Movie Name: GREXIT
Lead actor – Greece
Supporting Cast – IMF, EU, Goldman Sachs (in a villainous role), Lehman Brothers (in a blink-and-you-miss appearance).
The hero of our movie, Greece, wants to join a club named Eurozone to improve his social status and expand his business using the club’s network. It’s an elite club which has some rigid criteria to appoint new members.
Following data shows comparison of club’s criteria and our hero’s status at the start of the 21st century.
|Required||Greece’s actual stats|
||< 1.5%||* complex story|
|Budget Deficit||< 5%||
The hero is not in the best of financial health as is evident by the data. However, he is too very keen to enter the club and boost his image. Enter Goldman Sachs, the wily old landlord who helps Greece to fudge this data and enter the club.
People who refused to loan Greece any money for expanding his business suddenly start flocking to his house and offer loans with no strings attached. Lenders think that even if Greece is unable to repay the money in future, the club members will surely bail him out.
Greece’s hands are full of cheap money. He starts spending them without any inhibition. He gets too big for his boots and decides to sponsor a sports extravaganza called The Summer Olympics in 2004 thinking that this will be improve his credibility in the market and also expand his soft power. The total cost of the games works out to almost $90 bn. This, along with the household and other expenses results in a liquidity crunch for him. Greece, however, is determined to hold this event at any cost. So, he starts borrowing more capital. Being a Eurozone member, banks and financial institutions lend him freely at increased rates.
The games are successfully conducted and Greece is happy about the reviews. He is looking forward to repay the loans and improve his financial health. For this, he introduces austerity measures in his family and cuts down on the unnecessary expenses. Austerity measures help Greece and he is able to reduce his debt burden somewhat in 2006. However tragedy strikes in the form of sub-prime crisis in 2007.
Bankruptcy forces many financial behemoths like Lehman Brothers to close shop. Banks and financial institutions slow down on public spending. Greece too is affected. He is unable to repay the loan due to losses in the business. Mounting debts forces Greece to seek more loans from the banks – loans which came at higher rates, thanks to the sub-prime crisis. This results in pushing Greece’s Debt-to-GDP ratio to almost 180%.
Worried that Greece’s financial situation would engulf the other businesses, International Monetary Fund and European Union decide to lend around $ 146 bn in credit spread over 3 years starting 2010. But the loan comes with a condition that Greece has to further drive home its austerity measures, reduce spending and improve taxation.
Unhappy family and friends:
Greece had more reasons to worry though. No doubt, he was glad being bailed out by the banks, but the conditions left him high and dry. His family was against austerity as they felt it was too harsh. Reduction in spending made him fire workers. The resultant unemployment was 25% in general and more than 50% among the youth. It was said that the unemployment due to Greece’s misfortunes was worse than his friend America’s crisis during the economic depression.
Exodus and the worsening situation:
Fearing further recession, many of Greece’s skilled employees began deserting him. They started withdrawing money from Greece’s account and left for greener pastures. This aggravated the situation as there was a further liquidity crunch in the market.
IMF and the EU intervened with a bailout of $ 172 bn in 2012 and asked Greece to reduce its debt-to-GDP ratio to around 120% by 2020.
Will Greece be able to turnaround his financial situation, will he stay put in the prestigious Eurozone club or be evicted?
Stay tuned for the sequel !