The Fiscal Policy: The Greece Sovereign Debt Crisis (Essay Sample)

The Greece Sovereign Debt Crisis
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Table of Contents TOC \o "1-3" \h \z \u Introduction PAGEREF _Toc451174907 \h 3The Greek sovereign debt crisis PAGEREF _Toc451174908 \h 3Background PAGEREF _Toc451174909 \h 3The Financial Sovereign Debt Crisis: Response to the Financial Crisis by Lazaro Sandoval. Erika Beltran, Sodgerel Ulziikhutag and Temuum Zorigt. PAGEREF _Toc451174910 \h 4Nelson, R., Belkin, P. and Mix, D. (2011). Greece’s Debt Crisis: Overview, Policy Responses, and Implications. Congressional Research Service, pp.1-19. PAGEREF _Toc451174911 \h 4Alogoskoufis, G. (2012). Greece’s Sovereign Debt Crisis: Retrospect and Prospect. Hellenic Observatory Papers on Greece and Southeast Europe, (GreeSE Paper No.54), pp.9-25. PAGEREF _Toc451174912 \h 5Challenges and Resolutions PAGEREF _Toc451174913 \h 6Misconceptions PAGEREF _Toc451174914 \h 6Role of the agencies PAGEREF _Toc451174915 \h 7Incentives PAGEREF _Toc451174916 \h 7Fiscal policies PAGEREF _Toc451174917 \h 8Conclusion PAGEREF _Toc451174918 \h 9References PAGEREF _Toc451174919 \h 10
Introduction
In order to understand analyze and assess the Greek debt crisis it is important to put into account how it fell into debt in the first place, it also important to look at the financial crisis facing the Eurozone. The resolution of the Greece fiscal predicament is directly linked to the resolution of the European debt crisis (Alikhanov, 2013). This paper will look at this resolution and link it to how the policies applied to the resolution of the European debt crisis can be applied to Greece. This paper looks at how the Greece debt stabilized about its GDP and then destabilized about the European and global financial crisis.
The Greek sovereign debt crisis
Background
In the mid twentieth century the Greek economy was a mess it was ridden with unemployment despite having experienced an economic boom after the second world war. The fall of the military dictatorship that had ruled the country over a long period also saw than increase in prices and a rise in inflation by over 10% annually (Sandoval et al., 2011).The government tried to raise the economy by using deficit fiscal policies which resulted in increased borrowing rates. Prior to its entry to the Eurozone Greece had it borrowing rates at an all-time high compared to its other Europe counterparts. Towards the end of the 1990s decade its inflation rates fell sharply but the beginning of the millennium saw Greece admit to fiddling its deficit numbers to align with those of the European union’s regulations. At the time the deficit was about 3% of the GDP. The adoption of the euro as a national currency instilled over confidence in the Greece financial markets as well as its domestic and international investors who ignored its previously shaky credit history by assuming that they would be cautioned by the stability of the euro. Its borrowing interest rates fell to the same level as other European countries such as Britain and France. The economic growth was steady over a period of ten years until 2006 when it began to plummet. During this decade its growth was 3.9% which was higher than the Eurozone’s 2.2%; its GDP per capita also rose by about 45% (Sorribas-Navarro, 2011). However, this also resulted in the rise of the deficit once again to about 12.9% in 2009 which was worse than it had been before joining the Eurozone. This led to the pulling out of investors and an increase in the borrowing costs by the time it was 2010 which was the eight of the debt crisis. This was the time that it secured its first bailout from the European union of about €110 billion in exchange for implementing austerity measures (Zahariadis, 2016). A second bailout did not help its economic situation and in 2015 Greece had a referendum to determine whether it should accept international bailout measures (Sandoval et al., 2011).
Literature review
The Financial Sovereign Debt Crisis: Response to the Financial Crisis by Lazaro Sandoval. Erika Beltran, Sodgerel Ulziikhutag and Temuum Zorigt.
This article cites the effects of the European debt crisis on the continents financial markets and in particular the Eurozone. It looks at how the European union has worked fast to mitigate the effects of the Greece debt crisis and with the collaboration of the IMF they have tried to avert the global economic crisis that would ensue if the debt crisis persisted. The tensions within the Eurozone and the alienation that resulted from every nation wanting to solve its financial crisis had a significant contribution to the prevalence and severity of the debt crisis. As such the authors of the article recommend unity and equity in the Eurozone and the European union and the flexibility of the IMF regulations on the nations that it should help out when it comes to dealing with a debt crisis.
Nelson, R., Belkin, P. and Mix, D. (2011). Greece’s Debt Crisis: Overview, Policy Responses, and Implications. Congressional Research Service, pp.1-19.
At the beginning of the millennium, Greece adopted the Euro which led to an influx in access to cheap capital which was accelerated by the capital markets and increase investor confidence. However, the capital inflow was not managed correctly, and the respective EU failed to regulate the over-accumulation of debt. To prevent Greece from defaulting, they formulated an assistance package and ensured that the Greek government committed to economic reforms. However, this plan was not effective, and it forced for another financial assistance package as well as a call for the corporations, countries and private investors holding Greece bonds to accept the losses. Due to its membership at the Eurozone Greece could not depreciate its currency as a containment measure for its debt crisis. Although the agency responses prevented the debt default, they failed to provide a guideline for recovery of the Greek economy.
The Greek debt crises highlighted many issues in the global financial status; it set precedence for dealing with a future financial crisis; it also highlighted the tensions within the European Union as well as the need for the adjustment of the EU governance policies. During this crisis that did not only affect Greece but other members of the Eurozone, some members threatened to leave rather than help in bailing out and formulating a plan to solve the debt problems. Some of the countries were unwilling to undergo loss as a containment plan for the debt crisis.
The debt crisis also highlighted the problems that would affect global nations of a single country or region was affected by a financial crisis. For instance, despite Greek’s insignificant involvement with the USA, the USA was exposed to potential risks if the debt crisis caused the depreciation of the Euro against the dollar.
The dependence of the Greek government on international aid, grants and loans left its economy vulnerable to the wavering investors confidences as such they were at the mercy of the investors in its ability to service its loans. It also left it vulnerable to increase in interest rates. The lack of new injections into its income denied it the loans needed to service its current loans this meant that it could not sustain its debt burden. This meant that the government was left with limited choices to either default its loans or implement austerity measures.
Alogoskoufis, G. (2012). Greece’s Sovereign Debt Crisis: Retrospect and Prospect. Hellenic Observatory Papers on Greece and Southeast Europe, (GreeSE Paper No.54), pp.9-25.
According to this article, Greece was not only suffering a liquidity problem but also a solvency crisis. Therefore, any policies proposed should have covered both these issues. Among the fiscal policies proposed for the recovery of the Greece were the reduction of the budget deficit through cutting back on public spending.
The policy responses to the Greece crises was only reached through extensive negotiations with the agencies and the Greece government (Zahariadis, 2016) . The policies were comprehensive enough to help out other nations in the Eurozone who were experiencing the similar crises. The proposed reforms though beneficial for the Greece economic situation was not accepted positively by the political leaders who had beelected ion a platform to provide social protection, higher wages, and wealth redistribution. Even with the implementation of these policies the people were protesting what they claimed to be the interference of higher European powers. The protests exposed the fact that some of the Eurozone nations had more power and leverage than some of the European Union institutions. This upset the balance of power within the organization due to the realization that these powers could dictate the regulations and reforms to be taken by other sovereign nations. Some nations also raised issues with the help that the IMF offered to Greece; they even to the extent of trying to change the extent to which the fund could bail out a nation. This was a ploy to limit the use of the funds resources on just one region Europe, which is seen as highly economically developed.
This article also proposed that the policies should be acceptable and understandable to the people in terms of long term benefits. The solutions should be a dialogue process rather than imposed upon the affected countries. The article further argues that there is a need to address the confidence issues of both Greece and its domestic and international investors.
Challenges and Resolutions
Misconceptions
The Greece financial crisis has proved beyond doubt that despite the fact that most of the financial institutions appearing well supervised and individually sound, can still. Prior to...