Bye bye poor Greece?

Group 2: Johanna Nykopp, Anna Vanninen, Jenni Tepsa

How to help a collapsing country and does it do any good.

Greece has been living beyond its means before it joined the euro. After that, public spending soared and public sector wages practically doubled.

In addition to its roughly €300 billion of government debt, it turned out that the government owed another €600  billion or more in pensions. All together it made about €900 billion, or more than a quarter-million dollars for every working Greek.

The country was given 110bn euros of bailout loans in May 2010 to help it get through the crisis. In July 2011 it was earmarked to receive another 109bn euros.

In October 2011, the Eurozone asked banks to agree to a 50% “haircut” on their Greek holdings, alongside an enhanced 130bn-euro bailout. At the same time Finland was about to paralyze the aid-package negociations demanding collaterals from Greece.

In March 9th, the majority of private holders of Greek government bonds had agreed to trade in their bonds for new longer-dated ones with less than half the face value of the old ones and a low interest rate.

Holders of €152 billion of the €177 billion of sovereign bonds issued under Greek law signed up to the swap. Those who did not respond to the bond were forced to accept the deal.

According to some analyses even these actions will not save Greece from bankruptcy. David Harvey, a distinguished professor at City University on New York has said that Greece should have simply defaulted the debts in terms of achieving even some economic growth in the future – as Argentina did in their economic crisis in 1999-2002, and survived.

Harveys opinion is that Eurozone should be responding even in more responsive way, as the actions that it’s taking now will only paralyze Greece’s economy for years.

”What’s happening now in Europe is a political project rather than an economic necessity.  And the political project is about feathering the nest of the very, very rich at the expense of the very poor.”

Alastair Winter, chief economist at Daniel Stewart & Co, has said he is certain a third bail-out would ultimately be needed.

“I don’t see how they can possibly return to the capital markets in 2015.”

Polls in Greece have shown that 60% of the population is against the terms of the bailout.

However, now all the Eurozone countries have contributed in the Greece’s bailouts. In Finland there has been a debate should the collateral agreement be secret or not.

Finland’s finance minister Jutta Urpilainen says that this is what Greece banks wanted when they agreed with the terms of the agreement.  That means, the terms cannot be very flattering to the banks – they might even have lost the rest of their credibility in the eyes of international finance markets and the credit-rating agencies if the agreement came public.

Sounds like something that can still collapse on Greece or the Eurozone – but we don’t know.

Polls have also shown that 70% of the Greeks are against leaving monetary union.

Professor Ken Rogoff, the Harvard economist and former chief economist at the IMF has said that the Greeks “are going to end up defaulting hugely no matter what”, adding:

“The odds that they will be gone from the euro within a few years are very high.”

No country has ever left the euro before and there are no provisions about how they might go about it.

So what happens if Greece really leaves the euro? Alan Clarke, an economist at Scotia Capital has said:

“Either way you look at it, it’s bad. It’s not a soft-option for Greece. They are spending about 8% on GDP more than they are receiving in taxes. If the population aren’t happy with another 100,000 lay-offs and reject the deal, the government won’t be able to borrow and pay anyone.”

“For the Eurozone it’s bad. A lot of the EU banks are exposed to Greece, the initial ESFS deal said they would lose 21% of value of holdings, now it’s more like 50%. if it’s the whole hog of 100% that would have serious implications for EU banks. It would look like [the bankruptcy of] Lehman Brothers if banks go bust particularly if you have contagion. You have serious risk of bank failures. Take cover. There would be 110% chance of recession if Greece goes bad.”

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