Economics Report: Analyzing the Greek Credit Crisis and its Effects

This report delves into the Greek credit crisis, a sovereign debt crisis that emerged after the 2007-2008 financial crisis. It examines both internal and external factors that triggered the crisis, including unsustainable growth, high budget deficits, and substantial public debt. The report explores the role of government spending, government debt, corruption, and tax evasion in exacerbating the economic downturn. It also analyzes the impact on Greek households, the global economy, and the European Union. The analysis covers the decline in GDP, company bankruptcies, and the effects on financial institutions. The report concludes by highlighting the root causes of the crisis, the role of the Eurozone, and the impact of austerity measures. It also discusses the impact on the global economy including the reduction in domestic lending and the effects on the financial system. The report finally explains the effects of the crisis on the global economy and the global financial system.

Running head: ECONOMICS
Economics
Name of the student
Name of the university
Author note

ECONOMICS
Credit crisis of Greece
Introduction
The credit crisis which is faced by Greece is also the sovereign debt crisis in the
aftermath of the financial crisis of 2007-2008. The Greece crisis have started in the late 2009.
There are both external as well as internal factors which is known to the formation of crisis in
Greece. The Greek crisis had been triggered as the result of Great Recession which is known
to lead the budget deficit of various western nations for reaching or exceeding 10 percent of
Gross domestic product. High budget deficit in Greece was coupled with high amount of
public debt.
Unsustainable growth
Unsustainable growth in Greece led to a steep price which is in the form of rising
deficits and huge amount of debt load. In the year 2000, the debt to gross domestic product
ratio known to reach 103 percent in the year 2000 which was above the permitted level of 60
percent. The fiscal deficit of Greece which is the proportion of GDP was also above 3
percent in the year 2000. Despite the huge amount of budget deficit in Greece, the borrowing
rates of Greece have always been high in nature. By the year 2010, the country was unable to
borrow from the market. However, in the year 2009, the Greek government revealed that e
fiscal deficit had been 12.7 percent. According to the to the report published by the Greek
Ministry of Finance, it has found out that the five main causes which lead to the formation of
crisis are the poor growth of the gross domestic product, government debt, budget
compliance, data creditability and budget deficits. The other causes are the excess of
government spending, current account deficits and avoidance of tax.
Huge amount of government spending

ECONOMICS
The economy of Greece had been one of the fastest goring Eurozone from 2000 to
2007 when the foreign capital has flooded in. The capital inflow then coincided with a huge
amount of budget deficit. Greece have known to be the second biggest defines spending after
the US. The global financial crisis known to lead a negative impact on the growth rate of the
GDP.
When the economy of Greece contracted after the crisis, the debt to GDP ratio known to
have skyrocketed which rose to 100 percent in the year 2011.
Government debt
The government debt known to have increased in 2009 as a result of higher than
expected government deficit along with high cost of debt services. According to the Greek
government the structural economic reforms would require huge amount of loan which lead
to a huge level of loan. One of the main causes of the crisis in Greece was mainly due to large
amount of government debt. The root cause of the economic Greece due to the structural
economic inefficiencies which were borne out of the 1980s depression which the country
suffered through.
Corruption and tax evasion
Greece had been one of the worst performers during the evolution of the crisis.
According to the Transparency International which stated that in 2012, corruption have
known to play a major role in causing the financial crisis in Greece. Since the debt crisis
began in 2010 in Greece, the most international banks and the foreign investors have sold
their Greek bonds and other holdings. The reason is that they are no longer vulnerable to
what happens in Greece. The global financial crisis has resulted a considerable economic
slowdown in most of the developed countries which comprise of UK, France, Germany and
USA. Both the United States of America and the United Kingdom face the greatest financial

ECONOMICS
crisis. The global financial crisis has resulted to a huge amount of economic slowdown in the
developed countries which are UK, Germany, USA and France. USA and UK have faced the
greatest financial crisis. The global financial crisis is known to affect various countries in
many ways. It can affect the stock markets in emerging markets of various. The tax evasion
was also described as the national sport in Greece were more than €30 billion per year
remains uncollected in the form of tax. Maximum amount of tax had been uncollected due to
fraud and smuggling. Political corruption was quite usual in Greece. Before the crisis took
place, Greece had been one of the worst performers of the European Union according to the
Transparency International’ corruption Perception Index. By the year 2017, the Greece
ranked last in the European Union and had been the worst performer. Greek had also been
termed as the shadow economy or the underground economy from which no tax had been
collected.
The Greek economy had known to fare quite well in the 20h century with high
amount of growth rates along with low amount of public debt. Greece was very badly during
the credit crisis since its shipping and tourism industries ad been quite sensitive to the
changes in the business cycle. The government is known to spend heavily in order to keep the
economy functioning leading to the increase in the debt of the country. Despite the huge
amount of budget deficit in the year 2009, the government still kept on borrowing which rose
slowly. When the government was unable to borrow from the market, the government of
Greek requested for a loan of €45 billion from the International Monetary Fund in order to
cover its financial needs.

ECONOMICS
Figure 1 Greek government budget deficit as a percentage of GDP
The debt crisis has impacted the whole world and the crisis have also affected the
European economy at a large scale. The debt crises known to have originated from the fiscal
profligacy of the Greece. When Greece known to became the tenth member of the European
community, both the economy as well as the finances both were known to be in quite good
shape. At that time the debt to GDP ratio had been near about 30 percent and the budget
deficit were known to be below 3 percent of the gross domestic product. However, the
situation has dramatically changed over the next few years. Because of the low productivity,
eroding competitiveness, and rampant tax evasion, the government of Greece had to resort to
a huge amount of debt binge in order to keep the country going. The admission of Greece
into the Eurozone in the year 2001 and its adoption od the euro had made quite easier for the
government of Greece to borrow. The reason was that the Greek bond rates and also the rate
of interest have known to decrease at a huge rate. They are then known to converge with the
strong European union. One of the members of the strong European union was Germany. The
economy of Greece was also known to have bloomed where the real gross domestic product
growth averaged to 4 percent in the year 2008. It was also known as the second fastest to

ECONOMICS
achieve that rate after Ireland. However, the growth came at the cost of steep price with huge
rise in the deficits in the year 200, although the debt to gross domestic product ratio in Greece
was 103 percent.
Impact on the household
The economic crisis experienced by Greece have been quite deep and long lasting in
nature. The crisis have affected the families of Greece in various ways which includes
reduction of income and job losses along with business closures. During the year 2010, a
large of families have been impacted through wages or pension cuts and also many people
have lost jobs. More than 40 percent of the Greek households have experienced cut in their
wages and their pensions were also reduced. They had to resort to variety of strategies in
order to cope with the consequences of the crisis. Or discontinuing the subscriptions to
various services. One such strategy is known to be the passive strategies which includes
reduction in the buying of luxurious good. Bigger families and ethnic minorities living in the
mainland of Greece have been also affected by the crisis. The impact of crisis in Crete is
known to be highly affected due to suspension of wages and reduction in the number of
working hours compared to the other countries. The crisis has not only affected the
consumption level of household but also deceased their general satisfaction with life and also
their confidence on the political institutions. Around 80 percent of them experienced a
negative income shock as a result of the financial crisis.
Conclusion
One of the root causes of the economic crisis in Greece is mainly due to the structural
economic inefficiencies which took place during the 1980s. the credit crisis in Greece also
resulted due to the great depression which have affected the country few years ago. Since,
Greece have known to come out from the brutal fascist military rule, the country which is

ECONOMICS
embarked on a public sector have led economic boom which has known to sow the seeds of
the crisis which the country known to have faced today. However, most of the economist
blame the membership of the eurozone for the current debt crisis. Although, the membership
of eurozone have provided a lot of funding in order to spur the economic development of
Greece. It was also believed that that the membership with the eurozone caused artificially
low borrowing costs which allowed the governments for continuing the expansionary public
sector policies. In exchange of the European funding, Greece had been forced for imposition
of strict fiscal austerity. Some of the economist of the US have also known to criticize the EU
for being too late for helping Greece. The European Banks had been the largest holdings of
the Greek debt. However, this have shifted to troika which were ECB, European government
sponsored funds and the International Monetary Fund. The largest contributor to the fund in
order to help the economy of Greece had been Germany. The international Monetary Fund
known to have owed €32bn and the European central bank known to have owed €20bn.

ECONOMICS
Impact on the global economy
The Greece economy have also negatively impacted the world economy which lead to
billions in loss for the European banks as well as government. Although the debt crisis will
be hurting the short term growth prospects
Reduction in the domestic lending
The financial institutions in many countries can be negatively affected as the result of
financial crisis on the extent to which they hold assets which are already contaminated by the
subprime mortgages. The financial Sector is largely controlled by the government are
exposed to the subprime mortgages of the US. The financial flows from the rest of world will
also reduce. The foreign direct investment, trade credits and the flow of remittances are
known to be negatively affected by the crisis.
Global financial system
Since the debt crisis began in 2010 in Greece, the most international banks and the foreign
investors have sold their Greek bonds and other holdings. The reason is that they are no
longer vulnerable to what happens in Greece. The global financial crisis has resulted a
considerable economic slowdown in most of the developed countries which comprise of UK,
France, Germany and USA. Both the United States of America and the United Kingdom face
the greatest financial crisis. The global financial crisis has resulted to a huge amount of
economic slowdown in the developed countries which are UK, Germany, USA and France.
USA and UK have faced the greatest financial crisis. The global financial crisis is known to
affect various countries in many ways. It can affect the stock markets in emerging markets of
various
Effect of the credit crisis in Greece

ECONOMICS
In the year 2011, the gross domestic product of Greece has known to face the worst decline
which was about -6.9 percent in the year 2011. At that point of time, more than 100,000
companies of Greece went bankrupt. As a result, the rate of unemployment has grown from 7
percent to more than 20 percent. The youth unemployment has also grown from 22 percent to
kore than 50 percent. The gross domestic product of Greece declined from € 200 billion to
€179 billion in the year 2014. The government debt known to have increased in 2009 as a
result of higher than expected government deficit along with high cost of debt services.
According to the Greek government the structural economic reforms would require huge
amount of loan which lead to a huge level of loan. One of the main causes of the crisis in
Greece was mainly due to large amount of government debt. The root cause of the economic
Greece due to the structural economic inefficiencies which were borne out of the 1980s
depression which the country suffered through Greece was also known to be facing recession
for more than five years. This particular fall in the gross domestic product of Greece have
increased in Debt to GDP ratio 2hich have also worsened the debt crisis of Greece. The GDP
per capita fell from a peak of €22,500 in 2007 to €17,000 in 2014, a 24% decline. He
International Monetary Fund have reported in the year 2015, that Greece were unsustainable
as a result of the high debt level and significant changes in the policies which took place
since 2014. The report also stated that debt reduction can be needed if the package of reforms
under the consideration known o have weakened further.

ECONOMICS
Bailout programmes
There are various bailout programmes which the government took in order to save Greece
from the credit crisis. The first bailout programme took place in the year 2010. In the year
2010, the government of Greece have taken a series of austerity measures. The IMF along
with the Eurozone countries known to have agreed to a three-year loan of €110 billion. The
credit rating agencies are known to downgrade the governmental bonds of Greece to even a
lower status. This was however met with anger by the public of Greece leading to riots, social
unrest as well as protests. The second adjustment however took place during March 2012.
During that particular period of time, the Euro area leaders known to extend the Greek loan
repayment periods to a 15-year period and it will be also cutting the interest rates to 3.5
percent. They also known to approve an additional loan of €109 billion in order to help them.
However, after some time, both the IMF and the leaders of the Eurozone known to settle an
agreement with banks where they are known to accept a 50 percent write off the debt of
Greece. With the help of the support, Greece is known to decline its primary deficit from €25
billion to €5 billion. The unemployment rate however grew from 7 percent to 20 percent in
November. The Greek government debt crisis is known to be one of the current European
sovereign debt crises.
The government have also taken many steps to fight against tax evasion as well as corruption.
In the year 2009, the size of the black market in Greece had been around €65 billion which
more than twenty percent of the gross domestic product of Greece. According to a report it
has been found out that most of the self employed earners in Greece under reported their
earnings. The state is also known to have lost more than €11.2 billion in tax revenues. The
ship owners are also known to benefit a huge amount as a result of the tax exemptions. In the
year of 2010, the government have known to implemented a tax reform. In January 2012,
Athens was considering the establishment of a 100-strong unit to go after wealthy tax

ECONOMICS
evaders. There was also an introduction of the duty of non cash payments for amount of over
1500 euros. Germany has also known to offer experts from its financial management as well
as people from tax investigation office in order to build a better efficient tax administration.
The government have taken various anti corruption measures for fighting against the financial
crisis or the credit crisis in Greece. According to the report published by the Transparency
International, it has been found out that, more than 15 percent of Greeks have known to paid
the bribes. It has also found out that €1 billion was paid by companies in the term of bribes
for avoiding the payment of bribes in order to attain benefits. While calculating all sorts of
corruption in Greece, the total amount has been estimated to be around €3.5 billion per year.
The government who was elected in the year 2009, is known to fight against corruption. The
inspector of the public administration has also started an online census of the civil servants.
According to the latest reports it has been found out that Greece was among the top ten
economies of the world which is known to be the largest improvement of the business
climate.

ECONOMICS
Reference list
Artavanis, N., Morse, A. and Tsoutsoura, M., 2015. Tax evasion across industries: soft credit
evidence from Greece (No. w21552). National Bureau of Economic Research.
Artavanis, N., Morse, A. and Tsoutsoura, M., 2015. Tax evasion across industries: soft credit
evidence from Greece (No. w21552). National Bureau of Economic Research.
Artavanis, N., Morse, A. and Tsoutsoura, M., 2016. Measuring income tax evasion using
bank credit: Evidence from Greece. The Quarterly Journal of Economics, 131(2), pp.739-
798.
Baum, C.F., Schäfer, D. and Stephan, A., 2016. Credit rating agency downgrades and the
Eurozone sovereign debt crises. Journal of Financial Stability, 24, pp.117-131.
Bratis, T., Laopodis, N.T. and Kouretas, G.P., 2015. Creditor moral hazard during the EMU
debt crisis. Journal of International Financial Markets, Institutions and Money, 39, pp.122-
135.
Camba-Méndez, G. and Serwa, D., 2016. Market perception of sovereign credit risk in the
euro area during the financial crisis. The North American Journal of Economics and Finance,
37, pp.168-189.
Davis, J.S., Mack, A., Phoa, W. and Vandenabeele, A., 2016. Credit booms, banking crises,
and the current account. Journal of International Money and Finance, 60, pp.360-377.

ECONOMICS
Gogstad, M., Kutan, A.M. and Muradoglu, Y.G., 2018. Do international institutions affect
financial markets?: evidence from the Greek Sovereign Debt Crisis. The European Journal of
Finance, 24(7-8), pp.584-605.
Gourinchas, P.O., Philippon, T. and Vayanos, D., 2017. The analytics of the Greek crisis.
NBER macroeconomics Annual, 31(1), pp.1-81.
Karafolas, S. ed., 2016. Credit cooperative institutions in European countries. Berlin:
Springer.
Lütz, S. and Hilgers, S., 2018. When Overlapping Organisations Play Two-Level Games:
IMF–EU Interaction in Credit Lending to Latvia and Greece. New Political Economy, pp.1-
14.
O’Keeffe, C. and Gallagher, L.A., 2017. The winner-loser anomaly: recent evidence from
Greece. Applied Economics, 49(47), pp.4718-4728.
Papastamou, S., Valentim, J.P., Mari, S. and Marchand, P., 2018. Socio-cognitive
elaborations and reactions to economic crisis: Insights from Social Psychology. International
Review of Social Psychology, 31(1).
Potrafke, N. and Reischmann, M., 2016. How to Handle the Crisis in Greece? Empirical
Evidence Based on a Survey of Economics Experts.
Santos, T., 2015. Credit booms: implications for the public and the private sector.
Thalassinos, E.I., Stamatopoulos, T. and Thalassinos, P.E., 2016. The European sovereign
debt crisis and the role of credit swaps. In THE WORLD SCIENTIFIC HANDBOOK OF
FUTURES MARKETS (pp. 605-639).
Vouldis, A.T., 2015. Credit market disequilibrium in Greece (2003-2011)-a Bayesian
approach.