Unless you are literally living in a cave, you probably have heard something about this little news item called the "Greek Debt Crisis." You may have wondered what all the hoopla is about. Today we take a short detour from your regularly scheduled Whitecoatmoney topics to take a look at the Greek debt crisis.
How did Greece get here?
Believe it or not, the Greek debt crisis has been going on for at least a decade now. Like most western nations, Greece has increasingly borrowed to finance its operations. In fact, Greece has run budget deficits every year since 1973. Remember the 2004 Olympics? Yep that was financed mostly with debt. While the Olympics alone does not account for the situation Greece finds itself in today, it is representative of the reckless borrowing/spending that led to today's crisis. Within days of the closing ceremony, Greece warned that its debt figures would be worse than previously expected.
- 1973: The last year Greece had a budget surplus.
- 2001: Greece adopts the Euro, eliminating its ability to devalue its currency.
- 2004: The Greek Olympics - one of the biggest public spending projects in history.
- 2005: Greece became the first EU nation to be placed under fiscal monitoring by the European Commission.
- 2007-2009: The Great Recession spreads to Europe, Greece included.
- 2009: Greece announces that it had been understating its deficit figures for years, alarming creditors and further limiting Greece's ability to borrow.
- 2010-today: Bailout, austerity, continued decline in the Greek economy leads a vicious cycle. As of today, the Greek unemployment rates sits above 25%.
- 6/30/2015: Greece misses payment to the International Monetary Fund (IMF), becoming the first developed nation to default on its obligations.
Why can't Greece pay?
If Greece controlled its own currency and run out of money, it can devaluate its currency. The subsequent currency depreciation (i.e. inflation) would allow it to:
- Attract foreign investment due to the lowered cost of doing business in Greece.
- Make Greek exports cheaper, encouraging purchases of Greek goods.
- Pay back the debt in the new cheaper currency.
However, the devaluation tool is not available to Greece as long as it remains on the Euro. So in order for Greece to compete economically, it had to cut wages and spending, leading to multiple recessions and much social unrest.
As EU officials deliberate over whether to extend another round of bailout to Greece this weekend, there are essentially only 2 ways this show can end:
- Greece stays on the Euro - this effectively kicks the can down the road.
- Greece exits the Euro or "Grexit" - this allows Greece to regain the currency devaluation tool and gives it a shot at financial recovery.