The Debt Crisis in Greece - Essay Example

All economies around the world pass through ups and down. This is a normal phenomenon which economies encounter and government needs to devise ways to ensure that the magnitude of downturn in limited. The recent economic crisis hit major economies all around the world resulting in falling growth rates for economies. The crisis was so severe that even after a couple of years of the financial crisis economies are finding it difficult to come out of recession. One of the European Union economies that were affected was Greece. The paper looks into the various reasons which resulted in the economic crisis of Greece. The paper also looks into the impact it had on economies and the role International Monetary Fund has to ensure that Greece comes out of the debt crisis. The Greece economy was growing at a strong rate of 4.2% during the year 2000 to 2007. This made the government look towards large structural defecits as the economy was growing and the yield from the government bonds were falling (Smith, 2011). The use of Euro in 2001 made it easy for the Greece government to devalue the currency so that they were able to finance easily. Suddenly the world crisis of 2007 deepened and affected Greece badly as the economy relied mainly on tourism and shipping which was badly affected (Smith, 2011). Both this business were badly affected which was the starting point of the financial and debt crisis of Greece. The government to ensure that the sentiments among the people were positive and the impact of the crisis was minimum was looking towards concealing the information regarding the financial debt from the European Union and the government (Debt Crisis, 2010). This made the government take improper measures by concealing the information by paying hundred of millions to Goldman Sach to hide the information. The financial crisis further deepened as all economies including the US economy were unable to recover. This resulted in the widening of fiscal deficit which then has a wide spread effect. It was seen that the debt crisis grew from 9% to 12.7% in 2009. The problem continued and the debt crisis further got intensified and rose to 13.6% in 2010. It was calculated that the debt stood at €216 billion in 2010 (Boone & Johnson, 2010). The problem for Greece increased when the European Union was able to find the actual situation in hand and it affected other economies which were directly or indirectly related to Greece. This resulted in the panic to spread beyong Greece to other countries present in the European Union as seen from the growth in GDP as shown below The above graph shows that the effect of the debt crisis was so strong that it resulted in the GDP to become negative which thereby had an effect on the GDP of other economies (Euro Stat, 2011). The impact of this debt crisis was that the interest rate prevalent in Greece rose to new heights. This made investors especially foreign investment loose value as the interest component was very high. This is seen in the graph below The above graph shows that the fiscal deficit intensified so strongly in Greece that it resulted in the economy loose its growth rate and have a negative effect on the value of investors (Euro Stat, 2011). This made the world economies ponder on looking for a formula to bail out Greece. The concern of the fiscal deficit increased as International Monetary Fund (IMF) presented the view that the fiscal deficit could spread and have an effect on other economies due to the contagion effect (IMF, 2011). This made IMF look and present before other economies the importance of bailing out Greece. This brings forward another problem that the European Union faces. The countries in the European Union have agreed into a contract that known as European Financial Stability Facility which helps recovering countries gets bail out. This will expire in 2013 when a new rule European Stability Mechanism will work where banks and institutions which has helped economies come out of the bail out will loose the status of preferred creditors (IMF, 2011). This will make it difficult for the economies that have helped in the bail out to recover their money from the bailed economies. This increases the pressure on the other economies as finding an effective way to bail out will increase the pressure on them. This has resulted in increasing pressure on IMF as they have been provided with the onus and burden to take a decision which helps to control financial debt from passing on to other economies. This has made IMF look towards ensuring that a mechanism is developed which will help to bail out Greece. This has made the IMF look towards bailing out Greece along with the help of other countries in the European Union so that the fiscal deficit doesn’t spread over to other countries in the world economies. This made the European Union and IMF look towards providing a second bail out of €109 billion after €110 billion already provided (AFP, 2011). This has helped Greece and if the country follow a principle of transparency it will be able to ensure that the growth in ensured. IMF had to look towards bailing Greece as doing so will ensure that will reduce the contagion effect to spread to other economies. This has helped to spread positive sentiments among the masses which were witnessed in the rise in share market (AFP, 2011). The steps of IMF announcement resulted in the share market gain more than 1% thereby having a positive effect on the mind of the consumers (AFP, 2011). The other reason which made IMF ensure that the bail out package was delivered was that the IMF made economies that were heavily debt oriented to take a positive direction so that the spread of the crisis was limited (Chapman, 2011). The IMF took this decision on the backdrop that doing so will help to improve the maturity time of the loan by reducing the interest rate which will help the economies bailing out in the future as with the growth expected in Greece after it recovers from its financial debt will help (Europe Debt, 2011) Another factor which made IMF look towards providing the bail out amount is that 75% of the government constitutes from public and pension wages which has to be paid in all situation else it would result in the public loose confidence from the government (Greece Program, 2011). This will deepen the crisis as the people will be more concerned about the growth rates which will further make it difficult for the economy to grow. Despite the different factors which support that IMF should help Greece by bailing them out there are certain conditions that will make it difficult for IMF to support their decision. One major obstacle in the path of the government is the fact that the economy needs to be more competitive (Greece Program, 2011). This becomes difficult in times of crisis as getting the economy to perform in the same competitive spirit is difficult which will make the economies funding the debt difficult to recover their amount. Another factor which is gong against the decision to bail out Greece is that there is no cohesiveness and cooperative approach taken by all economies present in the European Union regarding the bail out process (Neuger & Bodoni, 2011). This complicates the matter as without the efforts of the European Union and banking institutions it will be difficult for IMF to ensure the bail out. The inability of the European Union to come at a common understanding and to develop a support structure which helps to bail out Greece makes the situation dicey for IMF. The IMF on the backdrop of the world economy and preventing the debt effect to spread to other economies need to put pressure and devise a strategy which will help to ensure that Greece is bailed out. This makes it important that IMF looks towards bailing out Greece so that other economies are not affected due to the financial debt taken by Greece. This could have a larger effect on other economies and would result in a situation where other economies that have bonds and other instruments purchased from Greece could face a financial distress. The IMF should also look towards bailing out Greece as the government needs to pay for the wages and pension and not doing so could result in some national and political tension in Greece. The affect of this could be widespread and since the government has already consumed the services it is important that the IMF look towards bailing out Greece. Doing so will help to ensure that Greece is bailed out from the financial crisis and will help other economies that are associated with it. This will help other economies to ensure that they are still able to conduct business in the similar way and will help the world economies to come out of recession. References AFP. 2011. Greek Rescue Deal Struck at Crisis Summit. Retrieved on August 24, 2011 from http://www.smh.com.au/business/world-business/greek-rescue-deal-struck-at-crisis-summit-20110722-1hrgb.html Boone, P. & Johnson, S. 2011. Greece & the Fatal Flaw in an IMF Rescue. Retrieved on August 24, 2011 from http://baselinescenario.com/2010/04/06/greece-and-the-fatal-flaw-in-an-imf-rescue/ Chapman, J. 2011. Playing with Fire: IMF Chief warns failure to get grip on Greek Crisis Threatens Global Economy. Retrieved on August 24, 2011 from http://www.dailymail.co.uk/news/article-2004962/Greece-bailout-IMF-chief-warns-Greek-crisis-threatens-global-economy.html Debt Crisis. 2011. The Cracks Spread & Widens: The Euro Zone Debt Crisis. Retrieved on August 24, 2011 from http://www.economist.com/node/16009119 Euro Stat. 2011. Euro Stat. Retrieved on August 24, 2011 from http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=0&language=en&pcode=tsieb090 Europe Debt. 2011. IMF Welcomes Agreement to Tackle Euro zone Crisis. Retrieved on August 24, 2011 from http://www.imf.org/external/pubs/ft/survey/so/2011/car072211a.htm Greece Program. 2011. IMF Approves €30 billion Loan for Greece on Fast Track. Retrieved on August 24, 2011 from http://www.imf.org/external/pubs/ft/survey/so/2010/new050910a.htm IMF. 2011. Euro zone Crisis Poses Global Threat. Retrieved on August 24, 2011 from http://www.cbsnews.com/stories/2011/06/20/501364/main20072623.shtml Neuger, J. & Bodoni, S. 2011. Bailout Bid for Greece Falters as Europe Insists Papandreou Cut Budget Gap. Retrieved on August 24, 2011 from http://www.bloomberg.com/news/2011-06-20/europe-fails-to-agree-on-greek-aid-payout-pressing-papandreou-to-cut-debt.html Smith, H. 2011. Greek Debt Crisis Deepens. Retrieved on August 24, 2011 from http://www.guardian.co.uk/world/2011/jun/14/greek-debt-crisis-deepens Read More