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The Greek government-debt crisis (also known as the Greek Depression)[3][4][5] started in late

2009, as the first of four sovereign debt crises in the eurozone - later referred to collectively as
the European debt crisis. The common view holds that it was triggered by the turmoil of
the Great Recession, but that the root cause for its eruption in Greece was a combination of
structural weaknesses in the Greek economy along with a decade-long pre-existence of overly
high structural deficits and debt-to-GDP levels of public accounts. In late 2009, fears of
a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt
obligations, due to the revelation that previous data on government debt levels and deficits had
been misreported by the Greek government.[6][7][8] This led to a crisis of confidence, indicated by
a widening of bond yield spreads and the cost of risk insurance on credit default
swaps compared to the other Eurozone countries - Germany in particular.[9][10] In 2012, Greece's
government had the largest sovereign debt default in history. Greece became the
first developed country to fail to make an IMF 1.6 billion loan repayment on June 30, 2015.
At that time, Greece's government had debts of 323bn.[12]
In April 2010, adding to news of the recorded adverse deficit and debt data for 2008 and 2009,
the national account data revealed that the Greek economy had also been hit by three distinct
recessions (Q3-Q4 2007, Q2-2008 until Q1-2009, and a third starting in Q3-2009),[13] which
equaled an outlook for a further rise in the debt-to-GDP ratio from 109% in 2008 to 146% in
2010. Credit rating agencies responded by downgrading the Greek government debt to junk
bond status (below investment grade), as they found indicators of a growing risk of a sovereign
default, and the government bond yields responded by rising into unsustainable territory making the private capital lending market inaccessible as a funding source for Greece.
On 2 May 2010, the European Commission, European Central Bank (ECB) and International
Monetary Fund (IMF), later nicknamed the Troika, responded by launching a 110 billion bailout
loan to rescue Greece from sovereign default and cover its financial needs throughout May
2010 until June 2013, conditional on implementation of austerity measures, structural reforms,
and privatization of government assets.[14] A year later, a worsened recession along with a
delayed implementation by the Greek government of the agreed conditions in the bailout
programme revealed the need for Greece to receive a second bailout worth 130
billion (including a bank recapitalization package worth 48bn), while all private creditors holding
Greek government bonds were required at the same time to sign a deal accepting extended
maturities, lower interest rates, and a 53.5% face value loss. The second bailout programme
was finally ratified by all parties in February 2012, and by effect extended the first programme,
meaning a total of 240 billion was to be transferred at regular tranches throughout the period of
May 2010 to December 2014. Due to a worsened recession and continued delay of
implementation of the conditions in the bailout programme, in December 2012 the Troika agreed
to provide Greece with a last round of significant debt relief measures, while the IMF extended
its support with an extra 8.2bn of loans to be transferred during the period of January 2015 to
March 2016.
The fourth review of the bailout programme revealed development of some unexpected
upcoming financing gaps.[15][16] Due to an improved outlook for the Greek economy, with
achievement of a government structural surplus both in 2013 and 2014 - along with a decline of
the unemployment rate and return of positive economic growth in 2014,[17][18] it was possible for
the Greek government to regain access to the private lending market for the first time since
eruption of its debt crisis - to the extent that its entire financing gap for 2014 was patched
through a sale of bonds to private creditors.[19]

The improved economic outlook was replaced by a new fourth recession starting in Q4-2014,
related to the premature snap parliamentary election called by the Greek parliament in
December 2014 and the following formation of a Syriza-led government refusing to respect the
terms of its current bailout agreement.[21] The rising political uncertainty of what would follow,
caused the Troika to suspend all scheduled remaining aid to Greece under its current
programme - until such time when the Greek government either accepted the previously
negotiated conditional payment terms or alternately could reach a mutually accepted agreement
of some new updated terms with its public creditors.[22] This rift caused a renewed and
increasingly growing liquidity crisis (both for the Greek government and Greek financial system),
resulting in plummeting stock prices at the Athens Stock Exchange, while interest rates for the
Greek government at the private lending market spiked, making it once again inaccessible as an
alternative funding source.
After the election, the Eurogroup granted a further four-month technical extension of its current
bailout programme to Greece; accepting the payment terms attached to its last tranche to be
renegotiated with the new Greek government before the end of April,[23] so that the review and
last financial transfer could be completed before the end of June 2015.[24] The new renegotiation
deal was still pending by the end of May.[25][26] Faced by the threat of sovereign default, which
inevitably would entail enforcement of recessionarycapital controls to avoid a collapse of the
banking sector - and potentially could lead to exit from the eurozone due to growing liquidity
constraints making continued payment of public pension and salaries impossible in euro,[27]
some final attempts for reaching a renegotiated bailout agreement were made by the Greek
government in the first half[29] and second half of June 2015.[30]
According to a statement by the Eurogroup, Greece excluded, the Greek government
unilaterally broke off the ongoing programme negotiations with the Troika late on the 26 June,[31]
diverting from their prior agreement to continue negotiating until a mutually acceptable
compromise could be presented to the Eurogroup in the afternoon of 27 June.[34] Few hours
later, Alexis Tsipras announced on national television that a referendum now instead would be
held on 5 July 2015, to approve or reject the achieved preliminary negotiation result (the latest
counter proposal submitted and offered by the Troika on 25 June) for a new set of updated
terms ensuring completion of the second bailout agreement.[35] The Greek government signaled
it would campaign for rejection of the new offered terms in such referendum, while four
opposition parties (PASOK, To Potami, KIDISO and New Democracy) objected the call for the
proposed referendum because it would be unconstitutional, and plead for the Greek
parliament or Greek president to reject the referendum proposal on this ground.[36] Meanwhile,
the Eurogroup notified the existing second bailout agreement would technically expire on 30
June (as regulated by its "20 February statement"), if not updated prior this date by a new
agreement setting up some mutually agreed updated terms, rendering it too late for Greece to
arrange a referendum on updated terms five days after its expiry.[32][34]
The Eurogroup clarified at its press conference on 27 June, that the only imaginable scenario in
which the Eurogroup perhaps could offer Greece further flexibility through a new technical
extension of its bailout program to pave the way for holding the proposed Greek bailout
referendum on 5 July, would be if the Greek government prior of 30 June settled a final
renegotiated deal with the Troika on a set of mutually agreed updated terms for program
completion - subject to the final approval by its proposed bailout referendum on 5 July. Reason
for this firm stance, was that the Eurogroup wanted the Greek government to take a prior share
of ownership for the subsequent program completion at the new updated terms, in the event the
imagined referendum was held and resulted in approval.[37] As for the Greek authorities'

continued call in negotiations to be granted additional debt relief, the Eurogroup had signaled
willingness to uphold their "November 2012 debt relief promise" still to be valid after reaching
agreement for updated terms for completion of the second programme.[30] This "November 2012
debt relief promise" was - and is - a guarantee, that if Greece complete its second program and
its debt-to-GDP ratio subsequently for whatever reason gets forecast to be higher than 124% in
2020 or 110% in 2022, then the Eurozone will implement a debt-relief with a big enough size to
ensure these two targets will still be met.[38]
On 28 June 2015, the referendum was approved by the Greek parliament, and ECB decided to
maintain availability of its Emergency Liquidity Assistance to Greek banks at its current level, as
it was still considered politically possible for Greece to ensure extension of its pre-required
current bailout program (at least until 30 June). As many Greeks continued rapidly withdrawing
cash from ATMs due to fear that capital controls would soon be invoked to stop their liquidity
loss, the Greek central bank convened a meeting on Sunday evening, 28 June, in order to
decide how to handle the liquidity crisis during the upcoming week.[citation needed]
Relative change in unit labour costs, 20002012
The causes of financial crises tend to accumulate over time and then become suddenly
apparent when an unsustainable trend stops. The 1999 introduction of the euro as a common
currency set the stage for the present crisis. A common currency reduced trade costs among the
Eurozone countries, increasing overall trade volume. At the same time, labor costs increased
more in peripheral countries such as Greece relative to core countries such as Germany,
making Greek exports less competitive. As a result, Greece saw its trade deficit rise
A trade deficit means that a country is consuming more than its income, which requires
borrowing from other countries. Both the Greek trade deficit and budget deficit rose from below
5% of GDP (a measure of the size of the economy) in 1999 to peak around 15% of GDP in the
2008-2009 periods.[40] As the Great Recession that began in the U.S. in 2007-2009 spread to
Europe, the flow of funds from the European core countries to the periphery began to dry up.
Reports in 2009 of fiscal mismanagement and deception increased borrowing costs; the
combination meant Greece could no longer borrow to finance its trade and budget deficits.[39]
A country facing a sudden stop in private investment and a high debt load typically allows its
currency to depreciate (i.e., inflation) to encourage investment and to pay back the debt in
cheaper currency, but this was not an option while Greece remains on the Euro.[39] Instead, to
become more competitive, Greek wages fell nearly 20% from mid-2010 to 2014, a form of
deflation. This resulted in a significant reduction in income or GDP, resulting in a severe
recession and a significant rise in the debt to GDP ratio. Unemployment has risen to nearly
25%, from below 10% in 2003. However, significant government spending cuts have also
helped the Greek government return to a primary budget surplus, meaning it now collects more
revenue than it pays out, excluding interest.[41]
Government summary report[edit]
In January 2010, the Greek Ministry of Finance in their Stability and Growth Program 2010 listed
these five main causes for eruption of the present government-debt crisis and the significantly

deteriorated debt-to-GDP ratio in 2009 (compared to what had been forecast one year earlier),
and outlined the first plan how to combat the crisis:[42]

GDP growth rates: After 2008, GDP growth rates were lower than the Greek national
statistical agency had anticipated. In the official report, the Greek ministry of finance reports
the need for implementing economic reforms to improve competitiveness, among others by
reducing salaries and bureaucracy,[42] and the need to redirect much of its current
governmental spending from non-growth sectors (e.g. military) into growth stimulating

Government deficit: Huge fiscal imbalances developed during the six years from 2004
to 2009, where "the output increased in nominal terms by 40%, while central government
primary expenditures increased by 87% against an increase of only 31% in tax revenues."
In the report the Greek Ministry of Finance states the aim to restore the fiscal balance of the
public budget, by implementing permanent real expenditure cuts (meaning expenditures are
only allowed to grow 3.8% from 2009 to 2013, which is below the expected inflation at
6.9%), and with overall revenues planned to grow 31.5% from 2009 to 2013, secured not
only by new/higher taxes but also by a major reform of the ineffective Tax Collection

Government debt-level: Mainly deteriorated in 2009 due to the higher than expected
government deficit. Since the debt-to-GDP ratio had not been reduced during the good
years with strong economic growth (2000-2007), there was no longer any headroom left for
the government to continue running large deficits in 2010, neither for the years ahead, due
to the annual debt-service costs being on the rise towards an unsustainable level.
Implementation of an urgent fiscal consolidation plan was therefore needed, to ensure the
deficit rapidly would decline to a level compatible with a declining debt-to-GDP ratio (not
exceeding its sustainable limit). The Greek government assessed it was not enough just to
implement their presented list of needed structural economic reforms, as the debt then still
would develop rapidly into an unsustainable size in the short-term, before the positive
results of such reforms - which typically first materialize after being implemented and
working for a couple of years - could be achieved. On this basis the government's report
emphasized, that in addition to implementing the needed structural economic reforms, it
was urgent each year in the coming four-year period also to implement packages of both
permanent and temporary austerity measures (with a size relative to GDP of 4.0% in 2010,
3.1% in 2011, 2.8% in 2012 and 0.8% in 2013). Implementation of this entire package of
structural reforms and austerity measures, in combination with an expected return of
positive economic growth in 2011, would then result in the baseline deficit being forecast to
decrease from 30.6 billion in 2009 to only 5.7 billion in 2013, while the debt-level relative
to GDP would stabilize at 120% in 2010-2011 and begin declining again in 2012 and 2013.

Budget compliance: Budget compliance was acknowledged to be in strong need of

future improvement, and for 2009 it was even found to be "A lot worse than normal, due to
economic control being more lax in a year with political elections". In order to improve the
level of budget compliance for upcoming years, the Greek government wanted to implement
a new reform to strengthen the monitoring system in 2010, making it possible to keep better
track on the future developments of revenues and expenses, both at the governmental and
local level.

Statistical credibility: Problems with unreliable data had existed ever since Greece
applied for membership of the Euro in 1999.[43] In the five years from 2005 to
2009, Eurostat each year noted a reservation about the fiscal statistical numbers for
Greece, and too often previously reported figures got revised to a somewhat worse figure,
after a couple of years.[44][45][46] In regards of 2009 the flawed statistics made it impossible to
predict accurate numbers for GDP growth, budget deficit and the public debt; which by the
end of the year all turned out to be worse than originally anticipated. Problems with
statistical credibility were also evident in several other countries, however, in the case of
Greece, the magnitude of the 2009 revisions and its connection to the crisis added pressure
to the need for immediate improvement. In 2010, the Greek ministry of finance reported the
need to restore trust among financial investors, and to correct previous statistical
methodological issues, "by making the National Statistics Service an independent legal
entity and phasing in, during the first quarter of 2010, all the necessary checks and
balances that will improve the accuracy and reporting of fiscal statistics".[42]
Government spending[edit]
Combined charts of Greece's GDP and debt since 1970; also of deficit since 2000. Absolute
terms time series are in current euros. Public deficit (brown) worsened to 10% in 2008, 15% in
2009 and 11% in 2010. As a result, the public debt-to-GDP ratio (red) rose from 109% in 2008 to
146% in 2010.
The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007: during
this period it grew at an annual rate of 4.2%, as foreign capital flooded the country.[47] Despite
that, the country continued to record high budget deficits each year.
Financial statistics reveal solid budget surpluses existed in 196073 for the Greek general
government, but since then only budget deficits were recorded.[48][49][50] In 197480 the general
government had an era with moderate and acceptable budget deficits (below 3% of GDP). This
was followed by a long period with very high and unsustainable budget deficits in 19812013
(above 3% of GDP).[49][50][51][52]
According to an editorial published by the Greek conservative newspaper Kathimerini, large
public deficits were indeed one of the features that marked the Greek social model since
the restoration of democracy in 1974. After the removal of the right-wing military junta, the
government wanted to bring disenfranchised left-leaning portions of the population into the
economic mainstream.[53] In order to do so, successive Greek governments have, among other
things, customarily run large deficits to finance enormous military expenditure, public sector
jobs, pensions and other social benefits. Greece is, as a percentage of GDP, the second-biggest
defense spender[54] among the 27 NATO countries after the United States, according to NATO
statistics. The US is the major supplier of Greek arms, with the Americans supplying 42 per cent
of its arms, Germany supplying 22.7 per cent, and France 12.5 per cent of Greece's arms
The long period with high yearly budget deficits caused a situation where, from 1993, the debtto-GDP ratio was always found to be above 94%.[56] In the turmoil of the global financial
crisis the situation became unsustainable (causing the capital markets to freeze in April 2010),
as the downturn had caused the debt level rapidly to grow above the maximum sustainable level
for Greece (defined by IMF economists to be 120%). According to "The Economic Adjustment
Programme for Greece" published by the EU Commission in October 2011, the debt level was

even expected further to worsen into a highly unsustainable level of 198% in 2012, if the
proposed debt restructure agreement was not implemented.[57]
Prior to the introduction of the euro, currency devaluation had helped to finance Greek
government borrowing; after the euro's introduction in January 2001, however, the devaluation
tool disappeared. Throughout the next 8 years, Greece was however able to continue its high
level of borrowing, due to the lower interest rates government bonds in euro could command, in
combination with a long series of strong GDP growth rates. Problems however started to occur
when the global financial crisis peaked, with negative repercussions hitting all national
economies in September 2008. The global financial crisis had a particularly large negative
impact on GDP growth rates in Greece. Two of the country's largest earners are tourism and
shipping, and both were badly affected by the downturn, with revenues falling 15% in 2009.[58]
Current account balance[edit]
Current account imbalances (19972014)
Economist Paul Krugman wrote in February 2012: "What were basically looking a
balance of payments problem, in which capital flooded south after the creation of the euro,
leading to overvaluation in southern Europe."[59] He continued in June 2015: "In truth, this has
never been a fiscal crisis at its root; it has always been a balance of payments crisis that
manifests itself in part in budget problems, which have then been pushed onto the center of the
stage by ideology."[60]
The translation of trade deficits to budget deficits works through sectoral balances. Greece ran
current account (trade) deficits averaging 9.1% GDP from 2000-2011.[40] By definition, a trade
deficit requires capital inflow (borrowing) to fund; this is referred to as a capital surplus or foreign
financial surplus. This can drive higher levels of government budget deficits, if the private sector
maintains relatively even amounts of savings and investment, as the three financial sectors
(foreign, government, and private) by definition must balance to zero. While Greece was running
a large foreign financial surplus, it funded this by running a large budget deficit. As the inflow of
money stopped during the crisis, reducing the foreign financial surplus, Greece was forced to
reduce its budget deficit substantially. Countries facing such a sudden reversal in capital flows
typically devalue their currencies to resume the inflow of capital; however, Greece cannot do
this, and has suffered significant income (GDP) reduction, another form of devaluation.[39][40]
Tax evasion and corruption[edit]
Further information: Tax evasion and corruption in Greece
Another persistent problem Greece has suffered in recent decades is the government's tax
income. Each year it has been below the expected level. In 2010, the estimated tax evasion
costs for the Greek government amounted to well over $20 billion.[61] The latest figures from
2013, also show that the State only collected less than half of the revenues due 2012, with the
remaining tax owings being accepted to be paid by a delayed payment schedule.[62] As of 2012,
tax evasion was widespread, and according to Transparency International's Corruption
Perception Index, Greece, with a score of 36/100, ranked as the most corrupt country in the EU.
One of the conditions of the bailout was implementation of an anti-corruption strategy;
Greek government agreed to combat corruption, and the corruption perception level
improved to a score of 43/100 in 2014, which was still the lowest in the EU, but now on par with
Italy, Bulgaria and Romania.[63][66]

It is estimated that the amount of tax evasion by Greeks stored in Swiss banks is around 80
billion EUR and a tax treaty to address this issue is negotiation between the Greek and Swiss
Data for 2012[69] place the Greek "black economy" at 24.3% of GDP, compared with 28.6% for
Estonia, 26.5% for Latvia, 21.6% for Italy, 17.1% for Belgium and 13.5% for Germany (partly in
correlation with the percentage of Greek population that is self-employed[70] i.e., 31.9% in
Greece vs. 15% EU average,[71] as several studies [72][73] have shown the clear correlation
between tax evasion and self-employment).
In early 2010, economy commissioner Olli Rehn denied that other countries would need a
bailout. He said, "Greece has had particularly precarious debt dynamics and Greece is the only
member state that cheated with its statistics for years and years."[74] It was revealed that
Goldman Sachs and other banks had helped the Greek government to hide its debts. Other
sources said that similar agreements were concluded in "Greece, Italy, and possibly elsewhere".
The deal with Greece was "extremely profitable" for Goldman. Christoforos Sardelis, former
head of Greeces Public Debt Management Agency, said that the country didnt understand what
it was buying. He also said he learned that "other EU countries such as Italy" had made similar
deals.[77] This led to questions about what other countries had made similar deals.[78][79][80]
According to Der Spiegel credits given to European governments were disguised as "swaps"
and consequently did not get registered as debt because Eurostat at the time ignored statistics
involving financial derivatives. A German derivatives dealer commented toDer Spiegel that
"The Maastricht rules can be circumvented quite legally through swaps," and "In previous years,
Italy used a similar trick to mask its true debt with the help of a different US bank."[80] These
conditions had enabled Greek as well as many other European governments to spend beyond
their means, while meeting the deficit targets of the European Union.[75][81] In May 2010, the
Greek government deficit was again revised and estimated to be 13.6%[82] which was the
second highest in the world relative to GDP with Iceland in first place at 15.7% and Great
Britain third with 12.6%.[83] Public debt was forecast, according to some estimates, to hit 120% of
GDP during 2010.[84] The actual government debt to GDP ratio was closer to 150%.[85]
To keep within the monetary union guidelines, the government of Greece had also for many
years misreported the country's official economic statistics.[86][87] At the beginning of 2010, it was
discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of
dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing.
Most notable is a cross currency swap, where billions worth of Greek debts and loans were
converted into yen and dollars at a fictitious exchange rate by Goldman Sachs, thus hiding the
true extent of Greek loans.[89]
The purpose of these deals made by several successive Greek governments, was to enable
them to continue spending, while hiding the actual deficit from the EU, which, at the time, was a
common practice amongst many European governments.[88] The revised statistics revealed that
Greece at all years from 2000 to 2010 had exceeded the Eurozone stability criteria, with the
yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and with the debt
level significantly above the recommended limit of 60% of GDP.
Debt levels revealed (2010)[edit]
The European statistics agency, Eurostat, had at regular intervals ever since 2004, sent 10
delegations to Athens with a view to improving the reliability of statistical figures related to the
Greek national account, but apparently to no avail. In January 2010, it issued a damning report
which contained accusations of falsified data and political interference.[90]

In February 2010, the new government of George Papandreou (elected in October 2009)
admitted a flawed statistical procedure previously had existed, before the new government had
been elected, and revised the 2009 deficit from a previously estimated 6%-8% to an alarming
12.7% of GDP.[91] In April 2010, the reported 2009 deficit was further increased to 13.6%,[92] and
the final revised calculation, using Eurostat's standardized method, set it at 15.7% of GDP; the
highest deficit for any EU country in 2009.
The figure for Greek government debt at the end of 2009 was also increased from its first
November estimate at 269.3 billion (113% of GDP)[93][94] to a revised 299.7 billion (130% of
GDP). The need for a major and sudden upward revision of both the deficit and debt level for
2009, only being realized at a very late point, arose due to Greek authorities previously having
published flawed estimates and statistics in 2009. To sort out all Greek statistical issues once
and for all, Eurostat then decided to perform their own in depthFinancial Audit of the fiscal years
200609. After having conducted the financial audit, Eurostat noted in November 2010 that all
"methodological issues" now had been fixed, and that the new revised figures for 20062009
finally were considered to be reliable.[95][96][97]
Despite the crisis, the Greek government's bond auction in January 2010 had the offered
amount of 8 bn 5-year bonds over-subscribed by four times.[98] At the next auction in March,
the Financial Times again reported: "Athens sold 5bn in 10-year bonds and received orders for
three times that amount".[99] The continued successful auction and sale of bonds was, however,
only possible at the cost of increased yields, which in return caused a further worsening of the
Greek public deficit. As a result, the rating agencies downgraded the Greek economy to junk
status in late April 2010. This led to a freeze of the private capital market, requiring the Greek
financial needs to be covered by international bailout loans to avoid a sovereign default.[100] In
April 2010, it was estimated that up to 70% of Greek government bonds were held by foreign
investors, primarily banks.[94] The subsequent bailout loans paid to Greece were mainly used to
pay for the maturing bonds, but also to finance the continued yearly budget deficits.
In the earlymid-2000s, Greece's economy was strong but at the same time government ran
large spending deficits. As the world economy cooled in the late 2000s, Greece was hit
especially hard because its main industriesshipping and tourismwere especially sensitive to
changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early
2010, as concerns about Greece's national debt grew, policy makers suggested that emergency
bailouts might be necessary.
Downgrading of creditworthiness (December 2009 April 2010)[edit]
On 23 April 2010, the Greek government requested an EU/IMF bailout package to be activated,
providing them with a loan of 45 billion to cover their financial needs for the remaining part of
2010.[101][102] Standard & Poor's slashed Greece's sovereign debt rating on 27 April to BB+
amidst hints of default by the Greek government,[103][104] in which case investors were thought to
lose 3050% of their money.[103]
On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold for Greek
debt,[105] which meant that the bonds became eligible as collateral even with junk status. The
decision was supposed to guarantee Greek banks' access to cheap central bank funding.[106]
Shutdown of banks and stock market (June 2015 present)[edit]
On 27 June 2015, the Greek government announced a shutdown of all banks in the country for
at least ten days (six banking days), stating they would re-open on 7 July.[107] It also

said automated teller machines, a large number of which had run out of cash, would "operate
normally again by Monday noon at the latest" and that withdrawals would be limited to 60 a
day for each account with exemptions for pension payments.
The Athens stock exchange (ATHEX) was also to be closed for a week, according
to Kathimerini,[108] since the announced closure of Greek banks requires a suspension in Greece
of the European TARGET2 international financial settlement system, which also processes
ATHEX settlements. Western Union has also stopped operating in Greece, since Monday, 27
June, and would not be open for at least a week.[109]
Solutions implemented[edit]
First Economic Adjustment Programme for Greece (May 2010 June 2011)[edit]
Main article: First Economic Adjustment Programme for Greece

On 1 May 2010, the Greek government announced a series of austerity measures[110] to

persuade Germany, the last remaining holdout, to sign on to a larger EU/IMF loan package.
The next day the eurozone countries and the International Monetary Fund agreed to a threeyear 110 billion loan (see below) retaining relatively high interest rates of 5.5%,[112] conditional
on the implementation of austerity measures. Credit rating agencies immediately downgraded
Greek governmental bonds to an even lower junk status.
The new austerity package was met with great anger by the Greek public, leading to massive
protests, riots and social unrest throughout Greece. On 5 May 2010, a national strike was held
in opposition to the planned spending cuts and tax increases.[111]Nevertheless, the new extra
fourth package with austerity measures was approved on 29 June 2011, with 155 out of 300
members of parliament voting in favour.
100,000 people protest against the austerity measures in front of parliament building in Athens
(29 May 2011).
Former Prime MinisterGeorge Papandreou and European Commission President Jos Manuel
Barroso after their meeting in Brussels on 20 June 2011.
Second Economic Adjustment Programme for Greece (July 2011 present)[edit]
Main article: Second Economic Adjustment Programme for Greece
EU emergency measures continued at a summit on 21 July 2011 in Brussels, where euro area
leaders agreed to extend Greek (as well as Irish and Portuguese) loan repayment periods from
7 years to a minimum of 15 years and to cut interest rates to 3.5%. They also approved the
construction of a new 109 billion support package, of which the exact content was to be
debated and agreed on at a later summit.[113] On 27 October 2011, eurozone leaders and the
IMF also came to an agreement with banks to accept a 50% write-off of (some part of) Greek
The austerity measures helped Greece bring down its primary deficit from 25bn (11% of GDP)
in 2009 to 5bn (2.4% of GDP) in 2011,[117] but as a side-effect they also contributed to a
worsening of the Greek recession. Overall the Greek GDP had its worst year in 2011 with a

7.1% decline.[118] The unemployment rate also grew from 7.5% in September 2008 to a, at the
time, record high of 19.9% in November 2011.[119][120]
Impact of the conducted bank recapitalization[edit]
The Hellenic Financial Stability Fund (HFSF) managed to complete a 48.2bn bank
recapitalization in June 2013, of which the first 24.4bn were injected into the four biggest
Greek banks. Initially, this 48.2bn bank recapitalization was accounted for as an equally sized
debt-increase, which - when assessed as an isolated factor - had elevated the debt-to-GDP
ratio by 24.8 points by the end of 2012. However, in return for this, the Greek government at the
same time received a number of shares in those banks being recapitalized, which it can now
sell again during the upcoming years (a sale that per March 2012 was expected to generate
16bn of extra "privatization income" for the Greek government, to be realized during 2013
2020). For three out of the four big Greek banks (NBG, Alpha and Piraeus), where there was an
additional private investor capital contribution at minimum 10% of the conducted
recapitalization, HFSF has offered them warrants to buy back all HFSF bank shares in semiannual exercise periods up to December 2017, at some predefined strike prices.[121] During the
first warrant period, the shareholders in Alpha bank bought back the first 2.4% of the issued
HFSF shares;[122] while the shareholders in Piraeus Bank only bought back the first 0.07% of the
issued HFSF shares,[123] and finally the shareholders in National Bank (NBG) only bought back
the first 0.01% of the issued HFSF shares, because the market share price was actually
cheaper than the strike price.[124] This means, that HFSF can not be certain to sell all their bank
shares, through the warrants program. In case some of the shares have not been sold by the
end of December 2017, then HFSF is subsequently allowed to sell them to alternative investors.
In May 2014, a second round of bank recapitalization for all six commercial banks in Greece
(Alpha, Eurobank, NBG, Piraeus, Attica and Panellinia),[65] worth 8.3bn, was concluded entirely
finanzed by private shareholders, without HFSF needing to tap into any of their current 11.5bn
reserve capital fund for future bank recapitalizations.[125] The fourth systemic bank (Eurobank),
which failed to attract private investor participation in the first recapitalization program, and thus
became almost entirely financed and owned by HFSF, also succeeded in the second round to
introduce private investors;[126] although this was only achieved by HFSF accepting in the
process to dilute their amount of shares from 95.2% to 34.7%.[127]
According to the third quarter 2014 financial report of HFSF, the fund is estimated to recover a
total of 27.3bn out of the initially injected 48.2bn to the fund. This estimated recovery of
27.3bn comprise: "A 0.6bn positive cash balance stemming from its previous selling of
warrants (selling of recapitalization shares) and liquidation of assets, 2.8bn estimated to be
recovered from liquidation of assets held by its "bad asset bank", 10.9bn of EFSF bonds still
held as capital reserve, and 13bn from its future sale of recapitalization shares in the four
systemic banks." The last of these figures is affected by the highest amount of uncertainty, as it
directly reflect the current market price of the held remaining shares in the four systemic banks
(66.4% in Alpha, 35.4% in Eurobank, 57.2% in NBG, 66.9% in Piraeus), which for HFSF had a
combined market value of 22.6bn by the end of 2013 but only was worth 13bn on 10
December 2014.[128] Once HFSF has completed its task to sell and liquidate all its assets, the
total amount of recovered capital will be returned to the Greek government, and by that year
consequently help to reduce its total amount of gross debt with a similar figure. In early
December 2014, the Bank of Greece allowed HFSF to repay the first 9.3bn out of its 11.3bn
reserve to the Greek government (being transferred through the Greek government so that it
results in direct repayment to ECB), as it was assessed there only remained a risk for some
minor additional bank recapitalizations/liquidations to be financed by HFSF in the future.[129] A
few months later, the remaining part of HFSF reserves were likewise approved for repayment to

ECB, resulting in a total of 11.4bn debt notes being repaid during the course of the first quarter
of 2015.[130]
Solutions under consideration[edit]
Possible default or restructuring[edit]
Further information: Sovereign default
Interest rate of Greek two-year government bonds traded in the secondary market reflecting the
markets' assessment of investment risk (source: Bloomberg).
Without a bailout agreement, there was a possibility that Greece would prefer to default on
some of its debt. The premiums on Greek debt rose to a level that reflected a high chance of a
default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to
90% chance of a default or restructuring.[131][132]
A default would most likely have taken the form of a restructuring where Greece would pay
creditors, which include the up to 110 billion 2010 Greece bailout participants i.e. Eurozone
governments and IMF, only a portion of what they were owed.[133] It has been claimed that this
could destabilise the Euro Interbank Offered Rate, which is backed by government securities.[134]
Possible withdrawal from the eurozone[edit]
Main article: Greek withdrawal from the eurozone
Some economists have argued that an orderly default is unavoidable for Greece in the long run,
and that a delay in organising an orderly default (by lending Greece more money throughout a
few more years), would just end up hurting Greece as well as EU lenders and neighboring
European countries even more.[135] Fiscal austerity or a euro exit is the alternative to accepting
differentiated government bond yields within the Euro Area. If Greece remains in the euro while
accepting higher bond yields, reflecting its high government deficit, then high interest rates
would dampen demand, raise savings and slow the economy. An improved trade performance
and less reliance on foreign capital would be the result.[citation needed]
Others argue that a Greek exit from the eurozone would result in major capital flight and
significant inflation that would destroy savings and make imports very expensive for Greeks. A
Greek departure from the eurozone might, moreover, precipitate a larger contraction of the
eurozone, as a result of the more marginal southern economies leaving. The departure of major
eurozone economies such as Spain and Italy would be a major blow to the stability of the euro
and might even lead to its eventual collapse.[136]
German Chancellor Angela Merkel and former French President Nicolas Sarkozy said on
numerous occasions that they would not allow the eurozone to disintegrate and have linked the
survival of the Euro with that of the entire European Union.[137][138] In September 2011, EU
commissioner Joaqun Almunia shared this view, saying that expelling weaker countries from
the euro was not an option: "Those who think that this hypothesis is possible just do not
understand our process of integration".[139]
Criticism of Germany's role[edit]
Germany has played a major role in discussion concerning Greece's debt crisis, as it was
predominantly German banks which held the largest amount of Hellenic debt.[140] Critics have
accused the German government of hypocrisy; of pursuing its own national interests via an

unwillingness to adjust fiscal policy in a way that would help resolve the eurozone crisis, citing
the supposed benefits it enjoyed through the crisis including falling borrowing rates, investment
influx, and exports boost thanks to the euro's depreciation;[141] of using the ECB to serve their
country's national interests; and have criticised the nature of the austerity and debt-relief
programme Greece has followed as part of the conditions attached to its bailouts.[142][143]
Charges of hypocrisy[edit]
Hypocrisy has been alleged on multiple bases. "Germany is coming across like a know-it-all in
the debate over aid for Greece", commented Der Spiegel,[144] while its own government did not
achieve a budget surplus during the era of 1970 to 2011,[145] although a budget surplus indeed
was achieved by Germany in all three subsequent years (20122014).[18] A Bloomberg editorial,
which also concluded that "Europe's taxpayers have provided as much financial support to
Germany as they have to Greece", described the German role and posture in the Greek crisis
In the millions of words written about Europe's debt crisis, Germany is typically cast as the
responsible adult and Greece as the profligate child. Prudent Germany, the narrative goes, is
loath to bail out freeloading Greece, which borrowed more than it could afford and now must
suffer the consequences. [ But] irresponsible borrowers can't exist without irresponsible
lenders. Germany's banks were Greece's enablers.[146]
German economic historian Albrecht Ritschl describes his country as "king when it comes to
debt. Calculated based on the amount of losses compared to economic performance, Germany
was the biggest debt transgressor of the 20th century."[144] Despite calling for the Greeks to
adhere to fiscal responsibility, and although Germany's tax revenues are at a record high, with
the interest it has to pay on new debt at close to zero, Germany still missed its own cost-cutting
targets in 2011, and also fell behind on its goals for 2012.[147]
There have been widespread accusations that Greeks are lazy, but analysis of OECD data
shows that the average Greek worker puts in 50% more hours per year than a typical German
counterpart,[148] and the average retirement age of a Greek is, at 61.7 years, older than that of a
US economist Mark Weisbrot has also noted that while the eurozone giant's post-crisis recovery
has been touted as an example of an economy of a country that "made the short-term sacrifices
necessary for long-term success", Germany did not apply to its economy the harsh pro-cyclical
austerity measures that are being imposed on countries like Greece,[150][151] In addition, he noted
that Germany did not lay off hundreds of thousands of its workers despite a decline in output in
its economy but reduced the number of working hours to keep them employed, at the same time
as Greece and other countries were pressured to adopt measures to make it easier for
employers to lay off workers.[150] Weisbrot concludes that the German recovery provides no
evidence that the problems created by the use of a single currency in the eurozone can be
solved by imposing "self-destructive" pro-cyclical policies as has been done in Greece and
Arms sales are another fountainhead for allegations of hypocrisy. Dimitris Papadimoulis, a
Greek MP with the Coalition of the Radical Left party:
If there is one country that has benefited from the huge amounts Greece spends on defence it is
Germany. Just under 15% of Germany's total arms exports are made to Greece, its biggest
market in Europe. Greece has paid over 2bn for submarines that proved to be faulty and which
it doesn't even need. It owes another 1bn as part of the deal. That's three times the amount
Athens was asked to make in additional pension cuts to secure its latest EU aid package. []

Well after the economic crisis had begun, Germany and France were trying to seal lucrative
weapons deals even as they were pushing us to make deep cuts in areas like health. []
There's a level of hypocrisy here that is hard to miss. Corruption in Greece is frequently singled
out as a cause for waste but at the same time companies like Ferrostaal and Siemens are
pioneers in the practice. A big part of our defence spending is bound up with bribes, black
money that funds the [mainstream] political class in a nation where governments have got away
with it by long playing on peoples' fears.[152]
Thus allegations of hypocrisy could be made towards both sides: Germany complains of Greek
corruption, yet the arms sales meant that the trade with Greece became synonymous with highlevel bribery and corruption; former defence minister Akis Tsochadzopoulos was gaoled in April
2012 ahead of his trial on charges of accepting an 8m bribe from Germany company
Ferrostaal.[152] In 2000, the current German finance minister, Wolfgang Schuble, was forced to
resign after personally accepting a "donation" (100,000 Deutsche Mark, in cash) from a fugitive
weapons dealer, Karlheinz Schreiber.[153]
Another is German complaints about tax evasion by moneyed Greeks.[154] "Germans stashing
cash in Switzerland to avoid tax could sleep easy" after summer 2011, when "the German
government [] initialled a beggar-thy-neighbour deal that undermine[d] years of diplomatic
work to penetrate Switzerland's globally corrosive banking secrecy."[155] Nevertheless, Germans
with Swiss bank accounts were so worried, so intent on avoiding paying tax, that some took to
cross-dressing, wearing incontinence diapers, and other ruses to try and smuggle their money
over the SwissGerman border and so avoid paying their dues to the German taxman.[156] Aside
from these unusual tax-evasion techniques, Germany has a history of massive tax evasion: a
1993 ZEW estimate of levels of income-tax avoidance in West Germany in the early 1980s was
forced to conclude that "tax loss [in the FDR] exceeds estimates for other countries by orders of
magnitude." (The study even excluded the wealthiest 2% of the population, where tax evasion is
at its worst).[157] A 2011 study noted that, since the 1990s, the "effective average tax rates for the
German super rich have fallen by about a third, with major reductions occurring in the wake of
the personal income tax reform of 20012005."[158]
Alleged pursuit of national self-interest[edit]
Listen to many European leadersespecially, but by no means only, the Germansand you'd
think that their continent's troubles are a simple morality tale of debt and punishment:
Governments borrowed too much, now they're paying the price, and fiscal austerity is the only
"An Impeccable Disaster"
Paul Krugman, 5 November 2013
Since the euro came into circulation in 2002a time when the country was suffering slow
growth and high unemploymentGermany's export performance, coupled with sustained
pressure for moderate wage increases (German wages increased more slowly than those of
any other eurozone nation) and rapidly rising wage increases elsewhere, provided its exporters
with a competitive advantage that resulted in German domination of trade and capital flows
within the currency bloc.[160] As noted by Paul De Grauwe in his leading text on monetary union,
however, one must "hav[e] homogenous preferences about inflation in order to have a smoothly
functioning monetary union."[161] Thus Germany broke what the Levy Economics Institute has
called "the golden rule of a monetary union" when it jettisoned a common inflation rate.[162]
The violation of this golden rule led to dire imbalances within the eurozone, though they suited
Germany well: the country's total export trade value nearly tripled between 2000 and 2007, and
though a significant proportion of this is accounted for by trade with China, Germany's trade

surplus with the rest of the EU grew from 46.4 bn to 126.5 bn during those seven years.
Germany's bilateral trade surpluses with the peripheral countries are especially revealing:
between 2000 and 2007, Greece's annual trade deficit with Germany nearly doubled, from 3
bn to 5.5 bn; Italy's more than doubled, from 9.6 bn to 19.6 bn; Spain's well over doubled,
from 11 bn to 27.2 bn; and Portugal's more than quadrupled, from 1 bn to 4.2 bn.
German banks played an important role in supplying the credit that drove wage increases in
peripheral eurozone countries like Greece, which in turn produced this divergence in
competitiveness and trade surpluses between Germany and these same eurozone members.[164]
Germans see their government finances and trade competitiveness as an example to be
followed by Greece, Portugal and other troubled countries in Europe,[165] but the problem is more
than simply a question of southern European countries emulating Germany.[166] Dealing with
debt via domestic austerity and a move toward trade surpluses is very difficult without the option
of devaluing your currency, and Greece cannot devalue because it is chained to the euro.
Roberto Perotti of Bocconi University has also shown that on the rare occasions when
austerity and expansion coincide, the coincidence is almost always attributable to rising exports
associated with currency depreciation.[168] As can be seen from the case of China and the US,
however, where China has had theyuan pegged to the dollar, it is possible to have an effective
devaluation in situations where formal devaluation cannot occur, and that is by having the
inflation rates of two countries diverge.[169] If inflation in Germany is higher than in Greece and
other struggling countries, then the real effective exchange rate will move in the strugglers'
favour despite the shared currency. Trade between the two can then rebalance, aiding recovery,
as Greek products become cheaper.[167] Paul Krugman estimated that Spain and other
peripherals would need to reduce their 2012 price-levels relative to Germany by around 20
percent to become competitive again:
If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the
peripherywhich would imply an overall eurozone inflation rate of something like 3 percent. But
if Germany is going to have only 1 percent inflation, we're talking about massive deflation in the
periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would
greatly magnify the debt burden. This is a recipe for failure, and collapse.[170]
This view, that German deficits are a crucial factor in assisting eurozone recovery, is shared by
leading economics commentators,[170][171][172] by the OECD,[173] the Carnegie Endowment for
International Peace,[174] Deutsche Bank,[175] Credit Suisse,[176] Standard & Poor's,[177] the
European Commission,[178] and the IMF.[179] The Americans, too, asked Germany, repeatedly and
heatedly, to loosen fiscal policy, though without success.[180][181] This failure led to the US taking a
more high-powered tack: for the first time, the Treasury Department, in its semi-annual currency
report for October 2013, singled out Germany as the leading obstacle to economic recovery in
Therefore, it is argued, the problem is Germany continuing[183] to shut off this adjustment
mechanism.[166] "The counterpart to Germany living within its means is that others are living
beyond their means", agreed Philip Whyte, senior research fellow at the Centre for European
Reform. "So if Germany is worried about the fact that other countries are sinking further into
debt, it should be worried about the size of its trade surpluses, but it isn't."[184]
This chorus of criticism, however, germinates in the very poorest of soil because, in October
2012, Germany chose to legislate against the very possibility of stimulus spending, "by passing
a balanced budget law that requires the government to run near-zero structural deficits
indefinitely."[185] OECD projections of relative export pricesa measure of competitiveness

showed Germany beating all euro zone members except for crisis-hit Spain and Ireland for
2012, with the lead only widening in subsequent years.[186]
Even with such policies, Greece and other countries would have faced years of hard times, but
at least there would be some hope of recovery.[187] During 2012, it seemed as though the status
quo was beginning to change as France began to challenge German policy,[188] and
even Christine Lagarde called for Greece to at least be given more time to meet bailout targets.
Further criticism mounted in 2013: a leaked version of a text from French president Francois
Hollande's Socialist Party openly attacked "German austerity" and the "egoistic intransigence of
Mrs Merkel";[190] Manuel Barroso warned that austerity had "reached its limits";[191] EU
employment chief Laszlo Andor called for a radical change in EU crisis strategy"If there is no
growth, I don't see how countries can cut their debt levels"and criticised what he described as
the German practice of "wage dumping" within the eurozone to gain larger export surpluses;
and Heiner Flassbeck (a former German vice finance minister) and economist Costas
Lapavitsas charged that the euro had "allowed Germany to 'beggar its neighbours', while also
providing the mechanisms and the ideology for imposing austerity on the continent".[192]
Battered by criticism,[193] the European Commission finally decided that "something more" was
needed in addition to austerity policies for peripheral countries like Greece. "Something more"
was announced to be structural reformsthings like making it easier for companies to sack
workersbut such reforms have been there from the very beginning, leading Dani Rodrik to
dismiss the EC's idea as "merely old wine in a new bottle." Indeed, Rodrik noted that with
demand gutted by austerity, all structural reforms have achieved, and would continue to
achieve, is pumping up unemployment (further reducing demand), since fired workers are not
going to be re-employed elsewhere. Rodrik suggested the ECB might like to try out a higher
inflation target, and that Germany might like to allow increased demand, higher inflation, and to
accept its banks taking losses on their reckless lending to Greece. That, however, "assumes
that Germans can embrace a different narrative about the nature of the crisis. And that means
that German leaders must portray the crisis not as a morality play pitting lazy, profligate
southerners against hard-working, frugal northerners, but as a crisis of interdependence in an
economic (and nascent political) union. Germans must play as big a role in resolving the crisis
as they did in instigating it."[194] Paul Krugman described talk of structural reform as "an excuse
for not facing up to the reality of macroeconomic disaster, and a way to avoid discussing the
responsibility of Germany and the ECB, in particular, to help end this disaster."[195]Furthermore,
as Financial Times analyst Wolfgang Munchau observed, "Austerity and reform are the opposite
of each other. If you are serious about structural reform, it will cost you upfront
money."[196] Claims that Germany had, by mid-2012, given Greece the equivalent of 29 times the
aid given to West Germany under the Marshall Plan after World War II completely ignores the
fact that aid was just a small part of Marshall Plan assistance to Germany, with another crucial
part of the assistance being the writing off of a majority of Germany's debt.[197]
Artificially low exchange rate[edit]
Though Germany claims its public finances are "the envy of the world",[198] the country is merely
continuing what has been called its "free-riding" of the euro crisis, which "consists in using the
euro as a mechanism for maintaining a weak exchange rate while shifting the costs of doing so
to its neighbors."[199] With eurozone adjustment locked out by Germany, economic hardship
elsewhere in the currency block actually suited its export-oriented economy for an extended
period, because it caused the euro to depreciate,[200]making German exports cheaper and so
more competitive.[165][201] The weakness of the euro, caused by the economy misery of peripheral
countries, has been providing Germany with a large and artificial export advantage to the extent
that, if Germany left the euro, the concomitant surge in the value of the reintroduced Deutsche

Mark, which would produce "disastrous"[202] effects on German exports as they suddenly
became dramatically more expensive, would play the lead role in imposing a cost on Germany
of perhaps 2025% GDP during the first year alone after its euro exit.[203] November 2013 saw
the European Commission open an in-depth inquiry into German's surplus,[204] which hit a new
record in spring 2015.[205] As the German current accounts surplus looked set to smash all
previous records again in Spring 2015, one commentator noted that Germany was "now the
biggest single violator of the eurozone stability rules. It would face punitive sanctions if EU treaty
law was enforced."[206] 2015 is "the fifth consecutive year that Germany's surplus has been
above 6pc of GDP," it was pointed out. "The EU's Macroeconomic Imbalance Procedure states
that the Commission should launch infringement proceedings if this occurs for three years in a
row, unless there is a clear reason not to."[206]
Advocacy of internal devaluation for peripheral economies[edit]
The version of adjustment offered by Germany and its allies is that austerity will lead to an
internal devaluation, i.e. deflation, which would enable Greece gradually to regain
competitiveness. "Yet this proposed solution is a complete non-starter", in the opinion of one UK
economist. "If austerity succeeds in delivering deflation, then the growth of nominal GDP will be
depressed; most likely it will turn negative. In that case, the burden of debt will increase."[207] A
February 2013 research note by the Economics Research team at Goldman Sachs again noted
that the years of recession being endured by Greece "exacerbate the fiscal difficulties as the
denominator of the debt-to-GDP ratio diminishes",[208] i.e. reducing the debt burden by imposing
austerity is, aside from anything else, utterly futile.[209][210] "Higher growth has always been the
best way out the debt (absolute and relative) burden. However, growth prospects for the near
and medium-term future are quite weak. During the Great Depression, Heinrich Brning, the
German Chancellor (193032), thought that a strong currency and a balanced budget were the
ways out of crisis. Cruel austerity measures such as cuts in wages, pensions and social benefits
followed. Over the years crises deepened".[211] The austerity program applied to Greece has
been "self-defeating",[212] with the country's debt now expected to balloon to 192% of GDP by
2014.[213] After years of the situation being pointed out, in June 2013, with the Greek debt burden
galloping towards the "staggering"[214] heights previously predicted by anyone who knew what
they were talking about, and with her own organization admitting its program for Greece had
failed seriously on multiple primary objectives[215] and that it had bent its rules when "rescuing"
Greece;[216] and having claimed in the past that Greece's debt was sustainable[216]Christine
Lagarde felt able to admit publicly that perhaps Greece just might, after all, need to have its debt
written off in a meaningful way.[214] In its Global Economic Outlook and Strategy of September
2013, Citi pointed out that Greece "lack[s] the ability to stabilise [] debt/GDP ratios in coming
years by fiscal policy alone",[217]:7 and that "large debt relief" is probably "the only viable option" if
Greek fiscal sustainability is to re-materialise;[217]:18 predicted no return to growth until 2016;
and predicted that the debt burden would soar to over 200% of GDP by 2015 and carry on
rising through at least 2017.[217]:9 Unfortunately, German Chancellor Merkel and Foreign Minister
Guido Westerwelle had just a few months prior already spoken out again against any debt relief
for Greece, claiming that "structural reforms" (i.e. "old wine in a new bottle", see Rodrik et al.
above) were the way to go andastonishinglythat "debt sustainability will continue to be
Strictly in terms of reducing wages relative to Germany, Greece had been making 'progress':
private-sector wages fell 5.4% in the third quarter of 2011 from a year earlier and 12% since
their peak in the first quarter of 2010.[220] The second economic adjustment programme for
Greece called for a further labour cost reduction in the private sector of 15% during 20122014.

German views on inflation as a solution[edit]

The question then is whether Germany would accept the price of inflation for the benefit of
keeping the eurozone together.[222] On the upside, inflation, at least to start with, would make
Germans happy as their wages rose in keeping with inflation.[222] Regardless of these positives,
as soon as the monetary policy of the ECBwhich has been catering to German desires for low
inflation[223][224] so doggedly that Martin Wolf describes it as "a reincarnated Bundesbank"[225]
began to look like it might stoke inflation in Germany, Merkel moved to counteract, cementing
the impossibility of a recovery for struggling countries.[175]
All of this has resulted in increased anti-German sentiment within peripheral countries like
Greece and Spain.[226][227][228] German historian Arnulf Baring, who opposed the euro, wrote in his
1997 book Scheitert Deutschland? (Does Germany fail?): "They (populistic media and
politicians) will say that we finance lazy slackers, sitting in coffee shops on southern beaches",
and "[t]he fiscal union will end in a giant blackmail manoeuvre [] When we Germans will
demand fiscal discipline, other countries will blame this fiscal discipline and therefore us for their
financial difficulties. Besides, although they initially agreed on the terms, they will consider us as
some kind of economic police. Consequently, we risk again becoming the most hated people in
Europe."[229] Anti-German animus is perhaps inflamed by the fact that, as one German historian
noted, "during much of the 20th century, the situation was radically different: after the first world
war and again after the second world war, Germany was the world's largest debtor, and in both
cases owed its economic recovery to large-scale debt relief."[230] When Horst Reichenbach
arrived in Athens towards the end of 2011 to head a new European Union task force, the Greek
media instantly dubbed him "Third Reichenbach";[184] in Spain in May 2012, businessmen made
unflattering comparisons with Berlin's domination of Europe in WWII, and top officials "mutter
about how today's European Union consists of a 'German Union plus the rest'".[227] Almost four
million German touristsmore than any other EU countryvisit Greece annually, but they
comprised most of the 50,000 cancelled bookings in the ten days after the 6 May 2012 Greek
elections, a figure The Observer called "extraordinary". The Association of Greek Tourism
Enterprises estimates that German visits for 2012 will decrease by about 25%.[231] Such is the illfeeling, historic claims on Germany from WWII have been reopened,[232] including "a huge,
never-repaid loan the nation was forced to make under Nazi occupation from 1941 to 1945."[233]
Analysis of the Greek rescue[edit]
One estimate is that Greece actually subscribed to 156bn worth of new debt in order to get
206bn worth of old debt to be written off, meaning the write-down of 110bn by the banks and
others is more than double the true figure of 50bn that was truly written off. Taxpayers are now
liable for more than 80% of Greece's debt.[234] One journalist for Der Spiegel noted that the
second bailout was not "geared to the requirements of the people of Greece but to the needs of
the international financial markets, meaning the banks. How else can one explain the fact that
around a quarter of the package won't even arrive in Athens but will flow directly to the country's
international creditors?" He accused the banks of "cleverly manipulating the fear that a Greek
bankruptcy would trigger a fatal chain reaction" in order to get paid.[235] According to Robert
Reich, in the background of the Greek bailouts and debt restructuring lurks Wall Street. While
US banks are owed only about 5bn by Greece, they have more significant exposure to the
situation via German and French banks, who were significantly exposed to Greek debt.
Massively reducing the liabilities of German and French banks with regards to Greece thus also
serves to protect US banks.[236]

Creditors of Greece 2011 and 2015

According to Der Spiegel "more than 80 percent of the rescue package is going to creditors
that is to say, to banks outside of Greece and to the ECB. The billions of taxpayer euros are not
saving Greece. They're saving the banks."[237] One study found that the public debt of Greece to
foreign governments, including debt to the EU/IMF loan facility and debt through the
eurosystem, increased by 130 bn, from 47.8 bn to 180.5 billion, between January 2010 and
September 2011.[238] The combined exposure of foreign banks to Greek entitiespublic and
privatewas around 80bn euros by mid-February 2012. In 2009 they were in for well over
200bn.[239] The Economist noted that, during 2012 alone, "private-sector bondholders reduced
their nominal claims by more than 50%. But the deal did not include the hefty holdings of Greek
bonds at the European Central Bank (ECB), and it was sweetened with funds borrowed from
official rescuers. For two years those rescuers had pretended Greece was solvent, and provided
official loans to pay off bondholders in full. So more than 70% of the debts are now owed to
'official' creditors", i.e. European taxpayers and the IMF.[240] With regard to Germany in particular,
a Bloomberg editorial noted that, before its banks reduced its exposure to Greece, "they stood
to lose a ton of money if Greece left the euro. Now any losses will be shared with the taxpayers
of the entire euro area."[146]
Initially, European banks had the largest holdings of Greek debt. However, this has shifted as
the "troika" (i.e., European Central Bank or ECB, International Monetary Fund or IMF, and a
European government-sponsored fund) have purchased Greek bonds. As of early 2015,
Germany and France were the largest individual contributors to the fund, with roughly 100B
total of the 323B debt. The IMF is owed 32B and the ECB 20B. Foreign banks had little
Greek debt.[241]
European banks[edit]
Excluding Greek banks, European banks had 45.8bn exposure to Greece in June 2011, with
9.4bn held by French and 7.9bn by German banks.[242] However, by early 2015 their holdings
were minimal, roughly 2.4B.[241]
Hedge funds[edit]
Though it was largely foreign banks, represented in the various talks by the Institute of
International Finance, who originally held Greek government bonds, by the time of the February
2012 negotiations they had sold on perhaps half their holdings, largely to hedge funds and other
investors not represented at the talks.[243] In February, hedge funds were thought to control 25
30% of Greek bonds, and are widely believed to be unwilling to participate in any voluntary debt
reduction, complicating any deal. To neuter the hedge-fund veto on negotiations, the Greek
government was expected to, and did, pass retroactive legal provisions to allow it to force
losses on bondholders.[244] This would be a default, triggering CDS payments;[243] the Greek case
might be more complicated than Argentina, putting some investors off. One hedge fund that had
earlier told Reuters it was considering legal options said it had now decided to agree to the
swap, even though that would mean a small loss.[245] "For much of the past 18 months, investing
in or against eurozone bonds has been a fools errand for the worlds $2tn hedge fund industry.
A regime of political vacillation and punishing volatility left few fund managers who sought to
play the crisis-stricken market with anything to show for their efforts."[246][247]
Greek public opinion[edit]

According to a poll in February 2012 by Public Issue and SKAI Channel, PASOKwhich won
the national elections of 2009 with 43.92% of the votehad seen its approval rating reduced to
a mere 8%, placing it fifth after centre-right New Democracy (31%), left-wing Democratic Left
(18%), far-left Communist Party of Greece (KKE) (12.5%) and radical left SYRIZA (12%). The
same poll suggested that Papandreou was the least popular political leader with a 9% approval
rating, while 71% of Greeks did not trust Papademos as prime minister.[248]
In a poll published on 18 May 2011, 62% of the people questioned felt the IMF memorandum
that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in
the Minister of Finance, Giorgos Papakonstantinou, to handle the crisis.[249](Evangelos
Venizelos replaced Papakonstantinou on 17 June). 75% of those polled had a negative image of
the IMF, and 65% felt it was hurting Greece's economy.[249] 64% felt that sovereign default was
likely. When asked about their fears for the near future, Greeks highlighted unemployment
(97%), poverty (93%) and the closure of businesses (92%).[249]
Polls have shown that, the vast majority of Greeks are not in favour of leaving the Eurozone.
Roger Bootle, a London City economist, wrote of this: "there has been so much propaganda
over the years about the merits of the euro and the perils of being outside it that both expert and
popular opinion can barely see straight. It is true that default and a euro exit could endanger
Greece's continued membership of the EU. More importantly, though, there is a strong element
of national pride. For Greece to leave the euro would seem like a national humiliation. Mind you,
quite how agreeing to decades of misery under German subjugation allows Greeks to hold their
heads high defeats me."[207] Nonetheless, other 2012 polls showed that almost half (48%) of
Greeks were in favour of default, in contrast with a minority (38%) who are not.[251]
Economic and social effects of the crisis[edit]
See also: 20102012 Greek protests
Protests in Athens on 25 May 2011
Economic effects[edit]
Greek GDP suffered its worst decline in 2011 when it clocked growth of 6.9%;[252] a year where
the seasonal adjusted industrial output ended 28.4% lower than in 2005,[253][254] during that year,
111,000 Greek companies went bankrupt (27% higher than in 2010).[255][256] As a result, the
seasonally adjusted unemployment rate also grew from 7.5% in September 2008 to a then
record high of 23.1% in May 2012, while the youth unemployment rate during the same time
rose from 22.0% to 54.9%.[119][120][257] On 17 October 2011, Minister of Finance Evangelos
Venizelos announced that the government would establish a new fund, aimed at helping those
who were hit the hardest from the government's austerity measures.[258] The money for this
agency would come from a crackdown on tax evasion.[258]
Social Effects[edit]
The social effects of the austerity measures on the Greek population have been severe, as well
as on poor and needy foreign immigrants, with some Greek citizens turning to NGOs for
healthcare treatment[259] and having to give up children for adoption.[260] "[F]ood aid, in a western
European capital?" remarked one aghast BBC journalist after visiting Athens, before observing:
"You do not measure a people's ability to survive in percentages of Gross Domestic
Product."[261] Another BBC reporter wrote: "As you walk around the streets of Athens and beyond
you can see the social fabric tearing."[262]

Employment and unemployment in Greece from 2004 to 2014

In February 2012, it was reported that 20,000 Greeks had been made homeless during the
preceding year, and that 20 per cent of shops in the historic city centre of Athens were empty.
The same month, Poul Thomsen, a Danish IMF official overseeing the Greek austerity
programme, warned that ordinary Greeks were at the "limit" of their toleration of austerity, and
he called for a higher international recognition of "the fact that Greece has already done a lot
fiscal consolidation, at a great cost to the population";[264] and moreover cautioned that although
further spending cuts were certainly still needed, they should not be implemented rapidly, as it
was crucial first to give some more time for the implemented economic reforms to start to work.
Estimates in mid-March 2012 were that an astonishing one in 11 residents of greater Athens
some 400,000 peoplewere visiting a soup kitchen daily.[266]
Prominent UK economist Roger Bootle summarised the state of play at the end of February
Since the beginning of 2008, Greek real GDP has fallen by more than 17pc. On my forecasts,
by the end of next year, the total fall will be more like 25pc. Unsurprisingly, employment has also
fallen sharply, by about 500,000, in a total workforce of about 5 million. The unemployment rate
is now more than 20pc. [] A 25pc drop is roughly what was experienced in the US in the Great
Depression of the 1930s. The scale of the austerity measures already enacted makes you
wince. In 2010 and 2011, Greece implemented fiscal cutbacks worth almost 17pc of GDP. But
because this caused GDP to wilt, each euro of fiscal tightening reduced the deficit by only 50
cents. [] Attempts to cut back on the debt by austerity alone will deliver misery alone.[207]
Thus, youth unemployment in mid-2013 stood at almost 65%;[267] there were 800,000 people
without unemployment benefits and health coverage, and 400,000 families without a single
bread winner;[268] the far Right was consistently polling a double-digit share of the vote;[269] the
Greek healthcare system on its knees,[270][271] and HIV infection rates were up 200%.[272][273]
International ramifications[edit]
Long-term interest rates (secondary market yields of government bonds with maturities of close
to ten years) of all eurozone countries except Estonia.[1] A yield being more than 4% higher
compared to the lowest comparable yield among the eurozone states, i.e. yields above 6% in
September 2011, indicates that financial markets have serious doubts about credit-worthiness of
the state.[2]
Outlook in May 2010
Greece represents only 2.5% of the eurozone economy.[274] Despite its size, the danger is that a
default by Greece may cause investors to lose faith in other eurozone countries. This concern is
focused on Portugal and Ireland, both of whom have high debt and deficit issues.[275] Italy also
has a high debt, but its budget position is better than the European average, and it is not
considered among the countries most at risk.[276] Recent rumours raised by speculators about a
Spanish bail-out were dismissed by Spanish Prime Minister Jos Luis Rodrguez Zapatero as
"complete insanity" and "intolerable".[277]
Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010,
more than 20 points less than Germany, France or the US, and more than 60 points less than
Italy, Ireland or Greece,[278] and according to Standard & Poor's it does not risk a default.


Spain and Italy are far larger and more central economies than Greece; both countries have
most of their debt controlled internally, and are in a better fiscal situation than Greece and
Portugal, making a default unlikely unless the situation gets far more severe.[280]
Outlook in October 2012
The contagion risk for other eurozone countries in the event of an uncontrolled Greek default
has greatly diminished in the last couple of years. This is mainly due to a successful fiscal
consolidation and implementation of structural reforms in the countries being most at risk, which
significantly improved their financial stability. Establishment of an appropriate and permanent
financial stability support mechanism for the eurozone (ESM),[281] along with guarantees by ECB
to offer additional financial support in the form of some yield-lowering bond purchases (OMT) for
all eurozone countries involved in a sovereign state bailout program from EFSF/ESM (at the
point of time where the country regain/possess a complete market access),[282][283] also greatly
helped to diminish the contagion risk.
If Spain signs a negotiated Memorandum of Understanding with the Troika (EC, ECB and IMF)
outlining ESM shall offer a precautionary programme with credit lines for the Spanish
government to potentially draw on if needed (beside of the bank recapitalisation package they
already applied for), this would qualify Spain also to receive the OMT support from ECB, as the
sovereign state would still continue to operate with a complete market access with the
precautionary conditioned credit line. In regards of Ireland, Portugal and Greece they on the
other hand have not yet regained complete market access, and thus do not yet qualify for OMT
support.[284] Provided these 3 countries continue to adhere to the programme conditions outlined
in their signed Memorandum of Understanding, they will qualify to receive OMT at the moment
they regain complete market access.[282]
At the current economic climate, with the long-term 10-year government bond rate down at
1.5% in Germany, financial markets as a rule of thumb only indicate a continued existence of
significant contagion risks, for those countries still having a similar government bond rate above
the 6% limit.[285] Looking at the average values for October 2012, only the following 3 out of 17
eurozone countries still battled with long-term interest rates higher than 6%:[286]

Cyprus = 7.0% (Not regulated by the market since Sep.2011; If traded freely it was
expected to be significantly higher in Oct.2012)
Portugal = 8.2%

Greece = 18.0%
Outlook since November 2013

The contagion risk for other eurozone countries in the event of an uncontrolled Greek default
further abated to an insignificant level starting from November 2013. This was reflected by the
simple observation, that since then no other eurozone country (except Greece) suffered from
government long-term interest rates above the 6%-level,[286] being perceived to mean long-term
debt sustainability only was remaining to be at risk for Greece and no longer at risk for any
other states in the eurozone. In other words, the rest of the eurozone had improved their fiscal
stance to levels now making them shock-resilient, i.e. to withstand contagion pressures from a
negative event like a Greek default.[287] This simple observation, became further confirmed by
developments observed in interest rate spreads since the fourth quarter of 2014, where a
significant rise for Greece was observed along presence of some continued declining interest
rates (no negative contagion) for all other eurozone states.[288]

India does not have a large exposure to Greece as far as direct trade is concerned, said
Commerce Secretary Rajeev Kher. But he said that exports from India could be impacted
negatively if the European Union is affected.
2) Minister of State of Finance Jayant Sinha on Wednesday said India has emerged as a
beacon of stability in an increasingly volatile world, pointing to the country's improved macroeconomic fundamentals as compared to a few years ago. "The government is focused on
adding layers of defence from a macro-perspective...whether it is foreign exchange reserves,
fiscal deficit or current account deficit," he said.
3) Former RBI governor Bimal Jalan too said he does not see the Greece crisis impacting the
Indian economy much. India is not a very high trade dependent country and India's GDP growth
rate could be impacted by "0.2 per cent or something" if the crisis escalates, he said.
4) Europe is India's largest trading partner with $129 billion of merchandise commerce in 201415. Of this, the European Union accounted for $97 billion with the UK, Germany, France and
Italy being the leading partners.
5) Dr Jalan hopes that the European Central Bank, which is in the midst of a massive $1.1
trillion stimulus programme, would be able halt the spread of the Greece crisis across the
continent. Global brokerage Nomura too said that it does not see the Greece problems
escalating into a systemic European crisis.
6) Greece has a small economy (GDP of around $250 billion) comprising less than 2 per cent of
euro area GDP. And compared to the 2011-12 European debt crisis, the rest of the euro area is
in a much stronger economic position, Nomura said.
7) Nomura also said that Greek sovereign debt is now mostly held by other European
governments, the IMF and the European Central Bank, unlike the 2011-12 crisis when private
players held most of the country's debt. According to Reuters, Greece owes official lenders
242.8 billion euros ($271 billion), with Germany by far the largest creditor.
8) If the Greece turmoil persists, the US Federal Reserve may delay its rate hikes, said Saugata
Bhattacharya, senior VP for Business & Economic Research at Axis Bank. Analysts had earlier
said the Fed was on track to hike rates from end of this year. A Fed rate hike may cause some
turmoil in global financial markets as investors could flock to US bonds to take advantage of
higher rates.
9) Nomura in fact remains bullish on Indian rupee, citing India's stronger economic
fundamentals as compared to the other emerging markets. RBI Governor Raghuram Rajan
recently said that he expected India's economy would be able to withstand any impact from the
crisis in Greece, thanks in part to its foreign exchange reserves, which reached a record high of
$355.46 billion as of June 19.
10) Market view: Analysts say that Indian markets have shown a strong resilience to the Greek
crisis as compared to a bigger selloff in other markets. They say that 8100 levels offer a strong
support for Nifty. Gaurang Shah, AVP at Geojit BNP Paribas Financial Services, told NDTV that
the recent selloff in Chinese stock markets could trigger some safe-haven buying in Indian

equities as India remains less exposed to Greece crisis as compared to some other Asian
Greece could default on its debts on Tuesday, which could trigger a chain reaction that sees the
country fall out of the euro, the currency 19 European countries use. Greece and the creditors
are are struggling to agree on the terms to get more loans to the country.
Greece will vote on June 5 to decide on whether to accept painful cutbacks in return for
desperately needed financing.
Till now, Greek Prime Minister Alexis Tsipras has been defiant and has urged to voters to reject
creditors demands, insisting a No vote in next Sundays referendum would strengthen Athens
negotiating hand.
Greeces bailout program ends Tuesday, when the country is unlikely to make a 1.6 billion euro
($1.8 billion) repayment to the International Monetary Fund.
Greece crisis has affected the global markets, including India.
We look at pointers that tell us if India will be affected by Greece debt crisis:
Software and engineering exports
Indias software and engineering exports may take a hit and the country may also face larger
capital outflows due to a weaker euro.
Commerce Secretary Rajeev Kher said exports from India would be impacted negatively if the
European Union is hit from the Greece crisis, although he ruled out any major direct impact of
the prevailing Greek situation.
Engineering exporters body EEPC India said the economic crisis in Greece will impact
engineering exports from India as European Union is the largest destination for such shipments.
The industry body said it sees indirect impact from the UK, Italy, Turkey and France.
Capital outflows
Finance Secretary Rajiv Mehrishi said the economic crisis in Greece may trigger capital
outflows from India and the government is consulting the RBI to deal with the situation.
Greece crisis does not have any effect directly on India. (But) interest rate may firm up in
Europe. In case of firming up of interest rate in Europe, there can be outflow of capital from
India, Mehrishi said.
Better prepared this time
Indian authorities say they are drawing up plans to meet any adverse impact on the economy
from the crisis. However, economists say authorities are better prepared this time to face any
adverse fallout as the situation in Greece has been volatile for some time. Unlike the earlier
global financial crisis, authorities have been preparing to deal with any adverse fallout of a
Greece exit, but they say there may be short-term volatility.

Domestic demand drives India's growth

Growth in India is driven by domestic demand and is expected to pick up. Most multilateral
agencies see India as a bright spot with GDP growth in 7-8% range.

India has enough forex reserves

RBI governor Raghuram Rajan has said the Indian economy will see through any impact of
theGreece crisis. Robust forex reserves, which are at an all-time high of $355 billion, will
cushion any possible impact of the crisis
Greece is a short-term risk
Economists say the Greece situation is a short-term risk and authorities must keep a close eye
and there should be close coordination between various wings.
India does not have large exposure to Greece as far as trade is concerned, he said.
However, he said that if European Union is hit, it could have negative impact on India's trade.
Industry chamber Assocham said Indian economy is not really centric to Greece directly but if
European Union is impacted due to the crisis, then India could be affected.
Europe is India's largest trading partner with USD 129 billion of merchandise eng ..