Eurozone Crisis 2011

Advertisement




The eurozone has been plunged into renewed turmoil by Greece’s decision to hold a referendum on the EU’s efforts to bail out its stricken economy.

In October, the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) said they had reached agreement with Greece on reforms to put the nation back on track. However, the leaders of Germany and France, as well as the IMF, have now said that Athens will not receive its next tranche of emergency aid until Greece decides whether or not to remain in the eurozone.  This is money from the 110bn-euro ($148bn; £95bn) bailout agreed last summer. Eurozone leaders have subsequently agreed a more comprehensive bailout package, including losses for banks and a larger bailout fund. The whole point is to prevent what started in Greece spreading to other European economies.

Why is Greece in trouble?

Greece has been living beyond its means since even before it joined the euro, and its rising level of debt has placed a huge strain on the country’s economy. The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro. Public spending soared and public sector wages practically doubled in the past decade. It has more than 340bn euros of debt – for a country of 11 million people.

However, as the money flowed out of the government’s coffers, tax income was hit because of widespread tax evasion. When the global financial downturn hit, Greece was ill-prepared to cope. It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis – and then in July 2011, it was earmarked to receive another 109bn euros. But that still was not considered enough. Another summit was called in October in Brussels to solve the crisis once and for all.

Why did the crisis not end with the Greek bailout?

The aim of the original Greece bailout was to contain the crisis. That did not happen. Both Portugal and the Irish Republic needed a bailout too because of their debts. Then Greece needed a second bailout, worth 109bn euros. In July this year, eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent.

But bond yields continued to rise on Spanish and Italian debt – leading to fears that their huge economies will need to be bailed out too. The failure of Franco-Belgian lender Dexia also added to woes – French and German banks are large holders of Greek debt. The eurozone rescue fund – the European Financial Stability Facility – was 440bn euros, nowhere near big enough to deal with that scenario.

And so, in October, the eurozone agreed to expand the EFSF to 1tn euros and got banks to agree to a 50% “haircut” on their Greek holdings. But then Greece’s Prime Minister George Papandreou shocked European leaders by calling a referendum on the bailout package. That has led the leaders of Germany and France, as well as the IMF, to declare that Athens would not receive its next tranche of emergency aid until the referendum had passed.

What would happen if Greece defaulted?

Europe’s banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding. An “orderly” default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A “disorderly” default could mean much of this debt not being repaid – ever. Either way, it would be extremely painful for banks and bondholders. What’s more, Greek banks are exposed to the sovereign debts of their country. They would need new capital, and it is likely some would need nationalising. A crisis of confidence could spark a run on the banks as people withdrew their money, making the problem worse.

A Greek exit from the euro is seen by some as inevitable if the country defaulted. The big question would then be, what about other heavily-indebted nations in the eurozone? It might be a repeat of the collapse of Lehman Brothers, which sparked the credit crunch that pushed Europe and the US into recession.

Source : BBC

RSS GK Current Affairs

  • History of Indian National Flag
    Every free nation of the world has its own flag. It is a symbol of a free country. The National Flag of India was designed by Pingali Venkayyaand and adopted in its present form during the meeting of
  • Maharatna Navratna and Miniratna Scheme
    Maharatna Scheme The Government introduced the Maharatna scheme in December 2009 with the objective to delegate enhanced powers to the Boards of identified large sizes of Navratna CPSEs to facilitate
  • Ishwar Chandra Vidyasagar
    Ishwar Chandra Vidyasagar, the great scholar, academician, and reformer born on 26th September 1820 in Birsingha Village of district Midnapor (now in Paschim Medinipur), West Bengal. His father Tha
  • History of Commonwealth Game
    History: Reverend Ashley Cooper was the first person to propose the idea of having a Pan-Britannic sporting contest to foster a spirit of goodwill and understanding within the British Empire. In 1928,
  • Bharat Ratna Award
    Bharat Ratna is the highest civilian honour, given for exceptional service towards advancement of Art, Literature and Science, Sports and in recognition of Public Service of the highest order.
  • Famous Lakes and Rivers in India and World
    Lakes Lake Baikal (Russia) is the deepest lake in the world. One of the biggest and most ancient lakes of the world is situated nearly in the center of Asia in a huge stone bowl set 445 m above sea le
  • Famous Cities and River Banks in India and World
    CityCountryRiver AdelaideAustraliaTorrens AmsterdamNetherlandsAmsel AlexandriaEgyptNile AnkaraTurkeyKazil AllahabadIndiaAt the confluence of the Ganga and Yamuna AgraIndiaYamuna AyodhyaIndiaSaryu Ahm
  • Popular Names of Personalities
    Popular Name Personality Lady with the lamp Florence Nightingale Grand Old man Dadabhai Naoroji of India Iron Duke Duke of Wellington Guru Ji M. S. Golwalkar Jonn Bull England and the English peo
  • Career Scope in Print Media
    Print media are lightweight, portable, disposable publications printed on paper and circulated as physical copies in forms we call books, newspapers, magazines, and newsletters. They hold informative
  • National Sports Awards 2020
    National Sports Awards are given every year to recognize and reward excellence in sports. Rajiv Gandhi Khel Ratna Award is given for the spectacular and most outstanding performance in the field