Greece’s Complicated Debt Puzzle

After Greece joined the eurozone in 2001, the country embarked on a decade long borrowing and spending spree heavily supported by Germany and willing banks.

As the financial crisis unfolded in 2008 and the markets tumbled, global economic hardship took a heavy toll on Greece.

It was later discovered that Greece’s government was deceptive and repeatedly lied to EU government heads in Brussels and Frankfurt about its national numbers by failing to mention corruption, over spending, and tax evasion as major risks to the sustainability of the Greek economy. 

In late 2009, fears of a sovereign debt crisis grew stronger among investors concerning Greece’s ability to meet its debt obligations due to a steady increase in government debt levels, causing a crisis of confidence as evidenced by a widening of bond yield spreads and the cost of  insurance on credit default swaps compared to the other countries in the 17 member eurozone.

On 2 May 2010, the eurozone countries and the IMF agreed on a €110 billion bailout loan for Greece on the condition that Greece’s government implements EU austerity measures.

In October 2011, Eurozone leaders agreed to offer a second €130 billion bailout loan for Greece, consisting of not only the implementation of another austerity package, but also an agreement that the majority of Greece’s private creditors agree to a restructure of the Greek debt, lowering the debt burden from a forecasted 198% of GDP in 2012 to 121% of GDP by 2020.

Today Greece owes its creditors nearly double the amount that the country is capable of generating.

Greece owes 400 billion euros ($517 billion) to private bondholders, the International Monetary Fund, the European Central Bank, and other creditors.

Following a recent 7.5 billion tranche receipt in March, Greece owes other countries more than 80 billion euros in near term bailout funds after already receiving 4.2 billion euros in rescue cash from the European Financial Stability Facility (EFSF) on May 10, 2012.

The Bank of Greece still owes 104 billion euros.

Greece has 143 billion euros of bills and bonds outstanding, raising total liabilities to 395 billion euros, according to Bloomberg data.

Political Uncertainty

After Greeks voted to reject their pro-austerity parties during their May 6th elections and offered support to Syriza, an anti-bailout party, more European leaders are talking openly about Greece exiting the Euro, a once taboo topic for discussion.

Greece will hold another election in mid-June to determine if Syriza will gain majority seats in parliament and stick to their anti-austerity plans.

Today European leaders will convene for informal talks in the midst of new threats to the troubled euro currency union. They are expected to discuss ways to boost economic growth and create jobs in the face of recession throughout much of Europe.

Expectations are low for any groundbreaking developments at the meeting but one of the closely watched topics will center on the topic of  joint eurobonds in the eurozone.

Germany and the Netherlands are heading for a direct confrontation with France over the topic of eurobonds.

According to the Guardian, Dutch finance minister Jan Kees de Jager told Dutch TV station RTL 7 yesterday that his government was not adamantly opposed to collective borrowing in principle but eurobonds could only be introduced after Europe had made significant progress towards full fiscal union.

A Future Greek Return to the Dracmha?

Yesterday, Bloomberg senior Europe economist David Tweed said that if Greece exits the euro, it is simply not possible for Greece to begin producing drachmas, Greece’s former currency before joining the euro.

Erick Nielson from Unicredit threw cold water on the remote possibility of Greece printing out dramchas if the country exits the euro in the future.

“How in the world are they going to secretly agree to print money, bring them in, control the banks, control capital flow, and think this is going to be orderly?” Nielsen questioned.

Instead of a return to the drachma, the more likely option if the ECB and IMF cuts off funding to Greece is the creation of a parallel currency that may be created to handle the IOU’s and promissory notes from Greek debts (E.G. pensions) without Greece actually exiting the eurozone.



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