In return for the loan the EU required Greece to adopt austerity measures These

In return for the loan the eu required greece to

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In return for the loan, the EU required Greece to adopt austerity measures. These reforms were intended to strengthen the Greek government and financial structures. They did that, but they also mired Greece in a recession that didn’t end until 2017. The crisis triggered the eurozone debt crisis, creating fears that it would spread into a global financial crisis. It warned of the fate of other heavily indebted EU members. The United States and the EU have strong economic ties, and a crisis in Greece that threatens to spill over to other Southern European countries could impact U.S. economic relations with the EU and the general economic recovery from the financial crisis. Additionally, the exposure of U.S. banks is estimated at $16.6 billion. On May 10, 2010, the U.S. Federal Reserved reopened credit swap lines with the European Central Bank (ECB), among other major central banks, to help ease economic pressures resulting from the crisis in Europe. The Build-up to Greece’s Debt crisis During the decade preceding the global financial crisis that started in fall 2008, Greece’s government borrowed heavily from abroad to fund substantial government budget and current account deficits. Between 2001, when Greece adopted the euro as its currency, and 2008, Greece’s reported budget deficits averaged 5% per year, compared to a Eurozone average of 2%, and current account deficits averaged 9% per year, compared to a Eurozone average of 1%. In 2009, Greece’s budget deficit is estimated to have been more than 13% of GDP. Many 4
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attributes the budget and current account deficits to the high spending of successive Greek governments. Outbreak of the Current Crisis & Capital inflows In 2009 , Greece announced its budget deficit would be 12.9%of its GDP. That's more than four times the EU's 3 percent limit. Rating agencies Fitch, Moody's, and Standard & Poor's lowered Greece's credit ratings. That scared off investors and raised the cost of future loans. In 2010 , Greece announced a plan to lower its deficit to 3 percent of GDP in two years. Greece attempted to reassure the EU lenders it was fiscally responsible. Just four months later, Greece instead warned it might default. The EU and the International Monetary Fund provided 240 billion euros in emergency funds in return of rigid measures. The loans only gave Greece enough money to pay interest on its existing debt and keep banks capitalized. The EU had no choice but to stand behind its member by funding a bailout. Otherwise, it would face the consequences of Greece either leaving the Eurozone or defaulting. Austerity measures required Greece to increase the VAT tax and the corporate tax rate. It had to close tax loopholes. It created an independent tax collector to reduce tax evasion. It reduced incentives for early retirement. It raised worker contributions to the pension system. At the same time, it reduced wages to lower the cost of goods and boost exports. The measures required Greece to privatize many state-owned businesses such as electricity transmission.
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