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Greece financial mess - How it came about?

July 5th, 2015 9:42 AM by Sam Kader

  • Starting in the early 80's - Greece engaged in a three-decade-long credit binge spending the money on plush government jobs for supporters of two major political parties - the center-left PASOK and the center-right New Democracy. Both parties looked the other way on widespread tax evasion where doctors and lawyers often reported less income than factory workers.
  • In 2001 with the arrival of Eurozone - Greece was waved in despite its rickety finances. Greece continued the debt binge with other euro countries buying Greece bonds in euro rather than in drachmas (that might devalue) paying its investors at almost the same low interest rates as those charged to rock-solid Germany.
  • In 2009 - after the global financial crisis - Greece revealed that its deficit was higher than advertised and its finances were out of control. It's borrowing cost shot up and it couldn't pay.
  • In 2010 - Greece received its first 110 billion euro bailout funds from other Eurozone countries and the International Monitory Fund (IMF) with attached conditions - for Greece to tackle the rampant bureaucracy corruption and to cut spending and deficits. Yet the cuts also undermine growth and weigh on the economy. Cut on government spending (since it's currency can't devalue) also made the debt burden bigger and pushed down GDP. Unemployment soared and misery multiplied. In one way - being in the Eurozone has prolonged its agony since Greece can't devalue it's currency and can't enact its own monetary policy.
  • In 2012 - it was clear that the second bailout was needed. Under Prime Minister Antonis Samaras - the Greek government narrowed deficits, and some reforms implemented. The economy seemed ready to grow after falling out 25%.
  • In September 2014 - fed up with years of agony, and austerity measures - voters chose a hard-left party - Syriza in an early election held in January 2015. The second bailout was no longer an option and with it - perhaps being in a Eurozone.

The interwoven nature of global economics means that any move by the European Central Bank to protect its member from a Greece exit from the euro would likely push the demand for the greenback and causing the bond yield to drop. For all intent and purposes, lower yield means lower interest/mortgage rates.

Posted in:Greece and tagged: Greece
Posted by Sam Kader on July 5th, 2015 9:42 AM

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