What caused the Greek financial crisis?

The Greek financial crisis was a debt crisis which began in 2009 off the back of the Great Recession and caused significant economic turmoil in Greece – of which the effects are still felt to this day. The crisis is referred to in Greece simply as ‘The Crisis’, and caused austerity measures, poverty and a subsequent humanitarian crisis. Greece’s economy and population have been permanently altered too, causing brain drain and increased social exclusion.

In this article, we explore the causes behind the economic crisis.

Economy of Greece pre-crisis

In 2000, Greece was accepted into the Economic and Monetary Union of the EU, joining the eurozone. The economy of Greece at the time was strong, but the central government viewed the EU as an opportunity to further accelerate growth and modernise the Greek economy. It was also a way of consolidating its democracy and stabilising the political landscape.

From 2000 to 2007, the Greek economy was one of the fastest-growing economies in the EU, and averaged a 4.2% CAGR.

Despite this growth, it was building a large deficit, which then transpired had been underreported, and was worse than previously thought – undoubtedly a foreshadowing of economic troubles to come.

Why did Greece go bankrupt?

Greece ran a large deficit in the early 2000s to take advantage of its booming economy, a similar strategy implemented by many other countries. Shipping and tourism were the largest sources of revenue, and the 2004 Olympics provided a huge influx of money.

However, in 2008, the Great Recession struck, which caused the precarious economy to crumble. The huge deficit began to increase, shipping and tourism declined sharply, and many of the government’s questionable economic decisions were exposed.

There was also an issue with tax evasion and corruption in the country, which was exposed by the global meltdown. It was estimated that 24.3% of the economy was operating without any tax payments, and the collection of taxes by the government was weak. VAT was also poorly regulated, and overall the government collected significantly less than was owed to it. Therefore, on paper, the economy seemed that it was running smoother than in reality.

The crash caused the government to introduce harsh austerity measures, which brought about unemployment, poverty, and adverse social effects. Greece’s financial woes began to increase beyond its neighbouring countries. Bond yield spreads began to widen, and costs of risk insurance on credit default swaps began to rise. Spending cuts and reforms began to exponentially increase, and faith in the Greek economy was waning.

Causes of the crisis

After Greece joined the eurozone in 2000, it emerged that the government had fudged their numbers in order to enter the EU.

The EU has certain financial requirements for entering the EU, outlined by its Stability and Growth Pact, two of which include:

• A debt-to-GDP ratio of no more than 60%
• A fiscal deficit of no more than 3%

It was revealed that Greece’s debt-to-GDP ratio in 2000 was actually at 103%, and its fiscal deficit was at 3.38%. Greece’s government disputed this claim of their deficit being too high.

Katinka Barysch, the chief economist for the Centre for European Reform also pointed out a double standard, as France and Germany had also defied the set limits, yet the EU still denied many Eastern European countries from joining due to their high deficits.

Further investigation into the fudged numbers revealed that Goldman Sachs (who were one of the key players in causing the Great Recession), had assisted Greece in concealing its debt by using credit-swap transactions to lower the numbers.

2004 Summer Olympics

Greece continued with spending by hosting the summer Olympic Games, which cost the state over €9 billion, causing the deficit to rise to 6.1%, and the debt-to-GDP ratio to hit 110.6%. This activity caused the European Commission to put the country under fiscal monitoring in 2005.

However, whether hosting the Olympic games contributed to the crisis is hotly debated. Many claim that the crisis began at this point, noting that the spending hit an all-time high right before the global meltdown in 2008. However, on the flip side, many economists argue that any negative effects that may have happened due to the Olympic games pale in comparison to the public debt and mismanagement of finances by the government.

Development of the crisis

The Great Recession in 2008 was marked as a direct trigger of the Greek government debt crisis, and from 2009 onwards, the Greek economy began to slowly slip into further turmoil.

Greece’s public finances were audited by Eurostat in 2010 and revealed the mismanagement, which the report referred to as “a series of failings in the institutional arrangements and practical compilation of Greek public finance data.”

The aftershocks of the Great Recession were in full swing, and to cope with the rising debts and all-around downgrading of its credit ratings, the Greek government was forced to introduce harsh austerity measures.

Between 2010 and 2017, Greece introduced 14 different austerity packages which significantly increased unemployment and social unrest. All of these measures are still in effect to this day.

Measures introduced included:

• Pay freezes for government employees
• Cuts in public sector pay
• Cuts in bonuses
• Cuts in overtime workers
• Increase in VAT
• Rises in tax on fuel, alcohol, luxury goods and cigarettes
• The pension age increased from 61 (60 for women) to 65
• Many other cuts to pensions and companies

This social unrest boiled over into a full anti-austerity movement. The economic troubles increased too, and even after bailouts from the IMF and ECB, Greece defaulted on one of its €1.6 billion IMF loans in 2015, demonstrating that the government was struggling under the weight of the debt.

In 2017, this burden was still present, and further fears of defaults were raised as Greece accepted further bailouts from the eurozone, totalling €8.5 billion.

Despite the bleak situation, Euclid Tsakalotos, minister of finance of Greece from 2015 to 2019, referred to the loan as signalling “light at the end of the tunnel”.

Is Greece still in debt in 2023?

Very much so. Greece is currently 2nd in the world for debt-to-GDP ratio behind Japan.

While the situation has stabilised in Greece, the country is still in a poor economic situation.
The national debt of Greece is still increasing, and the government is still working its way out of the accumulating debt.

However, the ebt-to-GDP ratio has been decreasing slowly but steadily, which could signal a brighter future.

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