The Greek Crisis in Ten Minutes
This article originally appeared on Jumbo Talk, Tufts University’s student-written admissions blog.
Listen children, and ye shall hear of how a number of countries and international financial institutions messed up so badly that the resulting crisis threatened the very foundations of Western Liberalism.
In 2009, the global market crashed. Why? In 2008, a number of US banks had made a series of bad loans, taken those loans, bundled them up, had them verified as good investments, sold them to others, and made more loans. So, when people started defaulting on those initial bad loans (because some people had decided it’d be a good idea to lend to basically whoever had a pulse) the entire structure came tumbling down, one domino after the other. Suddenly, no one wanted to lend anything to anyone, and the contagion spread around the world.
The Greek government depended on loans to pay for their government expenditure. Greeks love socialism (partly because communism never really died the way it did in other countries, and has been romanticized for its 20th century opposition to European-appointed kings) and politicians in the 90s and early 2000s knew this. So, to stay in office, they borrowed vast sums of money to pay for enormously popular social welfare programs, like increased public wages, huge pensions, and a whole bunch of government employment.
Let’s put that in context: in 2003, when Greece entered the Eurozone (the international club of countries that use the euro as their currency) the maximum percentage of debt-to-GDP allowed was 60%. Greece’s: 110%. How did they get in? They lied about it. Why did they get in? Because being in the Eurozone dropped interest rates on loans from around 7-10% to 2-3%. This allowed for even more reckless borrowing.
So when the global economy crashed in 2009, all of a sudden banks weren’t so keen to make loans. Greece needed such loans to pay off its other loans, and all of a sudden the Mediterranean nation was forced to admit just how far into debt it was – about 130% of GDP in 2009.
Greece, though, was not the only country in debt – others had been borrowing irresponsibly as well. If you’ve heard of the PI(I)GS countries (Portugal, Italy, Ireland, Greece, and Spain) this is why. Greece was unique, though, in two respects: first, it took all its private debt (from individuals buying too many jetskis with too few euros) and made it public (the government owns that debt); and second, because it didn’t respond to the prescribed cure like the rest of these countries.
In 2010, it looked like Greece and the rest of the PIIGS nations were not going to make it without some help, so the EU/Eurozone countries got together and bailed them out. This resulted in the creation of two mechanisms that allowed for emergency assistance: the European Stability Mechanism (ESM, a permanent mechanism that allows for emergency funding that went into effect in October of 2012) and the European Financial Stability Facility (EFSF, a “temporary crisis resolution mechanism” that went into effect in June of 2010).
This led to two deals to bail out Greece: one in 2010, and another in 2012 when it looked like the previous deal just was not cutting it. These deals, though, were not free. First, these were loans, not free cash. Second, there were conditions: Greece would enact reforms and implement austerity policies. Often, these two are conflated, but falsely so. Austerity simply means running a budget surplus so you can save money and pay off the debt. In the case of Greece, this meant huge cuts to pension and public wages. The reforms intended to accompany austerity were meant to induce growth, so that Greece could recover, and counteract the economy-shrinking effects of austerity.
This was the prescription given pretty much across the board by ‘the Troika’ – the trio of institutions that made most of these decisions, made up of the European Commision, the European Central Bank, and the International Monetary Fund. For the most part, it worked in every country – except Greece – for two reasons.
Greece’s economy is mostly centered on government employment
Greece failed to implement the ‘reforms’ part of the package
The Troika managed to shove austerity down Greece’s throat, but let the reforms slide. Neither was popular with the Greek people, but reforms would have at least helped heal the economy. Instead, austerity was insisted upon, time and time again, and Greece’s economy suffered a 5-year recession. After two bailouts, its debt is the only in Europe to be considered “unsustainable” (i.e. they can’t pay it, regardless of whether they would like to) by the IMF in a report released at the end of June 2015. However, Germany (which has an outsize role in the Eurozone because its economy was so strong during the creation of the euro) has a domestic political interest in making sure the Greeks pay – namely, that Merkel promised her people that she would make the Greeks pay.
That brings us to 2015. Greece had so far, with the assistance of the bailout programs of 2010 and 2012, managed to either pay off or roll back its debt payments, and had thus managed to avoid default. However, a long-term solution had not been found. In January of 2015, a new government came to power in snap elections caused by the failure of the former government to elect a new president (in Greece, effectively a figurehead). Greeks who were fed up with austerity measures and the lack of a deal voted in the leftist party SYRIZA, led by the fiery Alexis Tsipras, who came to office on promises that he would reject the austerity measures and demand a better deal for Greece.
When Tsipras came to office, there was a decent amount of political goodwill and sympathy towards the plight of the Greeks, and perhaps a deal could have been made. Instead of capitalizing on this, though, Tsipras appointed bad boy Yanis Varoufakis as finance minister and chief negotiator, who literally (and I do mean this literally) rolled up to negotiations on a motorcycle, not wearing a tie (a symbolic rejection of the EU’s ways, shared by Tsipras), swaggered into negotiations, called the Germans Nazis, and gave them the finger. Literally.
As one might imagine, a deal was not struck, and Varoufakis was eventually removed from his position as lead negotiator. Tsipras himself, though, did not have much more luck. Then, in June of 2015, things got real. Christine Lagarde, the chief of the IMF, stated that there would be no more postponements or grace periods. Greece had managed to roll back a payment due to the ECB in mid-June into one due to the IMF on June 30th, but this was the end of the line – and Greece did not have the funds to pay the 1.7 billion dollars it owed. June 30th was also the end date of the EFSF bailout plan – meaning without a deal to extend the original plan before the deadline, Greece would effectively default on its loans from the IMF and could be forced to leave the Eurozone.
Tsipras had managed to draft two potential deals with the Troika. However, he had not elected to sign either. Five days before the deadline, he did something that had not been done in 40 years: he called a referendum. The referendum was explicitly about whether or not Greeks approved of the deal on the table. If they voted yes, they approved of the deal, and Tsipras had implied that he would resign after signing the deal into law. If they said no, they did not approve, which Tsipras claimed would give him a stronger political mandate and thus a stronger position at the negotiating table.
However, others cast the choice as one between staying in Europe and a Grexit, or Greek exit from the Eurozone. If the Greeks rejected the deal, the logic went, then they clearly did not want to be a part of Europe, and wanted no deal at all, resulting in default and a Grexit. However, Greeks stood up to these fear tactics, and said no, 61% to 39%, on July 5th.
Since then, talks have resumed – this time with a real deadline. Varoufakis was asked to step aside, and complied. Euclid Tsakalotos, an Oxford-educated Marxist, was introduced as the new finance minister. Tsipras was told that if he did not have a proper proposal with credible reforms on the table by Thursday at midnight, Brussels time, that there would be no deal whatsoever. With just 3 hours to spare, at 9 p.m. on Thursday, July 9th, Tsipras sent the Eurogroup the long-awaited deal.
All that now remains is for two summits to occur: one with the 19 finance ministers of the countries of the Eurozone, on Saturday, July 11th, and one on Sunday, July 12th with all 28 European Union heads of state. If the July 11th summit approves the deal, on Sunday all that will be left to decide is if Greece is to receive humanitarian aid to alleviate suffering from lack of some medicines and possible food and gas shortages.
If, however, the finance ministers do not approve the deal, it will be up to the EU – and a unanimous vote is necessary in both cases. If the deal falls through, Greece will be out of the Eurozone. It will move back to the drachma, which will be almost worthless. This will allow it to paper over its loans with worthless currency, but people will suffer greatly as the cost of living stays the same while people get paid a great deal less. Economically, some say there is hope in this route – Argentina underwent the same procedure in 2002, and bounced back within a year. The devalued currency made their exports far more competitive, and the economy recovered. However, the difference is Greece does not practically export anything but tourism, and fear of the situation in Greece would be enough to discourage most.
Greece has never been closer to a deal, but it has also never been closer to leaving the Euro. Let’s hope they can pull it together.
This article was written with the help and advice of Corinne Candilis, student at Swarthmore College, and Andrew Economos, senior vice president at Capital Group.