Effects and Solutions to the Crisis
The effects of the crisis were perverse. The final revisions to the projections made in 2009 and the results of which were worse than the projections caused the Greek financial markets to tumble 6%, followed by a drop in the European markets, and the value of the Euro to the dollar to fall 2% (Smith and Seager). Ten year Greek bond yields rose to an all-time high of nearly 30% in 2012 (FRED). Greece’s Debt to GDP percentage rose to 172% in 2011 and has only recently shown signs of steadying around 180% (Kindreich). The unemployment rate rose to levels not seen since the early 1990’s. Additionally, 65% of Greeks now hold an unfavorable view of the European Union after the crisis (though only 35% believe in exiting the European Union) and 85% disagree with its handling of the economic situation (Pew Research Center). The crisis also resulted in “Militant trade unions” going on strike and international confidence in the economy sinking even further (Smith).
Economists and politicians had various solutions to the problems, yet none were perfect. One solution proposed was to default officially and go
through a formal process of paying off the most senior of loans. While this option may have seemed extreme, it wasn’t totally insane considering that many Latin American countries defaulted in the 1980’s and 1990’s, most of whom are back on good terms with world credit markets. Another option was to simply drop the Euro and develop its own monetary policy again, allowing for an inflated currency to be more competitive with exports. They would likely to still have defaulted under this option, but would have been better prepared for future growth with control over setting interest rates (The control the ECB holds over benchmark interest rates was a major problem for Greece leading up to the debt crisis since it couldn’t raise its own interest rates and remain competitive; the low interest rates encouraged loans to be taken out). The third option that was not chosen (and probably for good reason) was to fully liquidate all its assets, including parts of its borders that are ethnically Albanian, Macedonian, and Turkish. Though this option was the most extreme, politicians possibly could have used the threat of such an option to open negations for the other three (Altman).
Ultimately, the Greek government chose to remain in the European Union and resolve to more traditional methods of solving their crisis – higher taxes and cutting spending. Additionally, Greece’s Prime Minister reached out to other European nations for a bailout. In February 2010, Germany vowed not to give any aid to Greece stating that Greece had to solve the problem itself (this was done most likely due to political reasons regarding the upcoming election). However, May 2010, the ECB and IMF agreed to a €110 Billion Bailout on the condition that Greece implemented austerity measures and structural reforms to fix tax evasion. At the time, Greece owed Germany, Spain, France, Italy, United Kingdom, other European countries, United States, Japan and the rest of the world a total of €252.1 billion, so ultimately it was in the interest of the other European nations to help out Greece (BIS Quarterly Review). Greece received two more bailouts following the first – one in 2012 and another in 2015. However, in order to avoid a default on debt, Greece’s creditors were forced to grant a large haircut on Greek debt at 53.5% of the face value (Kindreich, 14).