Deconstructing the Greek Debt Crisis

By Michael J. Lockhart breaks down the on-going debt crisis going on in Greece.

At the center of the larger European Sovereign Debt Crisis lies the primary source of stress for European politicians as of late: Greece. Years of untethered spending, loans, and other forms of fiscal mismanagement has left the country on the verge of being unable to service its substantial debt load. This in turn threatens to topple the European economy and cause potential repercussions to the global financial markets.

Fairly confusing? You bet. Here’s the breakdown of what’s going down in Greece.


Greece has lived a fairly opulent lifestyle for the past few decades and has amassed a fair amount of debt, which left unchecked and unpaid, can result in a default. While it may surprise you that a whole country can default in a manner similar to your mortgage, Greece has a history of being unable to pay its debts and crashing (five times to be precise, in 1826, 1843, 1860, 1894, and most recently around the great depression in 1932).

What is different this time is that Greece’s fate isn’t just tied to its citizens anymore. By entering into the Eurozone and adopting the euro over a decade ago, Greece’s finances are now tied to that of much larger economies including presumed Euro-leader Germany. This ugly scenario means that Greece must ask for bailouts from its wealthier neighbors who negotiate these debt-repayment loans in conjunction with the European Central Bank and the International Monetary Fund (collectively the Troika bailout gods).

Following smaller, but controversial bailouts in Ireland and Portugal, Greece received its first bailout funds of 110bn euro in May 2010, with a second package of 109B euro aimed at 2011. However, this second package was deemed too small which began the current conundrum between lending partners and euro countries who wanted Greece to meet certain targets (cuts, taxes, and sign deals) that would put them on the hook for a repayment schedule (known as the austerity measures). In the wider scope of things, the EU has planned for a lending fund for bailouts (the European Financial Stability Facility or EFSF) to deal with this in the future (if it makes it this far), though it’s argued that it would need to exceed 1B euro in order to be effective.


Greece has two options on the table, and critics have been arguing for almost two years which one presents the most danger to the stability to the larger world financial markets.

1) Let Greece Default

A Greek default on its estimated $485bn (340bn euros), would result in mass chaos in the country as the government would have no money to pay its employees; debt, and costs could soar in everything from imports to affecting public services. This reaction would cut-off any lending to the country from European sources and as meetings prior to Christmas indicated, the Chinese, Americans, and Canadians are not going to step in to help them out. Greece would most likely lose the euro as its currency and have to revert back to its drachma (if it could afford to), and have its debt to GDP percentage rocket from the current 160%. If this happened, holders of Greek debt would be forced to write off their investments, and could potentially go under (banks that is, France and Germany have substantial Greek debt exposure themselves). This option would further impact the credibility of European investors and potentially send the European economy into a massive recession, greater than the Lehman Brothers financial crash in the US in 2008. As we learned four years ago, one recession is enough to cause a global financial crisis.

2) Bailout Greece

A full bailout of Greece would cut its debt to GDP to sustainable levels in targeted chunks so that the country can learn to operate with some financial stability. With this, Greece would have access to funds to re-start its economy and responsibly manage its assets (tourism is a large income provider). By doing this, Greece will need to accept harsh austerity measures that have so far been unacceptable to its citizens. Previous measures resulted in protests, fire bombings, and marches. While this option would undoubtedly hurt Greece and probably Europe for the moment, it remains the most logical option to avoid cataclysmic results globally.


While recently-elected Greek Prime Minister Lucas Papademos managed to have the austerity measures passed through parliament last week, it will come down to a meeting today in Brussels where all stakeholders: the 17 Eurozone members, Troika, and private holders of Greek debt come together and vote to approve the bailout package. While a vote seems like a set deal to ensure Greece’s stability, the fight is long from over as measures need to be enforced along with the great potential for repayments to fall short and send the country begging once again to the EU.


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