operations. However, the recent financial crisis created a potential risk of failure. Different from other nations, the Greek government did not have spare financial resources that be used to bail one troubled banks, which raised the threat of eventual failure (World Investment Report , 2010). The GDP of Greece also experienced a rapid decline due to the financial crisis. Greece first plunged into a recession in the year 2008 within a global slowdown that was instigated by the financial downturn. According to the Bank of Greece, the GDP has been declining since 2008. By the year 2011, it was estimated that the reduction would reach 5.5%, however it eventually reached 7%. The reduction in GDP was mainly linked to a decrease in public and private investment and consumption. Private consumption for instance was linked the decline in disposable income of households, a reduction in banking financing and the number of employees (Karasavvoglou and Polychronidou, 2013). A decline in GDP has also been influenced by consecutive adoption of austerity measures that were demanded by the International Monetary Fund and other Eurozone partners in exchange for the rescue fund provided to Greece. Such demands have heavily weighed down on the economy leading to a decline in GDP. By September 2013, the economy of Greece had contracted by roughly a quarter (Granitsas, 2014). The Greek property market was also adversely affected by the economic crisis. Vlamis (2013) highlights that; the Greek property market has played a key role in the economic growth of the country. The construction sector for instance played a significant role in the growth of the Greek economy. More specifically the contribution of the sector to the GDP of the country was about 6% and 8%. Furthermore, the construction sector has also influenced other sectors such as the electrical equipment, mining, and the building industry. The financial crisis and the implementation of strict austerity programmes from the year 2010 and the preceding years resulted to a substantial decline in the demand for goods and services, which further resulted to a decline in demand in the property sector. Quite a few companies that were perceived as the key players within the real estate industry in Greece and had listings in the Athens stock exchange during the year 2000-2007 become bankrupt. The financial crisis also affected the performance of firms in the non- banking sectors within the Greece economy. Notta and Vlachvei (2014) conducted a study on the impact of the financial crisis on firm performance of manufacturing firms in Greece. The study focused mainly on daily firms. Notta and Vlachvei (2014) gathered yearly balance sheet data of 128 dairy firms between the year 2006-2011, in order to calculate the financial indicators. The findings of the study disclosed that there was a change in the indicators from the 2009 and the preceding years, which signified the presence of a structural break. Additionally, the findings of the study revealed that there was a significant decline in the profitability of many firms during and after the crisis. Stylidis and Terzidou (2014) also reveal that there was a decline in performance of firms other sectors such as the tourism sector. This was majorly attributed to a decline in the attitudes of the residence towards tourism. The study conducted a test of 317 residence of the Kalava region and disclosed that most of them were not willing to support tourism after the crisis due to difficult economic times. It can therefore be stated that the financial crisis greatly affected the performance of firms in Greece. The rate of unemployment also rose sharply due to the financial downturn. Austerity policies were adopted when the economy of Greece was already a recession. During this particular period, the demand for goods and services reduced, numerous businesses went bankrupt while others relocated. Many organizations that continued to operate resorted to giving their employees arrears while others adopted layoffs. The implication of these occurrences is that the rate of unemployment escalated sharply from 6.6% in May 2008 to 27.6% in April 2013. Additionally, the earnings of employees continued to decline as the minim wage was also greatly reduced (Matsaganis, 2013). Why Interest Rates have remained so low over the years A variety of reasons can explain why interest rates have remained so low over the years after the financial crisis. One of the key reasons is for the purpose of stabilizing the financial system and the economy. A case in point is when looking the United States, in order to stabilize the financial system and the economy after the crisis, there was need to maintain a low interest rate. As a result, the Federal Reserve opted to lower the short- term interest rate to about near zero. Furthermore, a move to also lower the long- term interest rates offered additional support to the economy. The low interest rates were useful in stabilizing the economy in the sense that they assisted businesses and households to support the prices of other assets such as; houses and stocks (Federal Reserve, 2014). In the context of the Eurozone low interest rates have been useful in the creation of heterogeneity in terms of the browning costs. For instance, in Germany, since 2012, the interest rates imposed on new loans has declined by approximately 56% for big loans and 81% for small loans. In Italy, the rate has dropped by 140 and 29 points respectively. The creation of heterogeneity across nations of the EU can be associated to resolving the challenges that were experienced by banks during the downturn. For instance, the dramatic decline in the value of assets that was experienced during the downturn deteriorated the balance sheet of financial intermediaries, which further resulted to a wide reduction in credit in various countries in the Eurozone. Thus, a low interest rate creates heterogeneity, which is vital in preventing the spillover of such challenges across EU states (European Central Bank, 2013). Another factor why the interest rates have remained low is to enforce maximum price stability. Based on the assessment of factors such as the conditions of the labour market , analysis of financial development and inflation expectations , having a low interest rates has been proposed as the most appropriate move, essentially when it comes to the development of price stability (Federal Reserve,2014) . Price stability is usually understood as a stable and low rate of inflation that is maintained over a long period of time. According to economists, the ideal inflation rate is zero. Poole and Wheelock (2008) assert that political pressure has always existed in countries to maintain low interest rates, on the basis of the common argument by economists that that the inflation policy should be moderate. Thus, the low interest rates have been maintained as an approach to enforce maximum price stability, which basically involves a low rate of inflation. Maintaining a low interest rate has also been propagated as a means of preventing long-term economic stagnation. Andrew Haldane, the Chief economist of the Bank of England recently stated that there has been a weaker growth in the global economy, financial and political risk and a low wage growth. This basically implies that interest rates are supposed to remain lower. Global markets in the recent weeks have declined with many investors being disappointed with the lack of growth in Europe and essentially in Greece. Additionally, future economic prospects indicate that the global economy is bound to be unstable for some time and attaining growth can be challenging. According to Haldane, growth can only be attained if the borrowing costs are low. It is therefore essential to maintain a low interest rate as a means of preventing long- term economic stagnation (BBC News, 2014). Low interest rates have also been agitated as a prerequisite for supporting the job market. Although the job market has progressively been improving, maintaining a low interest rate is crucial to support employment (Federal Reserve, 2014). Why interest rates should remain Low for the Next Few years In my opinion, I do believe that interest rates should remain low for the next few years. One of the reasons is because the reduced interest rates that exist today are not just polices created by the Central banks but rather low interest rates are basically influenced by the real situation on the ground or the real situation of the economy. For, instance as noted by Andrew Haldane, the Chief economist of the Bank of England, the global economy is actually not experiencing any significant growth, and this demands that interest rates have to be low. Additionally, future prospects indicate that growth will still be slow. Based on this realistic picture of the economy, it can actually be stated that it is essential that in the next few years the interest rates should remain low until economic growth is effectively attained. I also believe that there is a strong need to support the employment sector. The recent financial crisis greatly affected the job market, a factor that should be resolved. Thus, if maintaining low interest rates is a prerequisite for supporting the job market, then I believe that it is actually a viable step that should be maintained until the employment sector is stabilized. Conclusion The above discussion has presented various views concerning the effects of the financial crisis in the Greek context. Some of the effects that have been highlighted include; the fact that Greece is that banks become hostage to the crisis, a decline in performance in commercial banks and other firms in other sectors , reduced employment, a decline in GDP and also the property market was also negatively affected. The paper also examined the reason why interest rates have remained low. The key proposal made by the paper is that interest rates should actually continue to remain low in the coming years in order to facilitate effective economic growth and growth of the employment sector. References BBC News 2014, Bank of England says keep interest rates low for now, BBC News. Ewing, J 2011, Greek Banks Feel Hostage to Debt Crisis, The New York Times. European Central Bank, 2013 , The economic consequences of low interest rates, ECB. Federal Reserve,2014, Why are interest rates being kept at a low level, Board of governors Federal Reserve system Granitsas, A 2014, Greek Crisis More Painful Than Thought, The wall street Journal. Karasavvoglou, A and Polychronidou, P 2013, Economic Crisis in Europe and the Balkans: Problems and Prospects, Springer Science & Business Media. Matsaganis , M 2013, The Greek Crisis : Social Impact and Policy Responses , Friedrich Ebert Stiftung . Notta, O and Vlachvei 2014, The impact of Financial Crisis on firm performance in case of Greek food manufacturing firms . Economics and Finance, 14(2014), 454-460. Poole , W and Wheelock, D 2008, Stable Prices, Stable Economy: Keeping Inflation in Check Must Be No. 1 Goal of Monetary Policymakers, The regional Economist. Stylidis, D and Terzidou , M, 2014, Tourism and the economic crisis in Kavala, Greece Original Research Article, Annals of Tourism Research, 44 (2014), Pages 210-226 Vlamis , P 2013, Greek Fiscal Crisis and Repercussions for the Property Market, Hellenic Observatory Papers on Greece and Southeast Europe. World Investment Report , 2010, Investing in a Low-carbon Economy World investment report past issues, United Nations Publications. Read More