Analysis of Greek Economy in Debt Crisis

Probability of  Countries Being Unable to Pay Back Debt

BBC News: Article 1

BBC News: Article 2

European Commission has announced that Greek economy would shrink by 3% this year due to its high risk of defaulting.

As illustrated in the graph, Greek’s probability of defaulting has passed 50% and is heading for 60%. At this rate, Greece will most definitely default if there are no strict cut-offs on government spending and European countries to aid Greece.

Other countries in Eurozone fear for Greek’s economic crisis might affect Eurozone severely. As a result of Greece’s high CDS, it is badly affecting Euro.

“The euro hit its lowest level against the dollar in more than a year, at $1.2887, and was also down against the pound, with one pound worth 1.1706 euros.”

EU economic and monetary affairs commissioner Olli Rehn describes Greek economic crisis as a “bush fire” and that “it must be contained” in order to prevent it to become a “forest fire” putting Eurozone at risk also.

Accordingly, EU and IMF has promised immediate aid and bail-out package for Greece’s debt crisis. However, there are many doubts about how the bailout package could help the Greek crisis.

“The problem is no one has a clear idea of how we’re going to get out of this situation,” said Julian Callow, chief Europe economist at Barclays Capital.

What will happen if Greece defaults? Last post, I have explained about the consequences of defaulting. First, the Greek currency and possibly Euro will experience hyperinflation and it will be a no better than a piece of toilet paper. Second, as the currency Euro is affected, this will affect the taxpayers in the Eurozone, forcing them to carry the some parts of Greek burden. If this is sever enough, it could mean the dissembling of the Eurozone.

So, what are the actions Greece is taking to fight this problem? Well, first is that they have asked help from EU and IMF, which helped them pay their short-run bills. Secondly, they have announced to cut their governmental spending from more than 10% to 3% by 2012.

It was a wise choice to ask for a bailout package, however, if Greece fails to recover from this debt crisis, it means that they’ve just added another debt to their already unbearable- debt list.

5 Responses so far »

  1. 1

    Abhishek said,

    EU leaders are continuing to put the blames of the EU debt crisis on “speculators” and the “Market” rather than themselves.They are not willing to see the core problems with the constitution of the EU itself where the monetary policy is common while the fiscal policy is individual.Blaming the market will not solve the current crisis nor will it pay down the mountains of debt that some countries have accumulated.Only well thought out comprehensive reforms properly communicated and executed will.

  2. 2

    Peter Anthony said,

    Great analysis Sang. We will have to wait and see how the crisis will resolve itself.

  3. 3

    Guha Rajan said,

    This is the peril of having the country having a strong currency.

    The current economy mess has impacted countries with strong currency rather than the one with a weeker one

    Had writen about the same in my blog too.

  4. 4

    Avenger said,

    A fed Bear is a dead bear.

    Feeding the Serbian bear with $20 billion grant aid from the West, and with $20 billion in weapons from Russia East, ended in 10 years war with 500000 innocent civilian dead, through execution, torture, raping, kidnapping and forcefully displacing millions of Croatian, Bosnian, and Kosovars. Shame on EU, shame on Russia.
    The actions of Serbian beast ended in dismembering of Yugoslavia, and creation of many independent states, sworn enemies to Serbia. If you go to Croatia they say don’t forget VUKOVAR, don’t forget Srebenica in Bosnia, Vojvodina in Hungary, “Western Outlands” in Bulgaria, and about Kosova there never will be peace without justice. So, Serbia will end a dead Bear if not protected from outsiders forever.
    Feeding Greece with grant aids, the West is creating another beast. Greece has created a virtual reality, with a very strong military, (330 Leopard tanks, F 16 jet fighters, a very powerful Navy, included up to date submarines, and more.)
    The Greek people never learned to pay their taxes …. because no one is ever punished.
    To make things more interesting Greece has FREE HEALTH CARE, LUCRATIVE PENSIONS, and HIGH PAID JOBS, which they cannot afford either.
    So the WEST is feeding another Bear that soon or later will end in a DEAD BEAR.

    • 5

      11kimsa said,

      I agree with you on the argument that Greece is enjoying many benefits that they simply cannot afford. And this is true with the American consumers also. People, or rather governments, should understand the simple economic rule: spend only on what you can afford. It’s simple as that, but it seems that this simple rule is hard to get across people. Thanks for posting comments on my blog post. 🙂

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