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Light of Knowledge

The Greece Debt Crisis

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By Pronali Mukherjee

The infamous crisis of the Greece began in 2009 and continues to affect the European Union time and again.

After two bailouts over the year in 2010 and 2012, the 2015 crisis might actually lead to Greece’s exit also known as ‘Grexit’ from the Eurozone after all. One might wonder how did Greece reached to this level. The problem was because of 3 main reasons: First: turmoil of the recession in 2008. Second: weaknesses in the foundation of the Greek economy; and Third: the lack of confidence among leaders.

According to Reuters in 2010 this lack of confidence was due to the disclosure of the fact that the past information on government deficit levels had been misreported by the Greek government leading to sudden mistrust.

 

During the first bail out the IMF, Eurozone leaders and the then Prime Minister of Greece agreed to a package of 110 billion euro over 3 years. And even after making changes in the government, cutting of salaries and other reforms it was constantly downgraded by credit rating companies. The second bail out took place in 2012 and the total amount of eurozone and IMF bailouts was nearly to 246 billion euros by 2016.

These bailouts came with terms, the lenders imposed the austerity terms that were harsh for Greece to follow. And after the parliamentary election in December 2014 and the following formation of Syriza-led government refusing to honour the terms of the current bailout agreement, leading to the rise of political uncertainty of what is to come further leading the “Troika” to suspend all support scheduled under the current program until the Greek government agrees the previous negotiated terms or could negotiate new terms mutually with its public creditors.

This led to rise in prices at the Athens Stock Exchange and increasingly growing liquidity crisis.

Coming to the current scenario in this case, to avoid failure of the banking sector and exit from the eurozone the Prime Minister of Greece Alexis Tsipras on 26th June announced a referendum to be held on 5th July 2015 to decide on the achieved preliminary negotiation result for a new set of updated terms to ensure completion of the second bailout agreement.

On the other hand, Eurogroup notified that the existing second bailout agreement would expire on 30th of June if not updated prior this date by a new agreement translating it as too late for Greece to arrange a referendum.

The referendum was approved by the Greek Parliament on 28th June and the European Central Bank decided to provide the country with its Emergency Liquidity Assistance to Greek Banks. On July 5th of 2015, majority of Greek citizens voted to reject the bailout terms causing indexes worldwide to tumble as most were not sure about Greece’s future fearing a potential exit from the European Union.

As on Monday 13th of July, Greece and the European creditors announced an agreement in Brussels to resolve the country’s debt crisis and maintain it in the eurozone. The agreement does not provide the assurance that Greece will receive a third bailout in five years but it does allow the start of detailed negotiations on a new assistance package for Greece.

The experts all over the world worried that Greece’s problems would affect the rest of the world and if it defaulted on its debts and exited the eurozone it might lead to a global financial shock.

However, others are of the opinion that if Grexit to take place it would not be a catastrophe. Since Europe as a whole is taking measures to avoid spilling the same on all over the world and since Greece only makes only a small part of it the Eurozone would actually be better off without Greece but as of now nothing is certain.

Now as to how it may affect the rest of the world, then it can be understood that it has a direct impact on the European market as it specifically harmful for the Eurozone. As the Euro brings the countries together and one fall out may have a severe impact as investors might fear that larger countries may also abandon the union currency in tough times.

At present, experts believe that it might not have an effect on India directly or indirectly but recent variations on the sensex proves otherwise and if Euro goes weak dollar grows stronger leading to weak Indian rupee value. This saves the gold businesses but might not spare oil prices.

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