The Greek Financial Crisis

Over the last several years, the Greek Financial Crisis has repeatedly generated headlines. While the troubled European nation has received multiple rounds of bailout funding to avoid defaulting on its obligations, the country's leaders have accepted harsh austerity measures in exchange for this support. As a result, the Greek government has cut salaries, reduced benefits, enacted labor reforms and hiked taxes.

These challenges have drawn the attention of political analysts, financial experts and investors, who have all weighed in on Greece's difficulties. In addition, these difficulties have generally been credited with worsening capital market volatility by fuelling global risk aversion.

While many have emphasized the importance of Greece staying in the eurozone, others have taken the opposite viewpoint, contending that a Greek exit or "Grexit" would benefit the 19-nation consortium and cause less damage to the global economy than some believe.

These differences in opinion are widespread, and many of the nation's officials also have contrasting views of how Greece should proceed moving forward.

Greece's Economy

These officials are coping with widespread discontent, as many Greek citizens are unhappy with conditions in the nation. Greece's economy fell into a lengthy recession in 2008, which lasted for six years before the nation entered an expansion in 2014, according to Eurostat figures.((Retrieved 1 September 2015
)) By the time the nation's economy managed to expand once again, it had lost more than 25% of its size.

Greece's gross domestic product rose 0.8% in 2014.[1] Thus far in 2015, the nation's output grew 0.1% in the first quarter and 0.9% during the second, according to Hellenic Statistical Authority figures.[2]

When explaining the country's recent economic improvement, many economists have pointed to tourism and retail sales.[3] Travelers have been flocking to Greece amid the turmoil in the Middle East and Turkey. In addition, many Greeks have been stepping up their spending due to concerns their nation will leave the eurozone and adopt the drachma once again.

However, many market observers are bracing for economic headwinds, as the nation prepares itself for austerity measures linked to a third bailout. Third-quarter GDP data will reflect capital controls implemented in June.

The overall economy has followed a long, downward trend before recovering, and the labor market has shown similar traits, with the unemployment rate rising from less than 12% in May 2010 to nearly 28% in November 2013.[4] This key measure of labor market strength then proceeded to track lower, falling to 25% in May 2015.[5]

Root Causes of the Crisis

Observers have cited many factors as helping cause the Greek Financial Crisis, including a complicated pension system, inefficient tax collection, widespread joblessness and inflated fiscal figures provided by the nation's government.

Greece's pension system is expensive, intricate and full of loopholes.[6] Currently, the nation has higher pension costs relative to GDP than any other country in the European Union.

In spite of Greece's fiscal challenges, some of its citizens retire as early as age 50, even after the country recently moved to increase its retirement age to 67. The nation's labor market, which has been struggling, worsens the situation by supplying many with an impetus to retire.

The weak jobs market undermines Greece's tax base, placing pressure on the revenue that the nation can use to pay its bills. This problem is worsened by tax evasion.[7] The country's government has announced its desire to prevent wealthy Greeks from dodging their tax responsibilities, as these citizens have proven particularly elusive.

In addition to pointing out these difficulties, market observers have repeatedly brought up Greece providing false information on its financial state. To join the eurozone, nations were required to meet certain economic convergence requirements, including having a budget deficit equaling no more than 3% of their GDP.

The eurozone accepted Greece in 2001, and the nation's citizens embraced this development, with polls showing that close to two-thirds of the country's people supported Greece joining the consortium.[8] Prime Minister Costas Simitis also spoke highly of his country becoming part of the eurozone.

"We all know that our inclusion in EMU (European Monetary Union) ensures for us greater stability and opens up new horizons," he stated.

However, European Central Bank President Wim Duisenberg provided a cautionary point of view, stating that Greece's economy still needed a lot of work.[9]

The concerns voiced by Duisenberg gathered momentum when a new center-right government, led by Prime Minister Konstantinos Karamanlis, rose to power in March 2004. It discovered the budget deficit represented 8.3% of GDP, more than five times as much as the 1.5% previously reported.

The new regime chose to conceal this information as the summer Olympic Games approached. However, in November of that year, Greece admitted to the world that it had provided false figures for its fiscal deficits between 2000 and 2003.[10]

The Crisis Unfolds

Less than 5 years later, the signs of the global financial crisis started appearing in the U.S. The nation's recession began during the fourth quarter of 2007, and the growing sense of nervousness snowballed as borrowers defaulted on their obligations, lenders racked up losses and debt-backed securities plunged in value.

The resulting turmoil spread to countries around the world. Greece, which was running a substantial deficit, was more susceptible to such impacts than other eurozone nations.[9]

In 2009, Greece received a series of credit downgrades from major credit ratings agencies. Fitch cut the nation's credit rating from A to A- in October, and then to BBB+ in December. Standard & Poor's and Moody's Investors Service followed suit, lowering their ratings for the country. Amid these downgrades, the global markets caused Greece's borrowing costs to surge.

At this point, the nation began working to get its fiscal house in order to avoid the intervention of the International Monetary Fund.


Greek Financial Crisis Timeline


First Austerity Package - February 2010

The Greek parliament formally approved its first austerity package on 9 February 2010, which involved increasing fuel duties, freezing the salaries of government employees and reigning in the nation's budget deficit.

Second Austerity Package - March 2010

This parliament followed up with a second set of measures on 3 March, which cut pay for public sector workers and hiked taxes on a wide range of items.

Even after making these changes, Greece faced more ratings cuts from different agencies. On 9 April 2010, Fitch cut the nation's rating to BBB-. On 22 April, Moody's also weighed in, lowering its rating for the country to A3. S&P followed suit 27 April, reducing the country's debt to junk status.

Greece Requests Bailout - April 2010

On 23 April 2010, Prime Minister George Papandreou formally requested a bailout. The ECB, the European Commission and the IMF intervened, working with Greece to help keep the troubled European nation afloat.

These parties announced the first bailout package, worth €110 billion over three years, on 2 May. The agreement required Greece to make changes including increasing fuel duties, placing a freeze on the salaries of government employees and reigning in its budget deficit.

Cutting government expenditures meant slashing jobs, which created additional problems for the nation's economy by taking money out of people's pockets and undermining consumption. The latest austerity measures triggered a nationwide strike and a demonstration involving tens of thousands of people.[11]

Third Austerity Package - May 2010

In spite of this reaction, the Greek parliament opted to approve the third austerity package on 6 May 2010. IIn the ensuing months, the nation's government continued to take action to improve its fiscal situation.

This included increasing the retirement age to 65 and reducing pension payments. In December, Greece enacted a law cutting compensation for employees of state-owned businesses, lowering many salaries and capping monthly wages.

Fourth Austerity Package - June 2011

Greece's efforts to maintain financial solvency continued in 2011, as the nation's parliament approved the fourth austerity package on 29 June. This initiative involved divesting several national assets and making sharp cuts to government spending.[12]

Fifth Austerity Package - October 2011

A fifth set of austerity measures followed in October 2011, and at least 70,000 protesters gathered in Syntagma Square in Athens.[13] These individuals convened to show their disapproval of tax increases and substantial reductions to pensions and worker compensation.

Greek Debt Haircut - October 2011

The nation once again flirted with default, but it was able to get past this potential problem when Greek bondholders agreed in October to accept a 50% loss on their debt-based securities when changing them into new loans.

Papandreou next requested a confidence vote from parliament, which resulted in 154 members voting for the haircut and 144 voting against it. Nonetheless, Papandreou announced in November 2011 that he was resigning. It was reported shortly after that Lucas Papademos, former vice president of the ECB, would ascend to the role of prime minister.

Sixth Austerity Package - February 2012

Greece experienced additional financial and political challenges in 2012, with the Greek parliament passing a sixth austerity package 12 February.[14] The latest round of measures, which included pension reforms and additional cuts to the salaries of government workers, received approval from lawmakers even as protesters violently demonstrated their dissatisfaction with the most recent fiscal changes.

Second Bailout - February 2012

While the latest measures were controversial, approving them helped clear the way so Greece could receive a second bailout. On 21 February, the Eurogroup finalized the latest round of aid, providing the Greek government with a fresh €100 billion loan. In addition, the agreement reduced the borrowing costs on bailout aid.

In spite of this progress, the nation's capital markets were volatile, with yields on Greece's 10-year bonds surging to 44.21% on 9 March.[15] The Athens Stock Exchange General Index, the main index of the Greek bourse, dipped below 500 in both May and June.

Greece held national elections in May 2012. The New Democracy party won the largest share of the vote, but it was unable to form a coalition and establish a governing majority.[16] Panagiotis Pikramenos, president of the nation's top administrative court, became caretaker prime minister until the next election could be held.

Antonis Samaras Becomes Prime Minister - June 2012

Voters once again took to the polls in June, resulting in Antonis Samaras, leader of the New Democracy party, ascending to the role of prime minister.[17] In the days following his victory in the general election, Samaras' party allied with both the Democratic Left and the socialist Pasok party to form a coalition.

Seventh Austerity Package - November 2012

With the new government in place, the Greek parliament approved the seventh austerity package on Nov. 7, securing €31.5 billion worth of aid so that the nation could once again skirt bankruptcy.[18]

Legislation Cuts 15,000 State Jobs - April 2013

In April 2013, the Greek parliament approved a bill that would cut roughly 15,000 government jobs by the end of 2014, with 4,000 being eliminated in 2013.[19] The legislation received the backing of all three parties making up the ruling coalition, but protesters showed their ardent disapproval outside parliament.

Eighth Austerity Package - July 2013

In July, these lawmakers narrowly passed a bill enacting additional austerity measures, which included lowering wages for state workers and generating further layoffs.[20] By approving these cutbacks, Greek lawmakers secured the first portion of yet another round of rescue loans to ensure the nation could pay its debts in a timely manner.

While the country again dodged financial insolvency, its citizens reacted to the news by holding a general strike.

Greece's government also faced continued instability. The Democratic Left party exited the coalition government in June after Samaras decided to close down the Hellenic Broadcasting Corporation, referred to as ERT.[21] As a result of this departure, the two remaining parties held a slim majority of three seats.

Greece Reports Primary Budget Surplus in 2014

Greece's economic situation started to show signs of improvement in 2014, as finance ministry data revealed the nation produced a 2013 primary budget surplus of €691 million, compared to a 3.46-billion-dollar deficit in 2012.[22] The 2013 figures represented the first time the nation reported a primary budget surplus in a decade.

Greece Returns to the Bond Market - April 2014

Greece also managed to sell bonds to global investors for the first time in four years, raising €3 billion by offering securities with a yield below 5%.[23] Even though the nation's government securities had a junk debt rating, they attracted more than €20 billion worth of interest.

Ninth Austerity Package/2015-2018 Budget - May 2014

The Greek parliament approved a budget plan for years 2015 through 2018 in May 2014.[24] The nation's lawmakers passed the plan, which predicted the nation's economy would grow in 2014 and 2015, as part of their efforts to secure further aid.

Greece approved the budget, which would prevent costs associated with pensions and wages from rising over a five-year period, as part of its latest agreement with international creditors to receive bailout funding.[25]

Syriza Sweeps European Parliament Elections - May 2014

The growth forecasts contained in Greece's 2015-2018 budget plan were followed by a sharp change in government after European Parliament elections were held in May. Syriza, a radical left party that campaigned against austerity measures, gained a larger share of the vote than any of its competitors, edging out the New Democracy party.[26]

In the coming months, the government held a snap election for the position of president, but Stavros Dimas, the candidate favoured by Samaras, was unable to attain a majority vote from Greek parliament.[27] This failure cleared the way so Greece could hold parliamentary elections in January 2015.

Alexis Tsipras becomes Prime Minister - January 2015

2015 saw radical political change for Greece, as Syriza won the largest share of votes during the January elections before creating an alliance with the Independent Greeks to establish a new coalition.[28] Pursuant to this new consolidation of power, Alexis Tsipras, the leader of Syriza, became prime minister at 40 years old.

Four Month Extension on Bailout Agreement - February 2015

The country's new government bought itself some time in February when it negotiated a four-month extension for its existing bailout agreement, eliminating the chances the nation would run out of money in March.[29] In exchange for this wiggle room, Greece indicated it would compile a list of reform measures, which would then be reviewed by eurozone finance ministers.

While this progress may have appeared promising, the various parties responsible for Greece's future prosperity seemingly encountered a logjam after a few months. Greece requested that the Eurogroup extend its bailout extension beyond June 30 so the nation could put proposed austerity measures to a vote through a referendum.[30] However, finance ministers declined this request when they met on 27 June.

Tsipras Announces Bailout Referendum - June 2015

That day, Tsipras announced he would hold a bailout referendum, giving citizens the power to either accept or reject an aid package offered by creditors. The Greek parliament approved his plan on June 28, clearing the way so the prime minister could allow voters to decide whether the nation would agree to the latest bailout terms.

Greece Imposes Capital Controls - June 2015

Greece quickly took action to keep its financial system under control, closing banks and announcing capital controls on 28 June.[31]Under these restrictions, citizens' daily withdrawals were capped at €60 a day, and they lost the ability to transfer funds overseas and make payments abroad.

The nation missed a key deadline June 30 when it failed to make a timely payment to the IMF. And on that day, Tsipras did an about-face, writing a letter to creditors indicating he was willing to accept most of the terms they demanded in exchange for additional bailout funding.[32]

Tenth Austerity Package - July 2015

The majority soundly rejected the creditor proposals on 5 July.[33] However, the nation wanted to remain in the eurozone, and Tsipras quickly proposed a bailout plan containing further austerity measures. After negotiating with creditors, Tsipras presented the package to the Greek parliament as necessary for the nation to avert bankruptcy.

The legislative body approved the agreement, which gave the country up to €86 billion in aid, on 16 July. On 20 July, the Greek people received a bit of a reprieve when the nation's banks reopened after being closed for roughly three weeks.[34]

Later that week, on 23 July, the Greek parliament approved the second round of austerity measures needed for the bailout, pushing the country one step closer to the aid it required.

Eleventh Austerity Package - August 2015

Greek lawmakers agreed to further austerity and reform measures 14 August, and that same day, eurozone finance ministers agreed to provide Greece's third bailout package.[35]

Tsipras Resigns - August 2015

Within a week of reaching this milestone, Tsipras resigned, executing a political manoeuvre in order to overcome rising dissent within his own party.[36] Tsipras submitted his resignation to President Prokopis Pavlopoulos on 20 August. Snap elections were scheduled for 20 September.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



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