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Running head: GREEK CURENCY CRISIS 1 The Greek Currency Crisis Paul M. Robertson Texas A&M University-Kingsville
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GREEK CURRENCY CRISIS 2 The Greek Currency Crisis Introduction The currency crisis in Greece created alarm in the world’s financial markets in 2010. Their government bonds were downgraded in April of 2010 and were subsequently bailed out in May of 2010 by the European Union to with €210 billion on condition that they would rein in their spending, privatize some governmental programs, and implement reforms to inspire competiveness and growth. 1. Causes of the Greek Currency Debt Crisis 1.1 Government Spending The Greek economy was one the fastest growing economies in the entire Eurozone from 2000 to 2007 with about 4.2% GDP growth per year (Greece 2009). It somehow was still recording record debt due to reckless government spending. By 1981, the Greek government only recorded budget deficits up to present day. Not a single year of budget surplus had been recorded (OECD Economic outlook 2009). Before the introduction of the Euro, Greece was able to use currency devaluation to help finance its borrowing. 1.2 Tax evasion and corruption Tax evasion cost Greece €20 billion in 2010 alone (Torchia 2010). Only half of tax revenues were collected in 2012, but they accepted a late pay policy that did not work either. Greece’s black market makes up for 24.3% of its GDP (Gimein 2012). That also correlates to the amount of self-employed persons in the country (Tsoukalis 2013). These self-employed persons make up for about the same amount of taxes not collected in most years. As far as corruption goes, successive Greek governments have with the help of Goldman Sachs, hidden their true debt
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GREEK CURRENCY CRISIS 3 numbers through cross currency swaps (Watts 2010). Goldman Sachs would convert Greece’s debts into dollars and Yen at fictitious exchange rates, all while collecting hundreds of millions in fees (Story 2010). The European statistics auditor Eurostat audited Greece’s debt to fix their flawed reporting. After having finally finished auditing, Eurostat increased Greece’s deficit from a previous 6-8% all the way to 15.7% of GDP. This was highest debt of any nation in the European Union (European Commission 2010). 1.3 Unsustainable and accelerating debt to GDP ratio From 1980 to 1996 Greece’s debt-to-GDP rose from 22% to 100%. This was their first period of accelerating debt-to-GDP ratios (European Commission 2012). This was followed by a short period of declining debt-to-GDP ratios. The second period with accelerating debt-to-GDP ratios took place between 2004 and 2011 where debt-to-GDP rose from 100% to 170% (European Commission 2012). 2. Evolution 2.1 Danger of Default There was a very high probability that Greece would default on their government debt without a bailout plan (Mandaro 2010). Some experts said that it would actually be better for the country to default, exit the Eurozone, and reinstate their own national currency such as the drachma. Economists that favor such an orderly default say that delaying the orderly default would actually hurt the Eurozone lenders and their neighbors more than it would to default immediately (Armitstead 2011).
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