Financial Crisis in Greece

For the past few months, I am sure that you have seen Greece in the news headlines. This is because they are amidst a financial crisis that could potentially cause huge problems for Europe, the European Union, and the Euro.

So how did this all start?

Back in February, Fitch Ratings, citing concerns about Greek banks' funding costs and profitability, downgraded the country's four major banks to triple-B, or two notches above "junk" status. The downgrade of Greece’s credibility came from fears that Greece would not be able to pay off its debt. The European Union (EU) mandates a ceiling for deficits at 3% for its member countries, however, in late 2009 Greece ran a deficit of 11.4% of GDP and it is projected to reach 12.5% in 2010.

Faced with increased pressure to decrease this number, Greece has started paring down its expenditures while finding new streams of revenue, such as selling bonds. Despite the efforts, the Euro is facing severe downward turns as the outlook for Greece and other EU member countries, such as Portugal, worsens. The Euro was implemented in 2002 as legal tender for 15 countries as a way to pull Europe together economically and politically. The Euro has weakened due to uncertainty that the EU will help Greece out of its Debt Crisis. Recently Portugal’s credit rating has been downgraded which has also effected the Euro. With the Euro weakening against the dollar, the cost of Oil and other raw materials priced in dollars is rising for European nations. Consumer prices are under pressure because goods imported from outside Europe are now becoming more expensive in terms of Euros. As of March 24, 2010, the euro was at $1.3355, the lowest it has been since May of 2009 and is at a 10 month low against the US dollar. Market Strategists expect the euro/US dollar to extend losses towards $1.32 in late march and decline as low as $1.28 before the beginning of May.

How is Greece going to pay off its debts?

Since Greece is part of the European Union, which shares a common currency, the Euro, Greece cannot simply print more money to pay off their debts that are becoming due. In order to have enough funds, they must borrow money. However, with their downgraded credit rating, the interest rates alone on a loan would be too high for Greece to ever pay back. Greece has instead turned to Germany, who is the richest country in the EU. Germany is apprehensive about loaning Greece money because they do not feel that it is fair that they have to bail out a nation who has consistently made bad financial choices and who has repeatedly broken the EU “rule.” It has actually been said that Germany would like Greece kicked out of the EU if there is further noncompliance. If Germany refuses to help Greece, then they will be forced to the International Monetary Fund (IMF) for loans.

IMF involvement will highlight the inability of Eurozone governments to deal with the Greek debt crisis on their own and would highlight the monetary strains in the Eurozone. It would show proof that the structural flaws that have surfaced are beyond the nations’ control and the IMF would be the final judge of whether Greece is doing enough to get its economy back on track, decisions which are currently decided by the Eurozone governments on the advice of the EUs executive commission. If the EU resorts to the IMF, this would further damage the euro’s reputation and could lead to an even greater fall against other key currencies.

So what has been happening in recent weeks in Greece?

On March 25, 2010 Leaders of the 16-nation euro zone backed a deal under which they and the IMF would jointly provide a bailout package for Greece, if needed. Then on April 9, 2010 Greece was downgraded again to the lowest possible rating as a result of the continued negative outlook for the future of Greece. Because of this, the euro zone agreed that Greece can borrow up to $40 Billion dollars (30 billion euro) by taking out three-year loans from members of the euro zone at an interest rate of close to 5%. Finally, on April 23, 2010 Greece officials announced that” the time has come for Greece to request aid from the euro zone and the IMF”. The bailout package was described as an”extreme, national necessity.”

* All information has been taken from The Wall Street Journal Online.