Greek crisis Flashcards
Give some background to the crisis.
EU was forming. More countries joining and signing treaties
What was the Maastricht Treaty?
Rules governing inflation, government deficit, government debt-to-gdp, exchange rates etc
Why was the Maastricht treaty important?
It was meant to ensure the stability of the group of countries.
What happened when Greece adopted the Euro?
Now there was no exchange rate fluctuations
Lower interest rates
Less asymmetric info so easier to attain L-T borrowing
Talk about the build up to the crisis for Greece
(Ratios, change in govt)
Greek government debt to gdp went for 68% in the 90s to >100% in 2006.
New government revealed that past deficits had been understated. Investors lost major confidence, rating agencies downgraded Greece and borrowing became a lot more expensive.
What does it mean that Debt-to-GDP for the Greek government became so high? Where was debt invested?
Not a problem in of itself so long as money is invested well to yield returns.
Greece was using it to offset missing tax revenue - subsidising tax evasion and not yielding returns
Why was the possibility of Greek sovereign default a risk to other countries?
Investors reevaluated other countries in EU. Also, French and German banks had heavy exposure to Greek government debt.
What metrics could be observed in Greece during this crisis?
Almost 50% of banks total loans were non-performing
GDP dropped heavily
Above 25% unemployment
Talk about the first stimulus.
Eurozone governments and IMF lend €110 billion conditional on structural reform
Talk about the second stimulus
Another €100 billion.
Government bond holders had to accept 50% haircut
More austerity
Talk about third stimulus and controversy
Greece believed all this austerity was to benefit French and German banks.
High taxes, low pensions etc
What were the conclusions from the Crisis?
European stability mechanism instated. Countries chip in to fund to use in emergency
More transparency in bank holdings
