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11 October 2015 |
"Debt " means a sum of money that is owed to someone else. A country, such as Greece, can borrow money from for instance other countries, and thus Greece will owe a debt to that other country. When a country owes someone money this is referred to as their sovereign debt. The Greek sovereign debt crisis refers to, on a simple level, the issue that Greece has a lot of sovereign debt which they cannot repay. Because Greece does not have any money left, the country is unable to pay back the debt instalments to its creditors in time and may be forced to default on its loans. Unless, for instance, they can receive new loans to pay back the old ones (to exemplify: imagine you have borrowed £1000 from Bank A. When Bank A wants its money back, you borrow money from Bank B to repay the debt owed to Bank A to avoid defaulting on your loan to Bank A).
Anyone pursuing a career in the City needs to develop an ability to understand the current international (and domestic) economic climate. This is because the macro-economic climate affects businesses across all industries. Such understanding forms part of candidates' commercial awareness and it is thus crucial to have a general, high level understanding of important economic developments such as the current crisis in Greece. It is not uncommon to be asked in interviews to explain the background to major global events.
When a country spends money this is called public spending. This is money going to for instance pensions, schools, roads, hospitals etc. A country's income is (mainly) tax paid on for instance company profits, income and goods (Value Added Tax). When a country spends more than it makes it has a budget deficit and it may borrow to cover that deficit. This is perfectly normal: most countries in Europe run a budget deficit and has a sovereign debt which they repay continuously. However, Greece's debt level has gone beyond what is normal, as the country has spent a lot of money (on for instance state-funded pensions at an early age) and has had issues with structuring a taxation system that works in a sufficient way, which has led to a very high level of tax avoidance.
The most problematic loans are those to the European Central Bank, the European Commission and the International Monetary Fund (IMF) (often referred to collectively in media as the "troika "). These loans (amounting to approximately £240bn in total) were originally given to Greece in 2010 during the repercussions of the financial crisis, a crisis in which Greece suffered enormously. As these loans were not enough, they received another one in 2012. The loans to the troika are the ones which they are currently struggling to pay back.
The loans provided by the troika had certain obligations attached, obligations aimed at ensuring the Greek government would start generating enough money by themselves so as to avoid a similar situation occurring in the future. These obligations involved the Greek government having to impose serious austerity measures. However, this turned out not to be enough as the money, which was believed would be enough for three years, was used up already after a year. The second loan had even more stringent obligations attached, forcing the Greek government to cut public spending even further.
The austerity measures Greece were obliged to undertake as part of the loan agreement have not been very effective, which is why today Greece is almost bankrupt and will require further loans or the country will default. They have, to simplify, used up all of the £240 given to them by the troika and have not managed to reform their economy in order to generate enough money to even begin to repay the debt. Another complicating factor is that the leftist political party Syriza, led by Tsipras, won the Greek election in January 2015. Their campaign was heavily based on anti-austerity, which means that they do not accept the troika's demanding obligations forcing the Greek government to cut back on spending. Syriza held a referendum in July 2015 where the Greek population confirmed that they did not want to accept the terms of the proposed bailout agreement with the troika. However, the troika do not want to lend Greece any more money unless they agree to such obligations. And, if the troika does not lend Greece more money, they will default on its loans. This is the foundation of the conflict.
This is a complicated question and it is outside the scope of this article to attempt to cover all of the potential consequences of a Greek default. This piece of writing is instead aimed at providing a high-level overview of the crisis' background.
"Grexit " (a play on words often used by media, combining "Greece " and "Exit ") covers the potential scenario where Greece is forced to leave the euro as a result of defaulting on its debt. Greece would instead return to its old currency which would be heavily devalued to encourage economic growth. The reasons many regard this as an undesirable outcome are numerous, but include:
A loan is paid back at regular intervals, and each payment is referred to as a debt instalment. For instance, the debtor could pay back in equal monthly payments that include interest and a portion of the principal (the full sum of the original loan).
An entity to whom money is owed.
Defaulting on loans
Failure to meet the legal obligations stating when and how a loan should be repaid.
When a government is spending more money than it makes it has a number of options. The country can borrow money, it can increase its taxes (as taxation is one of the key sources of income for a government) and it can cut public spending. Cutting public spending is what austerity measures normally refers to. Public spending includes money paid by the state for pensions, benefits, schools, hospitals, road works etc. This is generally unpopular among the population as it decreases the quality of services provided by the state. In Greece, the focus has been on reducing pension payments, raising mandatory pensions contributions from those working, end early retirement and raise retirement age (so people work for longer: people in employment contribute with tax and do not require pensions).
The arrangement of one's financial affairs in order to reduce the amount of tax paid.
Devaluation of currency
Deliberately lowering the value of a country's currency, by fixing a new rate in relation to a foreign currency using monetary policy. Devaluation in particular causes a country's exports to become cheaper (as one US dollar, for instance, will be worth more than it was before) and imports to become more expensive (as people in Greece would have to pay more to buy goods from other countries, because their currency is now worth less). More exports and less imports facilitates domestic economic growth.