Europe, Globe

Greece: the Zero Hour?

Stuck in a serious financial crisis due to the accumulation of a large public deficit, time is running out for this nation, and bankruptcy is fast approaching, with many predicting an imminent exit from the Euro Zone.

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Cira Rodríguez César


With a debt equivalent to 168% of its annual production, the Greek nation holds two world records: the lowest credit rating for a sovereign state and the most expensive debt to secure.

The situation is so difficult that 11.3 million Greeks seem to be losing hope of continuing to live with the single currency, as they have run out of patience with the deep austerity that has reduced public sector wages by 20 % and pensions by 10%.

Currently, almost 22% of Greeks are unemployed, 54% of young people do not have jobs and whole neighbourhoods of Athens are in misery. There are approximately 1.1 million unemployed, 42% more than in the same month in 2011. Over a period of almost five years, the country’s economy has lost all trace of credibility and confidence in the markets, and credit rating agencies have continued to lower the rating on its sovereign debt.

On the 3rd of March this year the agency Standard & Poor’s lowered its rating to C, which implies selective bankruptcy, one step before bankruptcy itself.

In late 2009, this Mediterranean country declared that the debt amounted to 6.7% of GDP, when in fact it was 12.7%, well above the maximum ceiling of 3, established by the Stability Pact of the European Union.

On May 10th 2010, faced with the impending bankruptcy of Greece, the EU agreed on two important steps.

First, a support plan with bilateral loans from the Euro Zone countries worth 80 billion euros and another 30 billion from the International Monetary Fund (IMF).

Of that amount, until late 2011, Athens had paid 73 billion euros, of which 9.794 billion went to Spain.

Second, the implementation of the European Financial Stability Facility with a capacity of 750 billion euros (60 billion from the European Commission, 440 billion from member states and 250 billion provided by the IMF).

This rescue stipulated that in 2012 Greece should collect half of the necessary resources from the markets and 100% should be returned by 2013, but the EU has already assumed Greece’s inability to attract the necessary funding to pay for that commitment and, must therefore introduce another austerity plan.

Given that Greece will run out of money next month and that there is no government to negotiate the necessary aid package, investors have begun to call for a cessation of payments and the exit from the Euro Zone sooner rather than later.

Germany, the European heavyweight, has asked the Greeks to rebuild a viable government, but they have also acknowledged that the situation was difficult, as the alternative is the trauma of new spending cuts, required in return for help, or living outside the Euro Zone.

Actions and consequences

With the problems in Greece, the debt crisis in the Euro Zone, made up of 17 countries, has entered a new and critical phase in the face of the fear that the country might fail to make its payments and that it might spark a global economic disaster like the one that followed the collapse of the US investment bank Lehman Brothers in 2008. In this situation, the finance ministers in the European block have told the Greek government to adopt more stringent austerity measures before a final decision is taken on new loans from the EU and the IMF.

Keeping in mind that the Greeks’ sovereign debt exceeds 340 billion euros, more than 30,000 euros per capita, so the longer the crisis continues, the greater the risk that the problems will spread to the other economies in the Euro Zone.

This is of particular concern to Ireland and Portugal, countries that have already been rescued, and Spain, whose economy is much larger and whose rescue would be much more expensive, perhaps too expensive, according to analysts.

In addition, a default of Greece would affect banks with a Greek debt, including the European Central Bank, and the great French and German lenders. It could also lead the credit markets to a standstill, as it happened after the collapse of Lehman Brothers, when banks virtually stopped lending money to each other.

A Greek default would mean disaster and humiliation for the EU, which launched the euro in 1999 as its most ambitious project and a symbol of the unity of the continent.

This has brought leading experts to think the unthinkable: that the Euro Zone could break apart, either through the expulsion of Greece or because Germany, the major player of the EU,  will choose to exit and may be tempted to return to its former currency, the Deutsche Mark. The Nobel prize in Economy winner, Paul Krugman, has insisted that Athens should leave the euro to save Spain and Italy, considering that there is no solution to solve its financial crisis.

European and US leaders are trying all means to find an alternative to that idea, as they do not want Greece to abandon the single currency, but Krugman thinks the opposite, that none of the solutions discussed will remedy the disaster.

Previously, the IMF managing director, Christine Lagarde, also did not rule out that Greece might be heading towards bankruptcy and that it would have to abandon the euro and the European Union.

By contrast, the EU has ensured that it would honour its commitments to Greece in an attempt to guarantee that it remains within the Euro Group, but insisted that, in return, the nation must meet its obligations.

European Commission President José Manuel Barroso, has reiterated that they want Greece to remain within the block, which is why they are hoping that the next government, after the elections scheduled on the 17th of June, will accept the conditions agreed for financial assistance.

During the G8 Summit, members reached a position in favour of growth and the creation of jobs as imperatives to overcoming the current global economic crisis, and called for a united and strong euro zone.

The leaders of the eight most powerful nations in the world (Germany, Canada, USA, UK, Italy, Japan and Russia) agreed on the importance of stability and the recovery of the block, and stressed that Greece should remain within it.

Avoiding bankruptcy

Finally, in late March this year, Greece announced that it would receive 172.7 billion euros to cover its financial needs until 2015, a figure that includes some of the funds not used during the first rescue operation in 2010, which is the second bailout agreed this year with additional funds from the IMF.

Finance ministers of the euro zone are awaiting approval of another support operation

of 130 billion euros, to which will be added 34.5 billion euros of the first aid offered by the European Community and an additional 8.2 billion from the IMF by 2015. That last figure is expected to be part of a loan of 28 billion that the IMF said would provide to Athens during a four-year period. (PL)

Translated by Sylvia Hoffmann – Email: sylviahoffmann.spanish@gmail.com

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