By Kyle N. Mitschiener & Vanessa Siy Van

In October of 2009, the Finance Minister of Greece revealed that the country had been mishandling its budget. What followed was a near collapse of the entire European economic system – a financial crisis of a severity not witnessed since the Second World War.

The problem began after the global economy experienced a slow growth rate resulting from the 2008-09 US financial crisis. Greece was the first to experience the effects of America’s recession, as it was mired in massive debt at that time.

Relying on tax revenues to pay off debt, Greece suddenly found itself strapped for cash when its economy slowed down and tax revenues decreased. Without a way to pay its rapidly rising debt, the Greek government defaulted on its debt in 2012.

By 2012 however, much truth had been revealed on how the government had been spending.

The Greek economy had been on shaky ground even prior to joining the Euro. Extensive government spending, revealed in an increase of almost 50% in public sector wages in the last ten years, coupled with rampant tax evasion led the state to conceal much of its financial activities in order to meet with the member-state requirements.

In November 2004, Greece admitted to outright lying in order to get in the Euro, deflating its borrowing rates for financing the 2004 Athens Olympics because of the cap on borrowing in the Euro. It has also falsely claimed that its deficit has been less than 3% of its GDP, another requirement in the Euro, but such has not been true since 1999, two years before it joined the Eurozone.

Since the financial crisis began in 2008, its debt rose to 262 billion euros, double what it was in 2004, and Greece officially requested for a bailout the following year. The EU and the International Monetary Fund (IMF) agreed on two bailouts, along with strict deficit reduction targets such as crippling austerity measures that led to massive unrest among Greek citizens.

As its credit rating dropped to “junk,” the floundering economy was given until 2016 to sort itself out. By 2012, that flickering hope was finally extinguished when a complete debt restructuring, commonly referred to as a “default,” took place and private holders of Greek bonds had to settle for swapping their bonds for half the price or gaining nothing at all.

It was the first time in history that bad debts were to be mitigated with sovereign-bonds.

Good, but not good enough

Now halfway through 2014, Greek figures are still alarming. Household debt continues to rise and despite private sector creditors writing off more than three-fourths of the debt and implementing lower interest rates on paying back loans, debt to banks still takes up over 80% of the GDP.

At this point, Greece has implemented only half of the measures on which the bailout loans are contingent as agreed upon in 2013.

All these developments came into discussion with the Troika (translates as “a set of three”) earlier this year, the three parties being the IMF, the European Central Bank (ECB), and the European Commission. These international creditors aim to create a deal that would appease both the Eurozone, from which the money needed for bailout and stimulus packages comes, and the citizens of Greece, who are very much still anti-austerity.

As of March 2014, the Troika has based its proposals on the stress tests by the European Central Bank on the four big banks in Greece. They have come up with 20 billion euros as a fair estimate for recapitalizing the Greek banks.

Setting the stage for a deal to be made, Greek economy boasted a surplus and was predicted to grow 0.5% this year.

This was a huge improvement from the six-month standstill in which contentious issues such as pension cuts, government worker layoffs, and tax raises were left unresolved. The development was largely brought about by a deal that allowed for 10 billion euros of bailout aid, serving as its name implies, to revamp the fragile economy as well as restore investor confidence in a state notoriously known for misreporting data to suit its own interests.

This was met with mixed reactions. Some creditors said that it was far too early to tell if the surplus would be permanent. Others argued that Greece had yet to meet its other financial targets and that it has yet to prove it can.

Last June 2014, the Greek Central Bank chief had optimistic predictions about the results of the latest round of ECB stress tests; these urged banks to recognize investments that they could no longer be paid back. Ideally, the banks would free up and allow for new investments to be made.

Both Greece and the Eurozone wait with bated breaths for the results of these tests, but waiting is wasted time, which constantly reminds the Greeks that every euro given in “aid” is a euro that must be paid back – with interest.

What’s to come

Despite the improvements in Europe, the recovery will have little effect on unemployment numbers. Unemployment, according to data from the Economist, is forecasted to fall from 12% in 2013, to 11.8% in 2014.

Though an improvement, it is too minute to make a substantial effect on the European economy. As for what this means for Europe in the near future, expect a steady but slow rebuilding.

Sources
“Asia Times Online :: Asian news and current affairs.” Asia Times Online :: Asian news and current affairs. N.p., n.d. Web. 1 July 2014. .

“Greece reaches deal with lenders to unlock €10bn aid tranche – FT.com.”Financial Times. N.p., n.d. Web. 1 July 2014. .

“New Greek central bank chief sees economy recovering in 2014.” Reuters. Thomson Reuters, 25 June 2014. Web. 1 July 2014. .

“Outstanding Debts Damage Greek Economy.” GreeceGreekReportercom Latest News from Greece. N.p., n.d. Web. 1 July 2014. .

“Timeline of a crisis: how Greece’s tragedy unfolded.” The Telegraph. Telegraph Media Group, 16 June 2011. Web. 29 June 2014. .

“Timeline: The unfolding eurozone crisis.”BBC News. N.p., n.d. Web. 30 June 2014. .

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