Crisis in Greece: What about solution?

Over the last decade, Greece went on a debt binge that came crashing to an end in late 2009, provoking an economic crisis that has decimated the country’s economy, brought down a government, unleashed increasing social unrest and threatened both Europe’s recovery and the future of the euro.

The Greek government has been kept afloat by its fellow eurozone countries, but at a steep price: the austerity measures demanded by  France and Germany in return for two massive bailout packages have ripped holes in the Greek safety net and plunged the country into a recession of near-Great Depression dimensions. After long resisting the idea of a default, European officials in March 2012 helped Greece negotiate a landmark debt restructuring deal with the vast majority of its private sector lenders, who agreed to swap 177 billion in Greek debt for new bonds worth as much as 75 percent less. It was the largest default in history.

Scenario 1: New bail-out succeeds

The Greek government is racing against time to fulfil the demands of international lenders and qualify for a new lifeline to avoid default. The immediate priority is to secure a 12bn-euro (£10.6bn; $17bn) loan instalment by 3 July – part of the 110bn-euro loan package granted by the EU and International Monetary Fund in May 2010. But even if the Greek parliament adopts the new austerity measures – tax rises, spending cuts and privatisation – necessary to get that 12bn euros, it will only bring temporary relief.

Jittery markets may calm down if the EU agrees on a new rescue package for Greece worth about 120bn euros, which would give Greece time to restructure its economy, boost much-needed tax revenue and eventually return to commercial lenders.

The new package is deemed necessary because the ratings agencies have downgraded Greece’s sovereign bonds so much that it cannot afford to borrow from commercial lenders.

That rescue could buy enough time to restore confidence in the euro and reduce Greece’s debt mountain.

Scenario 2: Greece quits euro – for a while

Being in the eurozone, Greece is unable to restore its economic competitiveness by devaluing its currency. Some commentators have entertained the notion that Greece could give up the euro, but not for good. Instead, it could take a “eurozone holiday,” temporarily sloughing off the obligations of the single currency and returning when the time was right. In this scenario, Greece would return to the drachma at a new exchange rate: one euro would equal one drachma. It would then devalue by nearly a quarter and return to the eurozone after a few years had passed at, say, 1.3 drachmas to the euro. Such a measure would certainly cut labour costs and boost exports.

However, it would increase the size of Greece’s debt mountain.

Scenario 3: A different sort of default

So what happens if Greece cannot meet its debt obligations?

Well, in that case, it will have to come clean and tell its creditors that they won’t be getting all the money they were owed. They will get most of it, but later than they had expected. This process is euphemistically known as “debt restructuring”. For it to work, holders of Greek government bonds would have to accept less than they were worth – or in the jargon of the markets, “take a haircut”.

According to analysts, the size of that haircut could be anything between 20% and 50%.

If the settlement were negotiated in an orderly fashion, it could form part of an acceptable solution – although it would make investors reluctant to buy more Greek bonds in the future. In their view, it would just be postponing the day of reckoning that they believe Greece must face. It would also raise interest rates for bonds issued by other troubled eurozone “periphery” economies – especially the Irish Republic and Portugal – and depress the value of the euro.


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4 thoughts on “Crisis in Greece: What about solution?

  1. the situation in Greece is very difficult en definitely not easy to fix.
    Also with these scenario´s I wonder if it will work. On all the scenario´s I notice some things that I don´t agree with or that I have a question about.

    With scenario 1I think it is very important that the Greece government adopts the new austerity measures. Even thought it brings only a temporary relief I think it´s good to show other countries that Greece is really trying. In my eyes it would have been wrong if Greece doesn´t do it´s best to cut down so much while the rest of Europe is lending them money and trying to save the situation.

    I don´t think that the EU should agree on another rescue package. It has already done a lot for Greece. The countries in the EU have problems of their own as well and I don´t think that all the money has to go to Greece. Besides the national problems there are other countries in the EU that maybe need a rescue package in the future as well. Take for example Spain or Portugal. They cannot get a rescue package if everything goes to Greece.

    Scenario 2 is a bit hard for me to understand. I get that with different exchange rates it will help Greece a bit. But I think it has more to it to just change the currency of a country. Can Greece just decide on their own exchange rate? And I think that the debts will still be there, only this time in dachmas instead of euro´s.

    Scenario 3 is a hard one, but I think that it will happen. Greece will not be able to pay all their debts pack and definitely not in time. It´s understandable that investors are reluctant to buy more Greek bonds in the future, but in time that will get better. It will take more years and hard work to get out of this crisis. Not only by Greece, but by the whole EU.

  2. solution to the crisis in Greece.
    At least the same problems of Greece as the debt is low competitiveness. Greece’s economy, and wages grew largely because no labor productivity growth, but because of state indebtedness, but the benefits are already in place are not as much. To increase competitiveness in the absence of monetary channel is only possible internal devaluation, thus reducing wages and prices, but what causes a wave of mass protests and strikes and when people do not work, so it is for the Greek economy comparable damage as not taking action. And Greece has implemented only a small part of austerity measures from Europe requires it.

    Withdrawal from the euro area uncompetitiveness problem, which is for Greece in the euro area superhuman task, solve the weaker currency. Yes, Greece would have gone bankrupt, yes, Greece would have passed through higher inflation, but could start again, what is for him to do far better than a beggar over Europe for many years and be vassal of European civil servants, for whom the ability to resolve the situation say so far with zero results enormous cost, low competitiveness and minimal economic growth.

    Those who would most Greek withdrawal from the euro area was lost by the euro area itself. European banks reported losses by both the Greek government bonds, but the vast majority of other Greek debt, whereas a significant weakening of the new drachma against the euro has increased the Greek debt to the private sector with the euro. If päťdesiatpercentného new drachma weakened by the principal debt repayments increased to double. In addition, performance of Greece in the euro area would set a precedent for other countries that they think is better to solve their monetary problems as the Brussels canal recipes. Candidates would have been a number of Portugal, which has similar problems with competitiveness as Greece.

    Perhaps this scenario, which the Greek is not the euro area, there was, it looks ugly. But, the question whether we have any better solution than putting off the inevitable for extremely high price. From my perspective, we, the current monetary system based on fiat money world flooded with debt, which at the current price level will never be repaid. The situation has, in my view only one solution – debt destruction, and to either bankruptcy or print more money and inflation, which reduces the real value of debt. Bankruptcy punishes irresponsible, inflation responsible.

  3. Addressing the Greek crisis could facilitate a common European bond. Euro area Member States to act vigorously to establish a common bond. Banks would be able to get in exchange for part of the Greek bonds. Inform the European press. A single bond Monday acted in Economic and Financial Committee of the EU (EFC), while about fifty European financial institutions. The key to resolving the current crisis could be a menu of French banks, because the commentators refer to this variant as the “French model”. Financial institutions have offered to reinvest 70 percent of total Greek bonds, which are due to expire between 2011 and 2014. For most of these bonds should be extended to 30 years maturity and the rest of the bank will bond with a rating of AAA, you are likely to issue a current eurozone bailout fund (EFSF). It is very similar to that used in the world crisis in Latin America 22 years ago. Investors had also just received new bonds, which bear named former Treasury Secretary Nicholas Brady of the United States. As can be called Brady bonds and bonds to be issued EFSF. European dailies but agree that it is almost time for consideration Eurobond, a common bond area.


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