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The Greek government-debt crisis is one of a number of current European sovereign-debt crises.. In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany.

The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets practically were no longer available for Greece as a funding source. On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on the implementation of austerity measures. In October 2011, Eurozone leaders agreed to offer a second €130 billion bailout loan for Greece, conditional not only the implementation of another austerity package, but also that all private creditors holding Greek government bonds should sign a deal accepting a 53.5% face value loss. This proposed restructure of all Greek public debt held by private creditors, which constituted a 58% share of the total Greek public debt, would according to the bailout plan reduce the overall public debt burden with roughly €110 billion. A debt relief equal to a lowering of the debt-to-GDP ratio from a forecasted 198% in 2012 down to roughly 160% in 2012, with the lower interest payments in subsequent years combined with the agreed fiscal consolidation of the public budget and significant financial funding from a privatisation program, expected to give a further debt decline to a more sustainable level at 120.5% of GDP by 2020.

The second bailout deal was finally ratified by all parties in February 2012, and became active one month later, after the last condition regarding a successful debt restructure of all Greek government bonds, had also been met. The latest bailout plan is to cover all Greek financial needs from 2012-14. If Greece can comply with all economic targets outlined in the bailout plan, the country is set for a possible return in 2015, to start using the private capital markets for debt refinance and as a source to cover its future financial needs.

In mid-May 2012 the crisis and impossibility to form a new coalition government after elections, led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as "Grexit" and started to affect international market behaviour. A second election in mid-June, ended with the formation of a new government supporting a continued adherence to the main principles outlined by the signed bailout plan. The new government however immediately asked its creditors, due to a delayed reform schedule and a worsened economic recession, to be granted an extended deadline from 2015 to 2017 before being required to be self-financed; with minor budget deficits fully covered by extraordinary income from the privatisation program for a subsequent 5-year period. The creditors are currently examining this request in the light of an updated and recalculated sustainability analysis of the Greek economy, and are expected to publish a report with their findings in September 2012. If Greece is granted the two extra years to restore their fiscal balance, this will either require creditors to: 1) fund Greece with a new extra third bailout loan, or 2) launch a new debt restructure to decrease the debt repayment (i.e., by imposing additional haircuts on governmental bonds, or by offering Greece to pay some lower/delayed interest rates).

The scheduled €31bn bailout disbursement for August 2012, was withheld by the creditors, awaiting reassurance by the "surveilance report" that Greece was still following the agreed path to restore and reform the economy. An essential part of that, will be for the Greek parliament to present and approve a new €11.9bn austerity package in September 2012, in order to reduce the 2013 fiscal deficit, as planned from 8.4% to 4.7%.

Causes

In January 2010 the Greek Ministry of Finance highlighted in their Stability and Growth Program 2010 these five main causes for the significantly deteriorated economic results recorded in 2009 (compared to the published budget figures ahead of the year):

• GDP growth rates: After 2008, GDP growth rates were lower than the Greek national statistical agency had anticipated. In the official report, the Greek ministry of finance reports the need for implementing economic reforms to improve competitiveness, among others by reducing salaries and bureaucracy, and the need to redirect much of its current governmental spending from non-growth sectors (e.g. military) into growth stimulating sectors.

• Government deficit: Huge fiscal imbalances developed during the past six years from 2004 to 2009, where "the output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues." In the report the Greek Ministry of Finance states the aim to restore the fiscal balance of the public budget, by implementing permanent real expenditure cuts (meaning expenditures are only allowed to grow 3.8% from 2009 to 2013, which is below the expected inflation at 6.9%), and with overall revenues planned to grow 31.5% from 2009 to 2013, secured not only by new/higher taxes but also by a major reform of the ineffective Tax Collection System.

• Government debt-level: Since it had not been reduced during the good years with strong economic growth, there was no room for the government to continue running large deficits in 2010, neither for the years ahead. Therefore, it was not enough for the government just to implement the needed long term economic reforms, as the debt then rapidly would develop into an unsustainable size, before the results of such reforms were achieved. The report highlights the urgency to implement both permanent and temporary austerity measures that - in combination with an expected return of positive GDP growth rates in 2011 - would result in the baseline deficit decreasing from €30.6 billion in 2009 to only €5.6 billion in 2013, finally making it possible to stabilize the debt-level relative to GDP at 120% in 2010 and 2011, followed by a downward trend in 2012 and 2013.

• Budget compliance: Budget compliance was acknowledged to be in strong need of future improvement, and for 2009 it was even found to be "A lot worse than normal, due to economic control being more lax in a year with political elections". In order to improve the level of budget compliance for upcoming years, the Greek government wanted to implement a new reform to strengthen the monitoring system in 2010, making it possible to keep better track on the future developments of revenues and expenses, both at the governmental and local level.

• Statistical credibility: Problems with unreliable data had existed ever since Greece applied for membership of the Euro in 1999. In the five years from 2005–2009, Eurostat each year noted a reservation about the fiscal statistical numbers for Greece, and too often previously reported figures got revised to a somewhat worse figure, after a couple of years. In regards of 2009 the flawed statistics made it impossible to predict accurate numbers for GDP growth, budget deficit and the public debt; which by the end of the year all turned out to be far worse than originally anticipated. In 2010, the Greek ministry of finance reported the need to restore the trust among financial investors, and to correct previous statistical methodological issues, "by making the National Statistics Service an independent legal entity and phasing in, during the first quarter of 2010, all the necessary checks and balances that will improve the accuracy and reporting of fiscal statistics".

The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007; during that period, it grew at an annual rate of 4.2% as foreign capital flooded the country.

Financial statistics reveal, that last time the Greek general government experienced a public budget surplus was back in the 1970s. According to an editorial published by the Greek conservative newspaper Kathimerini, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974. After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance public sector jobs, pensions, and other social benefits.

Since 1993, the debt-to-GDP ratio has remained high at an unhealthy territory above 94%. In the turmoil of the Global Financial Crisis it even rapidly grew above the maximum sustainable level for Greece (defined by IMF economists to be 120%). According to "The Economic Adjustment Programme for Greece" published by the EU Commission in October 2011, the debt level is expected to reach a highly unsustainable level of 198% in 2012, if the proposed debt restructure agreement is not implemented.

Initially, currency devaluation helped finance the borrowing. After the introduction of the euro in January 2001, the devaluation tool disappeared. Throughout the next 8 years, Greece was however able to continue its high level of borrowing, due to the lower interest rates government bonds in euro could command, in combination with a long series of strong GDP growth rates. Problems however started to rise, when the Global Financial Crisis peaked with negative repercussions hitting all national economies in September 2008. The Global Financial Crisis had a particularly large negative impact on the GDP growth rates in Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn, with revenues falling 15% in 2009.

Another consistent problem Greece has suffered from in recent decades, is the government's tax income. Each year it is several times below the expected level. In 2010, the estimated tax evasion costs for the Greek government amounted to well over $20 billion per year.

To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing. Most notable is a cross currency swap, where billions worth of Greek debts and loans were converted into Yen and Dollars at a fictitious exchange rate by Goldman Sachs, thus hiding the true extent of Greek loans. The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU. The revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Euros stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and also the debt level clearly exceeding the recommended limit at 60% of GDP.

In February 2010, the new government of George Papandreou (elected in October 2009), revised the 2009 deficit from a previously estimated 5% to an alarming 12.7% of GDP. In April 2010, the reported 2009 deficit was further increased to 13.6%, and at the time of the final revised calculation by Eurostat it ended at 15.6% of GDP, which proved to be the highest deficit for any EU country in 2009. The figure for Greek government debt at the end of 2009, was also increased from its first November estimate at €269.3 billion (113% of GDP), to a revised €299.7 billion (129% of GDP).

This major upward revision of the deficit and debt level, was caused by flawed estimates and statistics previously being reported by the Greek authorities in 2009, resulting in the need for Eurostat to perform an in depth Financial Audit of the fiscal years 2006-09. After having conducted the financial audit, Eurostat noted in November 2010, that all "methodological issues" had been fixed, and that the new revised numbers for 2006-2009 were finally considered reliable.

Despite the crisis, the Greek government's bond auction in January 2010 had the offered amount of €8bn 5-year bonds over-subscribed by four times. At the next auction in March, the Financial Times again reported: "Athens sold €5bn in 10-year bonds and received orders for three times that amount". The continued successful auction and sale of bonds, was however only possible at the cost of increased yields, which in return caused a further worsening of the Greek public deficit.

As a result, the rating agencies downgraded the Greek economy to junk status in late April 2010. In practical terms this caused the private capital market to freeze, so that all the Greek financial needs instead had to be covered by international bailout loans, in order to avoid a sovereign default. In April 2010, it was estimated that up to 70% of Greek government bonds were held by foreign investors (primarily banks). The subsequent bailout loans paid to Greece were mainly used to pay for the maturing bonds, but also to finance the continued yearly budget deficits.

The yearly change in the debt-to-GDP ratio is found by adding the "budget deficit in percentage of GDP" with the "stock-flow adjustment" and the calculated "impact of nominal GDP growth". Any positive nominal GDP growth will help to diminish the debt-to-GDP ratio through an increase of the denominator in the equation. While the "budget deficit" and "stock-flow adjustment" together comprise the governments yearly change to the amount of borrowed "public debt". Stock-flow adjustments occur whenever the government change the amount of cash liquidity on public accounts, or sale/buy some public financial assets (comparable to the amount of cash involved in the transaction). In example the bailout plan for Greece feature a stock-flow adjustment contribution, where a significant privatization of public assets worth €50 billion, will help to lower the amount of public debt in 2015-20, after also having financed some "cash adjustments" in the form of extra liquidity set aside on public accounts. Besides of being related to changes in the governments amount of "liquidity" and "financial assets", the yearly stock-flow adjustment can occasionally also be related to technical changes in the amount of nominal debt; which in example could be caused by the monetary devaluation Greece had in 1998 (reducing the "drachma debt" measured in euro; without having any impact on the debt-to-GDP ratio) or the debt restructure implemented by Greece in 2012 with a nominal haircut of all governmental bonds (reducing both the debt and debt-to-GDP ratio).

After implementation of the debt restructure in March 2012, as part of the new Second Economic Adjustment Programme for Greece, this meant that the forecasted debt-to-GDP ratio for 2012 fell from 198% to 160%. The signed deal however further stipulates, that in order to make Greece capable in 2020 to fully cover its future financial needs by using the private capital markets, they need to lower the nation’s debt-to-GDP ratio further down to maximum 120.5% in 2020. And this significant lowering of the ratio can only be achieved, by a continued compliance with the strict targets set in the bailout plan for the key areas: Fiscal consolidation, economic reforms, labor market reforms and a privatization of public assets worth €50 billion. If Greece fail on any of these targets, or if the real GDP growth will not improve to the expected levels, such disappointments will call for the Troika (EU, ECB and IMF) either to assist Greece with a third bailout loan, or alternatively to somehow increase the amount of offered debt relief. In that context it is important to note, that the bailout plan from March 2012 is based upon expectations of a real GDP growth of -4.7% in 2012 and 0.0% in 2013. The latest forecast published by the Greek Ministry of Finance on 1 October 2012, showed some worsened figures with a real GDP growth of -6.5% in 2012 and -3.8% in 2013. Despite of this challenge from the worsened recession, the outlook for budget deficits is on the other hand still on track, and compared to the targets in the bailout plan in fact a half percentage point better, as it is now forecasted to be 6.6% of GDP in 2012 and declining to 4.2% of GDP in 2013.

Evolution

In the early-mid 2000s, Greece's economy was strong and the government took advantage by running a large deficit, partly due to high defence spending amid historic enmity to Turkey. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries — shipping and tourism — were especially sensitive to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early 2010, as concerns about Greece's national debt grew, policy makers suggested that emergency bailouts might be necessary.

Danger of default

Without a bailout agreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring.

A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to €110 billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent. It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.

Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an “orderly default” on Greece’s public debt which would allow the country to withdraw simultaneously from the Eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighbouring European countries even more.

At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy, as has happened with other economic zones, for example the U.S. Federal Reserve expanding its balance sheet over $1.3 trillion since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt.

Downgrading of creditworthiness

On 23 April 2010, the Greek government requested an EU/IMF bailout package to be activated, providing them with a loan of €45 billion to cover their financial needs for the remaining part of 2010. A few days later on 27 April Standard & Poor's slashed Greece's sovereign debt rating to BB+ or amidst hints of default by the Greek government, in which case investors were thought to lose 30–50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement.

Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts continue to question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back. Stock markets worldwide declined in response to this announcement.

Following downgradings by Fitch and Moody's, as well as Standard & Poor's, Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear."

On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold for Greek debt "until further notice", meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier. As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.

First bailout loan and austerity measures (May 2010 - June 2011)

On 1 May 2010, the Greek government announced a series of austerity measures to persuade Germany, the last remaining holdout, to sign on to a larger EU/IMF loan package. The next day the eurozone countries and the International Monetary Fund agreed to a three year €110 billion loan (see below) retaining relatively high interest rates of 5.5%, conditional on the implementation of austerity measures. Credit rating agencies immediately downgraded Greek governmental bonds to an even lower junk status. This was followed by an announcement of the ECB on 3 May that it will still accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating, in order to maintain banks' liquidity.

The new austerity package was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece. On 5 May 2010, a national strike was held in opposition to the planned spending cuts and tax increases. In Athens some protests turned violent, killing three people.

Still the situation did not improve. It was originally hoped that Greece’s first adjustment plan together with the €110 billion support package would reestablish Greek access to private capital markets by the end of 2012. However it was soon found that this process would take much longer. The November 2010 revisions of 2009 deficit and debt levels made the 2010 targets even harder to reach, and indications signaled a recession harsher than forecasted. In May 2011 it became evident that due to the severe economic crisis tax revenues were lower than expected, making it even harder for Greece to meet its fiscal goals.

After the findings of a bilateral EU-IMF audit in June, which called for further austerity measures, Standard and Poor's downgraded Greece's sovereign debt rating to CCC, the lowest in the world. The major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuffled cabinet, and a vote of confidence in the parliament.

The crisis sent ripples around the world and major stock exchanges absorbed losses. To ensure the release of the next 12 billion euros from the eurozone bail-out package (without which Greece would have had to default on loan repayments in mid-July), the government proposed additional spending cuts worth €28 billion over five years.

On 27 June 2011 the trade unions began a forty-eight hour labor strike intended to force parliament members into voting against the austerity package; the first such strike in Greece since 1974. One United Nations official cautioned that the next planned package with new extra austerity measures in Greece could potentially pose a violation of human rights, if it was implemented without careful consideration to the peoples need for "food, water, adequate housing and work under fair and equitable conditions". Nevertheless, the new extra fourth package with austerity measures was approved on 29 June 2011, with 155 out of 300 members of parliament voting in favor.

Second bailout loan and austerity measures (July 2011 - present)

EU emergency measures continued at an extraordinary summit on 21 July 2011 in Brussels, where euro area leaders agreed to extend Greek (as well as Irish and Portuguese) loan repayment periods from 7 years to a minimum of 15 years and to cut interest rates to 3.5%. They also approved the construction of a new €109 billion support package, of which the exact content was to be debated and agreed on at a later summit, although it was already certain to include a demand for large privatization efforts. In the early hours of 27 October 2011, eurozone leaders and the IMF also came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt, the equivalent of €100 billion, to reduce the country's debt level from €340bn to €240bn or 120% of GDP by 2020.

On 7 December 2011, the new interim national union government led by Lucas Papademos submitted its plans for the 2012 budget, promising to cut its deficit from 9% of GDP 2011 to 5.4% in 2012, mostly due to the write-off of debt held by banks. Excluding interest payments, Greece even expects a primary surplus in 2012 of 1.1%. The austerity measures have helped Greece bring down its primary deficit before interest payments, from €25bn (11% of GDP) in 2009 to €5bn (2.4% of GDP) in 2011, but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.

Overall the Greek GDP had its worst decline in 2011 with -6.9%, a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005, and with 111,000 Greek companies going bankrupt (27% higher than in 2010). As a result, the seasonally adjusted unemployment rate also grew from 7.5% in September 2008 to a, at the time, record high of 19.9% in November 2011, while the youth unemployment rate during the same time rose from 22.0% to as high as 48.1%.; since then both rates have kept rising with seasonally adjusted unemployment rate and youth unemployment rate reaching respectively in June 2012 24.4% and 55% setting new record high values. Overall the share of the population living at "risk of poverty or social exclusion" did not increase significantly during the first 2 year of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010, which was also just slightly worse than the EU27-average at 23.4%, but for 2011 the figure was now estimated to have risen sharply above 33%.

In February 2012, an IMF official negotiating Greek austerity measures, admitted the so far implemented measures were harming Greece in the short term, and cautioned that although further spending cuts were certainly still needed, it was important the fiscal consolidation was not implemented with an excessive pace, as time should now also be given for the implemented economic reforms to start to work.

Some of the economic experts had argued in June 2010 that the best option for both Greece and the EU would be to engineer an orderly default on Greece’s public debt, and by the same time force Greece to withdraw from the eurozone, with a reintroduction of its national currency the drachma at a debased rate. The argument for the latter part of this radical approach, was that Greece also strongly needed to improve its competitiveness in order to reestablish positive growth rates, and a reintroduction of the old drachma would enable Greece to return using the devaluation tool as a mean for that.

In June 2011, a majority of the economists indeed agreed to recommend an orderly default straight away, as it was predicted to be unavoidable for Greece at the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years) would simply end up hurting EU lenders and neighboring European countries even more. However, if Greece were to leave the euro, the economic and political impact would be devastating. According to Japanese financial company Nomura an exit would lead to a 60 percent devaluation of the new drachma. UBS warned of "hyperinflation, military coups and possible civil war that could afflict a departing country". A confidential staff note drawn up in February 2012 by the Institute of International Finance, also revealed that they now favoured an orderly default with a continued Greek membership of the Euro, as the opposite scenario was expected to create losses of at least €1 trillion.

To avoid a chaotic Greek disorderly default and/or the systemic risks to the Eurozone in the scenario with Greece leaving the Euro, the EU leaders decided in October 2011, to engineer and offer an orderly default combined with a €130bn bailout loan, making it possible for Greece to continue as a full member of the Euro. The offered orderly default and bailout loan, was however conditional, that Greece at the same time approved a new austerity package.

Meeting requirements for activation of the second bailout loan

On 12 February 2012, amid riots in Athens and other cities that left stores looted and burned and more than 120 people injured, the Greek parliament approved the new austerity package, with a 199-74 majority. Forty-three lawmakers from the ruling Socialist PASOK and conservative New Democracy who voted against the bill were immediately expelled from their parties, reducing the ruling coalitions's majority in the 300-seat parliament from 236 to 193. The vote is now expected to pave the way for the EU, ECB and IMF to jointly release the funds, which are supposed to cover all the Greek financial needs in 2012-2014. According to the bailout plan, Greece should then be stable enough for a full return in 2015, to obtain all its future needs of economic funding from the private capital markets.

On 21 February 2012 the Euro Group finalized the second bailout package (see below), which was extended from €109 billion to €130 billion. In a marathon meeting in Brussels private holders of governmental bonds accepted a slightly bigger haircut of 53.5% Creditors are invited to swap their Greek bonds into new 3.65% bonds with a maturity of 30 years, thus facilitating a €110bn debt reduction for Greece, if all private bondholders accept the swap. EU Member States agreed to an additional retroactive lowering of the bailout interest rates. Furthermore they will pass on to Greece all profits that their central banks made by buying Greek bonds at a debased rate until 2020. Altogether this is expected to bring down Greece's unsustainable debt level from 165% in 2011, to a more sustainable level of 117% of GDP in 2020, somewhat lower than the originally expected 120.5%. The deal is expected to be finalized before 20 March, when Greece needs to repay bonds worth €14.5bn or default on its debts.

On 9 March 2012 a crucial milestone was reached, when it was announced that 85.8% of private holders of Greek government bonds regulated by Greek law (equal to €152 billion), had agreed to the debt restructuring deal. As this number was above the 66.7% threshold, it enabled the Greek government to activate a collective action clause (CAC), so that the remaining 14.2% (equal to €25 billion) were also forced to agree. At the same time it was announced that 69.8% of private holders of Greek government bonds regulated by foreign law (equal to €20 billion), also had agreed to the debt restructuring deal. Thus, the total amount of debt to be restructured was now guaranteed to be minimum 95.7% (equal to €196.7 out of €205.5 billion), while the remaining 4.3% of the private holders (equal to €8.8 billion) were offered a prolonged deadline at March 23 to voluntarily join the debt swap. A deadline that subsequently got prolonged further to April 20, with the positive outcome, that the total and final amount of acceptance rose to 96.9% (equal to €199.1 out of €205.5 billion), corresponding to a haircut or debt relief worth €106.5 bn. The Greek government currently discuss, how they shall treat the remaining group of foreign bondholders who opted to refuse the deal, and a final answer is only expected after the May 6 national election; but in all circumstances no later than May 15, where the first holdouts are due for a repayment of their maturing bond.

After the announcement from Greece, that minimum 95.7% of the holders of Greek government bonds would be a part of the scheduled debt swap, the president of the Euro Group Jean-Claude Juncker declared, that Greece had now also met the last of the conditions, for the next bailout package to be activated. As the debt swap deal caused significant economic losses to private creditors, Fitch downgraded Greece's sovereign debt rating from "C" to "RD" (Restricted Default), and the ISDA declared a credit event, meaning that €3.5 billion worth of credit default swaps (CDSs) on Greek debt would be triggered. The deal with a €107 bn debt relief, is the largest government debt restructuring in history.

In regards of the debt-to-GDP ratio, it should however be noted the deal only slightly improved the numbers from the previously forecasted 198% of GDP in 2012 to a new forecast at 161% of GDP in 2012. The reason for this mediocre improvement, is not only because the resctructured debt to private creditors only represented 58% of the total debt (while the remaining 42% of debt to public creditors remained untouched); but also because Greece along with the debt relief, had to setup some new "temporary debt" in the form of €48bn to recapitalize Greek banks (getting financial assets in return with an unknown long term duration). The need for money to recapitalize Greek banks, is not only due to the losses created by the debt restructure, but also because EU as part of the bailout plan require the banks to raise their core tier 1 capital ratio to minimum 9% by end-September 2012 and to minimum 10% in June 2013. Despite the fact that the recapitalization is scheduled to happen with a €25bn disbursement in Q2 2012 and a remaining €23bn disbursement in Q1 2013, both disbursements will account-wise be noted as new debt created in 2012. A temporary €35bn bank guarantee for the restructured debt was also loaned for in March 2012, but this loan was canceled again straight after the bank guarantee had expired in July 2012. So the net reduction of debt, will by the end of 2012 have the size of €58.5bn (reducing the debt-to-GDP ratio by 27%-point), with the full €106.5bn (equal to a debt-to-GDP ratio decline of 50%-point) only to take effect some years ahead, if Greece can succeed to sell their financial assets used for bank recapitalisation at a 1:1 price to some private financial investors. The €48bn temporary debt established to recapitalize banks, will be fully financed by the new €130bn bailout package.

Cancellation/revision of the second bailout loan

In May 2012 several EU officials reminded Greece, that no matter the outcome of the parliamentary elections, they had a choice either to respect and follow the agreed debt rescue plan, with the needed requirement to approve the next round of €11.9bn fiscal austerity for the budget years 2013 and 2014. Or in the alternative have the second bailout loan immediately cancelled, followed by an uncontrolled default and exclusion from the eurozone. As all attempts to form a new government failed after the parliamentary elections in May, a new round of elections were scheduled for June. The June election resulted in a new government formation, respecting the initially signed debt rescue plan, and the need to approve the planned fiscal austerity package for the budget years 2013 and 2014. A request was however made towards the Troika, to extend the deadline from 2015 to 2017 before being required to be self-financed, with no need to receive additional bailout funds. This request will be evaluated by the Troika, as part of conducting a new sustainability analysis of the Greek economy, while also analysing the current progres of the Greek government to follow the initially agreed "debt rescue plan". The report is expected to get published in September 2012.

The Troika decided to withhold the scheduled €31bn disbursement for August, pending the outcome of the status report and the political developments in Greece. If the report finds, that Greece did not deliver any progress on the agreed path outlined in the bailout plan, the second bailout loan will most likely get cancelled. If the report finds, that serious progress was made, but that certain unforeseen factors justify a prolonged deadline for Greece to restore the fiscal balance, a revision of the second bailout loan will most probably be granted. It is already rumoured, that a 2-year extension of the deadline, will require the Troika to expand the bailout package with an extra €20bn to Greece. The Troika report is however still to get published in September/October, before IMF or EU will even start to consider stating any official oppinion about revision proposals, and/or decide if the second bailout loan shall be cancelled due to an insufficient amount of progress for Greece in the attempt to follow the earlier agreed bailout plan.

As of 1 October 2012, the Troika and the Greek government were still in the process to negotiate and agree on a €13.5bn "austerity package for 2013-14", of which €10bn should be implemented as spending cuts and €3.5bn as tax hikes. The Greek government's latest proposal for the Troika, was that the financial budget for 2013 should implement the first €7.3bn of spending cuts and €0.5bn of tax hikes; with the remaining part of the austerity package only to be gradually implemented during 2014-16. The Troika's response to this proposal is still unknown. The official report featuring a new status for the bailout plan and a sustainability analysis of the Greek economy, is expected to get published later in October 2012. According to earlier official statements made by the Troika, the conclusion of the report will highly depend on the level of ambition and seriousness of the Greek government's measures agreed to, in the "austerity package" and Fiscal budget 2013. The Greek government will attempt to sign a final deal with the Troika, about the content and size of the needed "austerity package" and "Fiscal budget 2013", before the scheduled Eurogroup meeting on 8 October. If the Eurogroup approve the content of the negotiated deal, it will be submitted for a final approval or further consideration by the European head of states at the EU summit on 18 October 2012.

According to sources involved in the negotiations, the Troika on 2 October had explained to the Greek government, that the following points (all agreed upon in the March 2012 bailout agreement) still had to be complied with, before the withheld €31.5bn capital payment (of which €25bn was earmarked to recaptialization of banks) would be released:

• The Greek parliament should pass the needed €13.5 billion austerity package for 2013 and 2014, of which the Troika still needed the government first to deliver a specification of how they would achieve the last amount of €1.5 billion spending cuts for 2013 (mostly related to cuts for the health sector, defense, reform of local authorities and public sector) and €2 billion measures scheduled for 2014 (mostly related to tax hikes).
• The Greek parliament should pass the following 4 structual reforms:
  • Liberalization of so-called closed professions.
  • Deregulation of goods, services and energy markets.
  • Creation of a new body to manage state procurements.
  • Merging of all health insurance providers with the National Organization for Healthcare Provision (EOPYY).

In addition to the points above, the Troika also currently discuss with the Greek government how the "Labor market reform" should be, where the Troika reportedly pushed for lower minimum wages and a 30% reduction of the compensation paid by firms to dismissed employees; with this proposal however being rejected by the Greek government. Another point of disagreement is if the 20,000 civil servants loosing their job after a merging and abolition of around 250 state organizations, should be directly layoffed from the public sector (recommended by the Troika) or placed in a so-called labor reserve scheme at a reduced wage for two years before having their status re-evaluated (preferred by the Greek government).

International ramifications

Greece represents only 2.5% of the eurozone economy. Despite its size, the danger is that a default by Greece may cause investors to lose faith in other eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues. Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable".

Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, and according to Standard & Poor's it does not risk a default. Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.

Countermeasures

Measures taken by the Greek government

They adopted a number of austerity packages since 2010. According to research published on 5 May 2010 by Citibank, the fiscal tightening is "unexpectedly tough". The first 3 austerity packages will amount to a total of €30 billion (equal to 12.5% of the 2009 Greek GDP), and consist of tightenings equal to 5% of GDP in 2010, with a further set of tightenings equal to 4% of GDP in 2011.

First austerity package – February 2010

The first round came with the signing of the memorandums with the International Monetary Fund (IMF) and the European Central Bank (ECB) concerning a loan of €80 billion. The package was implemented on 9 February 2010 and included a freeze in the salaries of all government employees, a 10% cut in bonuses, as well as cuts in overtime workers, public employees and work-related travels.

Second austerity package – March 2010

On 5 March 2010, amid new fears of bankruptcy, the Greek parliament passed the "Economy Protection Bill", which was expected to save another €4.8 billion. The measures include (in addition to the above): 30% cuts in Christmas, Easter and leave of absence bonuses, a further 12% cut in public bonuses, a 7% cut in the salaries of public and private employees, a rise of VAT from 4.5% to 5%, from 9% to 10% and from 19% to 21%, a rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported cars of up to 10%–30%, among others.

On 23 April 2010, after realising the second austerity package failed to improve the country's economic position, the Greek government requested that the EU/IMF bailout package be activated. Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. The IMF had said it was "prepared to move expeditiously on this request".

Shortly after the European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan. The Troika was led by Servaas Deroose, from the European Commission, and included also Poul Thomsen (IMF) and Klaus Masuch (ECB) as junior partners. In return the Greek government agreed to implement further measures.

Third austerity package – May 2010

On 1 May 2010, Prime Minister George Papandreou announced a new round of austerity measures, which have been described as "unprecedented". The proposed changes, which aim to save €38 billion through 2012, represent the biggest government overhaul in a generation. The bill was submitted to Parliament on 4 May and approved on separate votes on 29 and 30 June. It was met with a nationwide general strike and massive protests the following day, with three people being killed, dozens injured, and 107 arrested.

The measures include:

• An 8% cut on public sector allowances (in addition to the two previous austerity packages) and a 3% pay cut for DEKO (public sector utilities) employees.
• Public sector limit of €1,000 introduced to bi-annual bonus, abolished entirely for those earning over €3,000 a month.
• Limit of €500 per month to 13th and 14th month salaries of public employees; abolished for employees receiving over €3,000 a month.
• Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month.
• Return of a special tax on high pensions.
• Extraordinary taxes imposed on company profits.
• Rise in the value of property (and thus higher taxes).
• Rise of an additional 10% for all imported cars.
• Changes were planned to the laws governing lay-offs and overtime pay.
• Increases in value added tax to 23% (from 19%), 11% (from 9%) and 5.5% (from 4%).
• 10% rise in luxury taxes and sin taxes on alcohol, cigarettes, and fuel.
• Equalisation of men's and women's pension age limits.
• General pension age has not changed, but a mechanism has been introduced to scale them to life expectancy changes.
• A financial stability fund has been created.
• Average retirement age for public sector workers will be increased from 61 to 65.
• The number of public-owned companies shall be reduced from 6,000 to 2,000.
• The number of municipalities shall shrink from 1,000 to 400.

On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and the International Monetary Fund. The deal consisted of an immediate €45 billion in loans to be provided in 2010, with more funds available later. The first installment covered €8.5 billion of Greek bonds that became due for repayment.

In total, €110 billion have been agreed on. The interest for the eurozone loans is 5%, considered to be a rather high level for any bailout loan. The European Monetary Union loans will be pari passu and not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. The loans should cover Greece's funding needs for the next three years (estimated at €30 billion for the rest of 2010 and €40 billion each for 2011 and 2012). According to EU officials, France and Germany demanded that their military dealings with Greece be a condition of their participation in the financial rescue.

As of 12 May 2010, the deficit was down 40% from the previous year.

Fourth austerity package (Mid-term plan) – June 2011

Further austerity was introduced in 2011. In the midst of public discontent, massive protests and a 24-hour-strike throughout Greece, the parliament debated on whether or not to pass a new austerity bill, known in Greece as the "mesoprothesmo" (the mid-term ). The government's intent to pass further austerity measures was met with discontent from within the government and parliament as well, but was eventually passed with 155 votes in favour (a marginal 5-seat majority). Horst Reichenbach headed up the task force overseeing Greek implementation of austerity and structural adjustment.

The new measures included:

• Raising €50 billion from privatisations and sales of government property.
• Increasing taxes for those with a yearly income of over €8,000.
• An extra tax for those with a yearly income of over €12,000.
• Increasing VAT in the housing industry.
• An extra tax of 2% for combating unemployment.
• Lower pension payments ranging from 6% to 14% from the previous 4% to 10%.
• Creation of a special agency responsible with exploiting government property, and others.

On 11 August 2011 the government introduced more taxes, this time targeted at people owning immovable property. The new tax, which is to be paid through the owner's electricity bill, will affect 7.5 million Public Power Corporation accounts and ranges from 3 to 20 euro per square meter. The tax will apply for 2011–2012 and is expected to raise €4 billion in revenue.

On 19 August 2011 the Greek Minister of Finance, Evangelos Venizelos, said that new austerity measures "should not be necessary". On 20 August 2011 it was revealed that the government's economic measures were still out of track; government revenue went down by €1.9 billion while spending went up by €2.7 billion.

On a meeting with representatives of the country's economic sectors on 30 August 2011, the Prime Minister and the Minister of Finance acknowledged that some of the austerity measures were irrational, such as the high VAT, and that they were forced to take them with a gun to the head.

Negotiations about a fifth austerity package (October 2011 – January 2012)

In October, Greek Prime Minister George Papandreou got parliamentary backing for further austerity measures. These new measures would allow Greece to get an extra installment of international loans that would prevent a sovereign default and they would make possible the partial write-off of Greek debt, the so called Private Sector Involvement (PSI). As a result of this backing, Greece was granted by the EU a quid pro quo of further austerity for a €100bn loan and a 50% debt reduction through PSI. Within a week, Papandreou, backed unanimously by his cabinet, announced a referendum on the deal, sending shockwaves through the financial markets. This resulted in Germany's chancellor Angela Merkel and France's prime minister Nicolas Sarkozy issuing an ultimatum declaring that, unless the referendum resulted in the approval of the new measures, they would withhold an overdue €6bn loan payment to Athens, money that Greece needed by mid-December. Papandreou cancelled the referendum the next day after the New Democracy Party, leaders of the opposition, agreed to back the agreement.

On 10 November Papandreou resigned as prime minister following an agreement with the New Democracy party and the Popular Orthodox Rally to appoint a new prime minister of common acceptance promulgate laws associated with implementing the new measures that were agreed with the EU. The person chosen for this task was non-MP technocrat Lucas Papademos, former Governor of the Bank of Greece and former Vice President of the European Central Bank; his appointment was criticised by left-wing parties and branded "unconstitutional". By contrast, three separate polls taken when Papademos assumed office revealed that around 75% of Greeks thought that temporary, emergency technocratic rule was "positive".

The EU insisted that whichever government was elected after Papademos in 2012, it must be bound to honour the agreed upon EU-IMF austerity strategy. It thus demanded that Greek party-political leaders sign legally-binding letters to this effect, as well as to any additional measures that might be required in future as part of the second rescue-package. Papademos argued in favour of signing, even in the face of opposition from major pro-austerity factions in his government. Such letters would bind Greek governments to austerity and structural adjustment through to 2020. It was announced that the general election to replace Papademos' technocratic administration was to be delayed until April, or even May 2012 because more time was needed to finalise plans for austerity and structural adjustment, as well as to complete negotiations over the Greek debt reduction.

Finalising the deal on the 50% PSI debt write-off, required by the troika as a condition for extending more aid, proved difficult in early 2012, with hedge funds being the most difficult to persuade. In an interview with The New York Times, Papademos said that if his country did not receive unanimous agreement from its bondholders to voluntarily write down €100bn of Greek's €340bn debt, he would consider legislating to force bondholder losses, and that if things went well, Greeks could expect "an end to austerity" in 2013. Others believed that even the proposed 50% would not be enough to prevent a sovereign default.

Fifth austerity package – February 2012

In February 2012, facing sovereign default, Greece was in need of more funds from the IMF and EU by 20 March 2012, and was negotiating over the next lending package, worth €130 billion. On 10 February 2012, the Greek cabinet approved the draft bill of a new austerity plan, which has been calculated to improve the 2012 budget deficit with €3.3 billion (and a further €10 billion improvement scheduled for 2013 and 2014). The austerity plan includes:

• 22% cut in minimum wage from the current €750 per month.
• Holiday wage bonuses (two extra months of full wage being paid each year) are permanently cancelled.
• 150,000 jobs cut from state sector by 2015, of which 15,000 shall be cut by the end of 2012.
• Pension cuts worth €300 million in 2012.
• Changes to laws to make it easier to lay off workers.
• Health and defence spending cuts.
• Industry sectors are given the right to negotiate lower wages depending on economic development.
• Opening up closed professions to allow for more competition, particularly in the health, tourism, and real estate sectors.
• Privatisations worth €15 billion by 2015, including Greek gas companies DEPA and DESFA. In the medium term, the goal remains at €50 billion.

The latest round of austerity measures means Greece will likely face at least another year of recession, presaging another round of business closures, before the economy will start to grow again, and foreign observers were shocked by both the cold-heartedness of German negotiators and a perceived lack of integrity on Greece's behalf because of Greece not honoring its commitments.

Showing position of disagreement, the transport minister Makis Voridis from the Popular Orthodox Rally party, along with five deputy ministers from various ministries, decided to resign. On 11 February, caretaker prime minister Lucas Papademos warned of "social explosion and chaos" if the parliament would not approve the deal the next day. Speaking to members of Parliament before their vote, Papademos stated that if the majority of them chose to vote against the austerity measures there would be several onerous consequences, including that the government would not be able to pay the salaries of its employees. On 13 February, the Greek Parliament subsequently approved this latest round of austerity measures by a vote of 199 to 74. During the period of parliamentary debate, massive protests were witnessed in Athens that left stores looted and burned and more than 120 people injured. The riot was one of the worst since 2010.

Despite being one of the ruling parties, the Popular Orthodox Rally voted against the plan and withdrew itself from the government. Forty-three MPs from the other two ruling parties (socialist PASOK and conservative New Democracy) also voted against the plan and were immediately expelled from their parties. This reduced the combined power of these two parties from 236 to 193 seats, which is still majority for the 300-seat parliament of Greece. The vote was a major precondition for the EU and IMF to jointly release the funds, which are supposed to cover all financial needs in 2012 and 2013, with the hope that Greece can start lending again at the private capital markets in 2014.

The determination of the leaders of Greek ruling parties to implement the new austerity package was however doubted. For example, Antonis Samaras (leader of New Democracy) talked about renegotiating the deal, despite voting for the austerity package. Because of such uncertainty, the Eurozone finance ministers demanded Greek main politicians to sign a written assurance for their continued support to implement the austerity package, both before and after any elections.

After passing the new austerity package on 13 February, there still remained four other hurdles for Greece, to receive the new €130 billion bailout loan:

• €325 million out of the total €3.3 billion austerity package still needed to be specified in the form of some exact "structural expenditure reductions", to be outlined and passed by a separate political bill.
• Written commitments from the main party leaders should be filed, to guarantee their continued support for the austerity program, both before and after elections in April 2012.
• The debt restructure agreement, with a debt write-off worth €107 billion, needs to be implemented by a bond swap in early March 2012, involving minimum 95% of the private creditors. Under the terms of the deal, all the holders (banks, pension funds, insurers and others) of €206 billion in Greek government bonds, would have to -if they accept the deal either voluntarily or by a collective action clause- write down the face value of their holdings by 53.5%, by swapping bonds they hold for longer-dated securities that pay a lower coupon. When calculated for the bonds with the longest maturity, the 53.5% haircut of face value, will be equal to a 74% loss on the net present value of the debt.
• A debt sustainability report by the Troika, based upon the full implementation of the latest austerity package and the debt restructure agreement, needs to show a sustainable outlook for the Greek economy, with the debt relative to GDP being reduced to 120% in 2020.

As of 19 February, Greece had managed to pass the first two hurdles. The debt restructure agreement and the result of the debt sustainability report was however still pending. Some of the newest calculations suggested that Greece would now need an enhanced bailout at €136 billion, and they were still likely to exceed the 120% debt level in 2020. It is now up to the Troika to decide if this can be accepted under the previous terms. Alternatively, the slightly worse outlook for the debt numbers can also be counterfeited, by some further debt restructuring and/or demands for additional austerity measures.

Fight against corruption and tax evasion

OECD estimated in August 2009, the size of the Greek black market to be around €65bn (equal to 25% of GDP), resulting each year in €20bn of unpaid taxes. This is a European record in relative terms, and in comparison almost twice as big as the German black market (estimated to 15% of GDP). Several successive Greek governments had in the past attempted to improve the situation, but all failed. A rapid increase in government revenues through implementing a more effective tax collecting system has been recommended. Implementing the proper reforms, is however estimated to be a slow process, requiring at least two legislative periods before they start to work.

Transparency International, an independent corruption monitoring NGO, found that 13% of Greeks paid fakelaki (bribery in the form of envelopes with cash donations) in 2009, which was estimated to account for €787 million in yearly corruption payments. At the same time it was estimated that roughly €1 billion was paid by companies in bribes to public institutions for avoiding bureaucratic rules or to get other benefits. When calculating all sorts of corruption in Greece, the total amount is estimated to be roughly €3.5 billion per year (equal to 1.75% of the Greek GDP). Compared with corruption levels measured by Transparency International for 160 other countries, Greece ranked at 49th in 2004, was down at 57th in 2008, and slumped to 71st in 2009. The government elected in October 2009 had on its agenda to increase the fight against fakelaki and other forms of corruption.

Anticorruption measures

The Inspector General of Public Administration has started an online census of civil servants. In connection with this census he has uncovered a number criminal offenses, including an entire non-existent health authority.

Tax collection improvements

In 2010 the government has implemented a tax reform. The year 2012 saw the introduction of a duty of non-cash payments for amounts over 1,500 Euros.

The Greek police have established a special unit, which deals exclusively with tax offenses. Germany has offered experts from its financial management and tax investigation office to help build a more efficient tax administration. However, months later it was not clear whether Greek officials would accept the offer.

In November 2011, the new Greek finance minister Evangelos Venizelos called upon all persons who owe the state more than €150,000 to pay their outstanding taxes by 24 November or find their names on a black list published on the Internet. The government later revealed the list, which also includes a number of prominent Greeks, including pop stars and sportsmen.

Measures taken by the EU and IMF

First rescue package (May 2010)

Having had the credit rating agencies further downgraded Greece's ability to achieve and the risk premiums on long-term Greek government bonds first record levels, the Greek government requested on 23 April 2010 official financial assistance.

The European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) agreed on 1–2 May 2010 with the Greek government to a three-year financial aid programme (loan commitments) totaling €110 billion. The Greek debt in exchange for household should be consolidated within three years, so that the budget deficit should be reduced by 2014 to below 3 percent.

Of the €110 billion promised by the IMF took €30bn, the Eurozone €80bn (as bilateral loan commitments). Instrumental in determining the rates of the individual euro area countries in the €80bn of the Eurozone was the respective equity interest in the capital of the ECB, which in turn is determined every five years after the prorated share of a country in the total population and economic output in the EU. The German share of the €80bn was 28%, or about €22.4bn in three years while France paid €16.8bn.

In May 2010 Greece received the first tranche of the bailout money totaling €20bn. Of this total, 5.5 billion came from the IMF and 14.5 billion of Euro states.

On 13 September the second tranche of €6.5bn was disbursed. The 3rd tranche of the same amount was paid on 19 January 2011. On 16 March, 4th tranche in the amount of €10.9 billion was paid out, followed by the 5th installment on 2 July. The 6th tranche of €8bn was paid out after months of delay in early December. Of this amount, the IMF took over €2.2bn.

Second rescue package (July 2011 - February 2012)

Early version - July 2011

Since the first rescue package proved insufficient, the 17 leaders of Euro countries approved a (preliminary) second rescue package at an EU summit on 21 July 2011. It was agreed that the aid package has a volume of €100 billion, provided by the newly created European Financial Stability Facility. The repayment period was extended from seven to 15 years and the interest rate was lowered to 3.5%.

For the first time, this also included a private sector involvement, meaning that the private financial sector accepted a voluntary cut. It was agreed that the net contribution of banks and insurance companies to support Greece would include an additional €37 billion in 2014. The planned purchase of Greek bonds from private creditors by the euro rescue fund at their face value will burden the private sector with at least another €12.6 billion.

It was also announced at the EU summit, a reconstruction plan for Greece in order to promote economic growth. The European Commission established a "Task Force for Greece".

EU summit - 26 October 2011

On the night of 26 to 27 October at the EU summit, the politicians made two important decisions to reduce the risk of a possible contagion to other countries, in the case of a Greek default. The first decision was to require all European banks to achieve 9% capitalization, to make them strong enough to withstand those financial losses that potentially could erupt from a Greek default. The second decision was to leverage the EFSF from €500bn to €1 trillion, as a firewall to protect financial stability in other Eurozone countries with a looming debt crisis. The leverage had previously been criticized from many sides, because it is something taxpayers ultimately risk to pay for, due to the significantly increased risks assumed by the EFSF.

Furthermore, the Euro countries agreed on a plan to cut the debt of Greece from today's 160% to 120% of GDP by 2020. As part of that plan, it was proposed that all owners of Greek governmental bonds should "voluntarily" accept a 50% haircut of their bonds (resulting in a debt reduction worth €100bn), and moreover accept interest rates being reduced to only 3.5%. At the time of the summit, this was at first formally accepted by the government banks in Europe. The task to negotiate a final deal, also including the private creditors, was handed over to the Greek politicians.

In view of the uncertainty of the domestic political development in Greece, the first disbursement was suspended after Prime Minister George Papandreou announced on 1 November 2011 that he wanted to hold a referendum on the decisions of the Euro summit. After two days of intense pressure, particularly from Germany and France, he finally gave up on the idea. On 11 November 2011 he was succeeded as prime minister by Loukas Papadimos, who leads a new transitional government. The most important task of this interim government was to finalize the "haircut deal" for Greek governmental bonds and pass a new austerity package, to comply with the Troika requirements for receiving the second bailout loan worth €130bn (enhanced from the previously offered amount at €109bn).

One of the German EFSF-leverage critics, Fabian Lindner, then likened the austerity pressure Greece was feeling to the attitude the US exercised over Germany in 1931. In that earlier circumstance, the collapse of an Austrian and then a German bank followed, leading to a worsening of the Great Depression, political change and ultimately war.

Final agreement - February 2012

The Troika behind the second bailout package defined three requirements for Greece to comply with in order to receive the money. The first requirement was to finalize an agreement whereby all private holders of governmental bonds would accept a 50% haircut with yields reduced to 3.5%, thus facilitating a €100bn debt reduction for Greece. The second requirement was that Greece needed to implement another demanding austerity package in order to bring its budget deficit into sustainable territory. The third and final requirement was that a majority of the Greek politicians should sign an agreement guaranteeing their continued support for the new austerity package, even after the elections in April 2012.

On 21 February 2012, the Euro Group finalized the second bailout package. In a thirteen-hour marathon meeting in Brussels, EU Member States agreed to a new €100 billion loan and a retroactive lowering of the bailout interest rates to a level of just 150 basis points above the Euribor. The IMF will provide "a significant contribution" to that loan but will only decide in the second week of March how much that will be. EU Member States will also pass on to Greece all profits which their central banks made by buying Greek bonds at a debased rate until 2020. Private investors accepted a slightly bigger haircut of 53.5% of the face value of Greek governmental bonds, the equivalent to an overall loss of around 75%.

It is the world's biggest debt restructuring deal, affecting some €206bn of bonds. The creditors are invited to swap their current Greek bonds into new bonds with a maturity of between 11 and 30 years and lower average yields of 3.65% (2% for the first three years, 3% for the next five years, and 4.2% thereafter), thus facilitating a €100bn debt reduction for Greece. Euro-area Member States have pledged to contribute €30bn for private sector participation. In case not enough bondholders agree to a voluntary bond swap, the Greek government has threatened to retroactively introduce a collective action clause to enforce participation.

The cash will be handed over after it is clear that private-sector bondholders do indeed join in the haircut, and after Greece gives evidence of the legal framework that it will put in place to implement dozens of "prior actions" - from sacking underperforming tax collectors to passing legislation to liberalise the country's closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June. In return for the bailout money Greece accepts "an enhanced and permanent presence on the ground" of European monitors. It will also have to service its debts from a special, separate escrow account, depositing sums in advance to meet payments that fall due in the following three months. This operation will be supervised by the troika: the International Monetary Fund, the European Union and the European Central Bank.

On 3 March 2012, The Institute of International Finance said twelve of its steering committee would swap their bonds and accept a loss of up to 75%. When all acceptances had been counted at March 9, and after the Greek parliament subsequently had decided to activate a collective action clause for the bonds covered by Greek law, the overall share of Greek government bonds to face a debt swap had reached 95.7% (equal to €197 billion). The remaining 4.3% of bond holders covered by foreign law and refusing the debt swap (equal to €9 billion), were given two weeks of extra time to reconsider and volountarily join the swap.

When the swap is executed, the bond holders will receive a cash payment on 15% of their original holding, and become issued with new Greek bonds worth 31.5% of their old bonds (covered by 24 new securities). Combined this will result in a 53.5% haircut of the face value, so that the Greek debt pile overall will decrease from its current level at €350 billion, to a more sustainable level around €250 billion.

Speculation about a third rescue package

A Financial Times editorial on 22 February 2012 argued leaders had "proved themselves unable to settle on a solution that will not need to be revisited yet again", that at best the deal could only hope to remedy one part of the Greek disaster, namely the country's debilitated public finances, though it would not likely even do that. The eurozone's latest plan did, at least, evince consistency with the currency block's previous behaviour:

from the start, its approach has been a halfway house of resisting a sovereign default but not doing enough to remove the risk altogether. The reason is obvious: core governments find it politically impossible to put up more money. So it is unfathomable that they did not demand more from private creditors. The debt restructuring leaves Greece and its helpers with €100bn of debt that could have been written down entirely and left funds to address future "accidents" without resorting to a third rescue. If there is another showdown with Greece it will have been caused by this.

The German finance minister Wolfgang Schäuble and Euro Group president Jean-Claude Juncker shared the scepticism, and did not rule out a third bailout. According to a leaked official report from the European Commission, European Central Bank and the International Monetary Fund, Greece may need another €50 billion ($66bn) from 2015 to 2020.

In mid-May 2012 the crisis and impossibility to form a new coalition government after elections led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as "Grexit" and started to affect international market behaviour, as well as causing an accelerated decrease of bank deposits in Greek banks (commonly referred to as a bank-run).

A second election in mid-June, ended with the formation of a new government supporting a continued adherence to the main principles outlined by the signed bailout plan. The new government however immediately asked its creditors to be granted 2 extra years, extending the deadline from 2015 to 2017 before being required to be self-financed, with minor budget deficits fully covered by extraordinary income from the privatisation program. The creditors are currently examining this request in the light of an updated and recalculated sustainability analysis of the Greek economy, and are expected to publish a report with their findings by the end of August 2012. If Greece is granted extra years to restore their fiscal balance, this will either require creditors to: 1) Fund Greece with a new extra third bailout loan, or 2) Launch a new debt restructure to decrease the debt repayment (i.e. by imposing additional haircuts on governmental bonds, or by offering Greece to pay some lower interest rates).

Economic and social effects of austerity measures

In exchange for European funding Greece was forced to impose strict fiscal austerity. As early as 2010 some economists expressed fears that the negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. In a 2003 study that analyzed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth.

US economist Joseph Stiglitz has also criticised the EU for being too slow to help Greece, insufficiently supportive of the new government, lacking the will power to set up sufficient "solidarity and stabilisation framework" to support countries experiencing economic difficulty, and too deferential to bond rating agencies.

Overall the increase in the share of the population living at "risk of poverty or social exclusion" was not significant during the first 2 year of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (and only slightly worse than the EU27-average at 23.4%), but for 2011 the estimated figure rose sharply above 33%. According to an IMF official, austerity measures have helped Greece bring down its primary deficit before interest payments, from €24.7bn (10.6% of GDP) in 2009 to just €5.2bn (2.4% of GDP) in 2011, but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.

Overall the Greek GDP had its worst decline in 2011 with -6.9%, a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005, and with 111,000 Greek companies going bankrupt (27% higher than in 2010). As a result, the seasonally adjusted unemployment rate also grew from 7.5% in September 2008 to a record high of 24.4% in June 2012, while the youth unemployment rate during the same time rose from 22.0% to 55%.

In an economy without a welfare regime to speak of, the impact of five consecutive years of recession has taken its toll. Charitable foundations that used to fund educational programmes have taken a big hit themselves in their bank deposits and have now shifted to paying for soup kitchens on the streets of Athens. Neighbourhoods are marked by buildings that owners are desperate to sell or rent and a major increase in the homeless sleeping rough. Almost half of Greece's young people are unemployed, as are one in five of their older peers. Despondency is everywhere, despite the "rescue". If future Greek governments keep to the terms of the bailout, by 2020 public debt will be back to what is was when the crisis erupted in 2009.

"ood aid, in a western European capital?" remarked one appalled BBC journalist, before observing: "You do not measure a people's ability to survive in percentages of Gross Domestic Product." Another BBC reporter wrote: "As you walk around the streets of Athens and beyond you can see the social fabric tearing." The social effects of the austerity measures on the Greek population have been severe, as well as on poor and needy foreign immigrants, with some Greek citizens turning to NGOs for healthcare treatment and having to give up children for adoption. The suicide rate in Greece used to be the lowest in Europe, but by March 2012 it had increased by 40%; Dimitris Christoulas, a 77-year-old pensioner, shot himself outside the Greek parliament in April because the austerity measures had "annihilated all traces for my survival". Patients with chronic conditions attending treatment at state hospitals in Athens are told to bring their own prescription drugs.

In June the previous year, at the time of the Greek parliaments approval of the fourth austerity package, an independent United Nations official had cautioned that this additional package of austerity in Greece could potentially pose a violation of human rights, if it were implemented without careful consideration to the population's need for "food, water, adequate housing and work under fair and equitable conditions". On 17 October 2011 Minister of Finance Evangelos Venizelos announced that the government would establish a new fund, aimed at helping those who were hit the hardest from the government's austerity measures. The money for this agency will come from the proceeds made by tackling tax evasion.

In February 2012, it was reported that 20,000 Greeks had been made homeless during the preceding year, and that 20 per cent of shops in the historic city centre of Athens were empty. The same month, Poul Thomsen, a Danish IMF official overseeing the Greek austerity programme, warned that ordinary Greeks were at the "limit" of their toleration of austerity, and he called for a higher International recognition of "the fact that Greece has already done a lot fiscal consolidation, at a great cost to the population"; and moreover cautioned that although further spending cuts were certainly still needed, they should not be implemented rapidly, as it was crucial first to give some more time for the implemented economic reforms to start to work. Estimates in mid-March 2012 were that an astonishing one in 11 residents of greater Athens—some 400,000 people—were visiting a soup kitchen daily.

Prominent UK economist Roger Bootle summarised the state of play at the end of February 2012:

Since the beginning of 2008, Greek real GDP has fallen by more than 17pc. On my forecasts, by the end of next year, the total fall will be more like 25pc. Unsurprisingly, employment has also fallen sharply, by about 500,000, in a total workforce of about 5 million. The unemployment rate is now more than 20pc. . . . A 25pc drop is roughly what was experienced in the US in the Great Depression of the 1930s. The scale of the austerity measures already enacted makes you wince. In 2010 and 2011, Greece implemented fiscal cutbacks worth almost 17pc of GDP. But because this caused GDP to wilt, each euro of fiscal tightening reduced the deficit by only 50 cents. . . . Attempts to cut back on the debt by austerity alone will deliver misery alone.

Criticism of Germany's role

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Germany has played a major role in discussion concerning Greece's debt crisis. Germany is currently Greece's biggest creditor \. The Germans have come under heavy fire for perceived hypocrisy and for nature of the austerity and debt-relief programme Greece has followed as part of its bailout, a programme that has led to accusations of Germany pursuing its own national interests rather than attempting to solve the crisis and make the adjustments necessary for the Mediterranean country to recover.

Charges of hypocrisy

Hypocrisy has been alleged on multiple bases. "Germany is coming across like a know-it-all in the debate over aid for Greece", commented Der Spiegel,. German economic historian Albrecht Ritschl describes Germany as "king when it comes to debt. Calculated based on the amount of losses compared to economic performance, Germany was the biggest debt transgressor of the 20th century." Despite calling for the Greeks to adhere to fiscal responsibility, and although Germany's tax revenues are at a record high, with the interest it has to pay on new debt at close to zero, Germany still missed its own cost-cutting targets in 2011 and is also falling behind on its goals for 2012. There have been widespread accusations that Greeks are lazy, but analysis of OECD data shows that the average Greek worker puts in 50% more hours per year than a typical German counterpart, and the average retirement age of a Greek is, at 61.7 years, older than that of a German. US economist Mark Weisbrot has also noted that while the eurozone giant's post-crisis recovery has been touted as an example of an economy of a country that "made the short-term sacrifices necessary for long-term success", Germany did not apply to its economy the harsh pro-cyclical austerity measures that are being imposed on countries like Greece, In addition, he noted that Germany did not lay off hundreds of thousands of its workers despite a decline in output in its economy but reduced the number of working hours to keep them employed, at the same time as Greece and other countries were pressured to adopt measures to make it easier for employers to lay off workers. Weisbrot concludes that the German recovery provides no evidence that the problems created by the use of a single currency in the eurozone can be solved by imposing "self-destructive" pro-cyclical policies as has been done in Greece and elsewhere. Arms sales are another fountainhead for allegations of hypocrisy. Greek MP Dimitris Papadimoulis:

If there is one country that has benefited from the huge amounts Greece spends on defence it is Germany. Just under 15% of Germany's total arms exports are made to Greece, its biggest market in Europe. Greece has paid over €2bn for submarines that proved to be faulty and which it doesn't even need. It owes another €1bn as part of the deal. That's three times the amount Athens was asked to make in additional pension cuts to secure its latest EU aid package. . . . Well after the economic crisis had begun, Germany and France were trying to seal lucrative weapons deals even as they were pushing us to make deep cuts in areas like health. . . . There's a level of hypocrisy here that is hard to miss. Corruption in Greece is frequently singled out as a cause for waste but at the same time companies like Ferrostaal and Siemens are pioneers in the practice.

Thus more allegations of hypocrisy stem not from the fact of the arms sales, but from the way in which they conducted: Germany complains of Greek corruption, yet the murky arms sales meant that the trade with Greece became synonymous with high-level bribery and corruption; former defence minister Akis Tsochadzopoulos was gaoled in April 2012 ahead of his trial on charges of accepting an €8m bribe from Germany company Ferrostaal.

Alleged pursuit of national self-interest

Since the euro came into circulation in 2002—a time when the country was suffering slow growth and high unemployment—Germany's export performance, coupled with sustained pressure for moderate wage increases (German wages increased more slowly than those of any other eurozone nation) and rapidly rising wage increases elsewhere, provided its exporters with a competitive advantage that resulted in German domination of trade and capital flows within the currency bloc. Germany's total export trade value nearly tripled between 2000 and 2007, and though a significant proportion of this is accounted for by trade with China, its trade surplus with the rest of the EU grew from €46.4 bn to €126.5 bn during those seven years. Germany's bilateral trade surpluses with the Mediterranean countries are especially revealing: between 2000 and 2007, Greece's annual trade deficit with Germany grew from €3 bn to €5.5 bn; Italy's doubled, from €9.6 bn to €19.6 bn; Spain's almost tripled, from €11 bn to €27.2 bn; and Portugal's quadrupled, from €1 bn to €4.2 bn.

Nobel laureate Paul Krugman remarked: "Listen to many European leaders—especially, but by no means only, the Germans—and you'd think that their continent's troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they're paying the price, and fiscal austerity is the only answer." Germans see their government finances and trade competitiveness as an example to be followed by Greece, Portugal and other troubled countries in Europe, but the problem is more than simply a question of southern European countries emulating Germany. Dealing with debt via domestic austerity and a move toward trade surpluses is very difficult without the option of devaluing your currency, and Greece cannot devalue because it is chained to the euro. Roberto Perotti of Bocconi University has also shown that on the rare occasions when austerity and expansion coincide, the coincidence is almost always attributable to rising exports associated with currency depreciation. As can be seen from the case of China and the US, however, where China has had the yuan pegged to the dollar, it is possible to have an effective devaluation in situations where formal devaluation cannot occur, and that is by having the inflation rates of two countries diverge. If German inflation rises faster than that of Greece and other strugglers, then the real effective exchange rate will move in the strugglers' favour despite the shared currency. Trade between the two can then rebalance, aiding recovery, as Greece's products become cheaper. Dean Baker therefore argued that the problem is Germany continuing to shut off just such an adjustment mechanism, meaning its "position on the heavily indebted southern countries is absurd. It wants to maintain its huge trade surplus with these countries, while still insisting that they make good on their debts. This is like a store owner insisting that his customers keep buying more from him, while still paying off their debts." "The counterpart to Germany living within its means is that others are living beyond their means", agreed Philip Whyte, senior research fellow at the Centre for European Reform. "So if Germany is worried about the fact that other countries are sinking further into debt, it should be worried about the size of its trade surpluses, but it isn't." Germany, though not the worst offender, has even been ringing up arms sales to Greece in the order of tens of millions of euros, and has "recruited thousands of the Continent's best and brightest . . . a migration of highly qualified young job-seekers that could set back Europe's stragglers even more, while giving Germany a further leg up."

OECD projections of relative export prices—a measure of competitiveness—showed Germany beating all euro zone members except for crisis-hit Spain and Ireland for 2012, with the lead only widening in subsequent years. In March 2012, Bernhard Speyer of Deutsche Bank reiterated: "If the eurozone is to adjust, southern countries must be able to run trade surpluses, and that means somebody else must run deficits. One way to do that is to allow higher inflation in Germany but I don't see any willingness in the German government to tolerate that, or to accept a current account deficit." A research paper by Credit Suisse concurred: "Solving the periphery economic imbalances does not only rest on the periphery countries' shoulders even if these countries have been asked to bear most of the burden. Part of the effort to re-balance Europe also has to been borne by Germany via its current account." At the end of May 2012, the European Commission warned that an "orderly unwinding of intra-euro area macroeconomic imbalances is crucial for sustainable growth and stability in the euro area," and prodded Germany to "contribute to rebalancing by removing unnecessary regulatory and other constraints on domestic demand". In July 2012, the IMF added its call for higher wages and prices in Germany, and for reform of parts of the country's economy to encourage more spending by its consumers (which would help generate demand that would soak up exports from other countries), saying such adjustments were "pivotal" to rebalancing the eurozone and global economy. Even with such policies, Greece and other countries would face years of hard times, but at least there would be some hope of recovery. By May 2012, there were signs that the status quo, and "it's tough to overstate just how fantastic the status quo has been for Germany", was beginning to change as even France began to challenge German policy.

As if to emphasise the root problem, when downgrading France and other eurozone countries in January 2012, S&P gave one of its reasons as "divergences in competitiveness between the eurozone's core and the so-called 'periphery'". The Germans "wear their anti-inflation obsession as a badge of honour", but Krugman again warned that "price stability for Germany . . . catastrophe for the euro." He estimates that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent to become competitive again:

If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery—which would imply an overall eurozone inflation rate of something like 3 percent. But if Germany is going to have only 1 percent inflation, we're talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.

Germany insists that it is ready to do "everything" to guarantee the eurozone. "Yet, for all the rhetoric, little has changed. The austerity strategy imposed by Berlin on Europe's 'Arc of Depression'—against the better judgement of the European Commission, the OECD, International Monetary Fund, and informed economic opinion across the globe—has not been modified in the slightest even though economic contraction has proved deeper than expected in every single victim country." The version of adjustment offered by Germany and its allies is that austerity will lead to an internal devaluation, i.e. deflation, which would enable Greece gradually to regain competitiveness. "Yet this proposed solution is a complete non-starter", noted one UK economist. "If austerity succeeds in delivering deflation, then the growth of nominal GDP will be depressed; most likely it will turn negative. In that case, the burden of debt will increase." Strictly in terms of reducing wages relative to Germany, Greece has made 'progress': private-sector wages fell 5.4% in the third quarter of 2011 from a year earlier and 12% since their peak in the first quarter of 2010. A leaked European Commission report called for nominal wages in the business economy to be reduced by a further 15% during 2012–2014.

The question then is whether Germany would accept the price of inflation for the benefit of keeping the eurozone together. On the upside, inflation, at least to start with, would make Germans happy as their wages rose in keeping with inflation. Regardless of these positives, as soon as the monetary policy of the ECB—which has been catering to German desires for low inflation—began to look like it might stoke inflation in Germany, Merkel moved to counteract, cementing the impossibility of a recovery for struggling countries. With eurozone adjustment locked out by Germany, economic hardship elsewhere in the currency block actually suited its export-oriented economy for an extended period, because it caused the euro to depreciate, making German exports cheaper and so more competitive. By July 2012, however, the European crisis was beginning to take its toll. Germany's unemployment continued its downward trend to record lows in March 2012, and yields on its government bonds fell to repeat record lows in the first half of 2012 (though real interest rates are actually negative).

German and other financial institutions have scooped a huge chunk of the rescue package: "more than 80 percent of the rescue package is going to creditors—that is to say, to banks outside of Greece and to the ECB. The billions of taxpayer euros are not saving Greece. They're saving the banks." Similarly in Spain:

German lenders will be among the biggest beneficiaries of a Spanish bank bailout, with rescue funds helping to ensure they get paid back in full for poor lending decisions made in the run-up to the financial crisis, and helping politicians in Berlin avoid a politically sensitive bank bailout of their own. German lenders were among Europe's most profligate before 2008, channelling the country's savings to the European periphery in search of higher profits. . . . German banks were facing deep losses linked to potential Spanish bank failures. However, a bailout of Spanish banks—backed initially by Spanish taxpayers and potentially later by the European Stability Mechanism—will ensure creditors won't take losses, making the bailout effectively a back-door bailout of reckless German lending. . . . Jens Sondergaard, senior European economist at Nomura, said: "The Spanish bailout in effect is a bailout of German banks. If lenders in Spain were allowed to default, the consequences for the German banking system would be very serious."

The shift in liabilities from European banks to European taxpayers has been staggering: one study found that the public debt of Greece to foreign governments, including debt to the EU/IMF loan facility and debt through the eurosystem, increased by €130 bn, from €47.8 bn to €180.5 billion, between January 2010 and September 2011. The combined exposure of foreign banks to Greek entities—public and private—was around 80bn euros by mid-February 2012. In 2009 they were in for well over 200bn. The director of LSE's Hellenic Observatory mused: "Who is rescued by the bailouts of the European debt crisis? The question won't go away. . . . The Greek banks—vital to the provision of new investment in an economy facing a sixth year of continuous recession—have certainly not been 'rescued' . . . face large-scale nationalisation. . . . Athenians might well turn the aphorism around and warn their partners in Lisbon: 'Beware of Europeans bearing gifts.'"

All of this has resulted in increased anti-German sentiment within peripheral countries like Greece and Spain, the situation perhaps inflamed by the fact that "during much of the 20th century, the situation was radically different: after the first world war and again after the second world war, Germany was the world's largest debtor, and in both cases owed its economic recovery to large-scale debt relief." When Horst Reichenbach arrived in Athens towards the end of 2011 to head a new European Union task force, the Greek media instantly dubbed him "Third Reichenbach"; in Spain in May 2012, businessmen made unflattering comparisons with Berlin's domination of Europe in WWII, and top officials "mutter about how today's European Union consists of a 'German Union plus the rest'". The German Foreign Ministry has advised its citizens in Greece to avoid "demonstrations and large gatherings". Almost four million German tourists—more than any other EU country—visit Greece annually, but they comprised most of the 50,000 cancelled bookings in the ten days after the 6 May 2012 Greek elections, a figure The Observer called "extraordinary". The Association of Greek Tourism Enterprises estimates that German visits for 2012 will decrease by about 25%.

Hedge funds

Though it was largely foreign banks, represented in the various talks by the Institute of International Finance, who originally held Greek government bonds they had so recklessly bought, by the time of the February 2012 negotiations they had sold on perhaps half their holdings, largely to hedge funds and other investors not represented at the talks. In February, hedge funds were thought to control 25–30% of Greek bonds, and are widely believed to be unwilling to participate in any voluntary debt reduction, complicating any deal. Their reluctance to take losses stems from their reckoned investment strategy, which would bring profit from a formal default on Greek bonds via a pay-out from the bond insurance. To neuter the hedge-fund veto on negotiations, the Greek government was expected to, and did, pass retroactive legal provisions to allow it to force a restructuring on bondholders. An imposed deal, however, would apparently trigger CDS payments, the Greek case might be more complicated than Argentina, putting some investors off. One hedge fund that had earlier told Reuters it was considering legal options said it had now decided to agree to the swap, even though that would mean a small loss.

"For much of the past 18 months, investing in or against eurozone bonds has been a fool’s errand for the world’s $2tn hedge fund industry. A regime of political vacillation and punishing volatility left few fund managers who sought to play the crisis-stricken market with anything to show for their efforts."

Analysis of the restructuring

Economist Rebecca Wilder commented that the obsession with the Greek minimum wage, and the insistence on slashing it, is incomprehensible. In March, Nouriel Roubini ruminated:

A myth is developing that private creditors have accepted significant losses in the restructuring of Greece's debt, while the official sector gets off scot free. . . . The reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors . . . .

Greece's public debt will unsustainable at close to 140 per cent of gross domestic product: at best, it will fall to 120 per cent by 2020 and could rise as high as 160 per cent of GDP. Why? A "haircut" of €110bn on privately held bonds is matched by an increase of €130bn in the debt Greece owes to official creditors. A significant part of this increase in Greece’s official debt goes to bail out private creditors: €30bn for upfront cash sweeteners on the new bonds that effectively guarantee much of their face value. Any future further haircuts to make Greek debt sustainable will therefore fall disproportionately on the growing claims of the official sector. Loans of at least €25bn from the European Financial Stability Facility to the Greek government will go towards recapitalising banks in a scheme that will keep those banks in private hands and allow shareholders to buy back any public capital injection with sweetly priced warrants. The new bonds will also be subject to English law, where the old bonds fell under Greek jurisdiction. So if Greece were to leave the eurozone, it could no longer pass legislation to convert euro-denominated debt into new drachma debt. This is an amazing sweetener for creditors. . . .

The reality is that most of the gains in good times . . . were privatised while most of the losses have been now socialised. Taxpayers of Greece's official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece's past, current and future insolvency.

One estimate is that Greece actually subscribed to €156bn worth of new debt in order to get €206bn worth of old debt to be written off, meaning the trumpeted write-down of €110bn by the banks and others is more than double the true figure of €50bn that was truly written off. Taxpayers are now liable for more than 80% of Greece's debt. According to Robert Reich, in the background of the Greek bailouts and debt restructuring lurks Wall Street. While US banks are owed only about €5bn by Greece, they have more significant exposure to the situation via German and French banks, who were significantly exposed to Greek debt. Massively reducing the liabilities of German and French banks with regards to Greece thus also serves to protect US banks.

Greek public opinion

According to a poll in February 2012 by Public Issue and SKAI Channel, PASOK—who won the national elections of 2009 with 43.92% of the vote—has seen its approval rating decimated to a mere 8%, placing it fifth after right-wing New Democracy (31%), left-wing Democratic Left (18%), left-wing Communist Party of Greece (KKE) (12.5%) and left-wing SYRIZA (12%). The same poll suggested that Papanderou is the least popular political leader with a 9% approval rating, while 71% of Greeks do not trust Papademos as prime minister.

In a poll published on 18 May 2011, 62% of the people questioned felt the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Giorgos Papakonstantinou, to handle the crisis. Evangelos Venizelos replaced Mr. Papakonstantinou on 17 June. 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece's economy. 64% felt that the possibility of sovereign default is likely. When asked about their fears for the near future, Greeks highlighted unemployment (97%), poverty (93%) and the closure of businesses (92%).

Polls have shown that, despite the awful situation, the vast majority of Greeks are not in favour of leaving the Eurozone, a fact attributed by some to there having been "so much propaganda over the years about the merits of the euro and the perils of being outside it that both expert and popular opinion can barely see straight. It is true that default and a euro exit could endanger Greece's continued membership of the EU. More importantly, though, there is a strong element of national pride. For Greece to leave the euro would seem like a national humiliation. Mind you, quite how agreeing to decades of misery under German subjugation allows Greeks to hold their heads high defeats me." Nonetheless, other polls show that the majority of Greeks (48%) are in favour of default, in contrast with a small minority (38%) who support the EU.

Speculation about Euro exit

"The euro should now be recognized as an experiment that failed", wrote Martin Feldstein in 2012. Economists, mostly from outside Europe, and associated with Modern Monetary Theory and other post-Keynesian schools condemned the design of the Euro currency system from the beginning and have since been advocating that Greece (and the other debtor nations) unilaterally leave the Eurozone, which would allow Greece to withdraw simultaneously from the Eurozone and reintroduce its national currency the drachma at a debased rate.

Economists like Tyler Cowen who favor this radical approach to solve the Greek debt crisis typically argue that an orderly default is unavoidable for Greece at the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just wind up hurting EU lenders and neighboring European countries even more. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.

However, German Chancellor Angela Merkel and former French President Nicolas Sarkozy said on numerous occasions that they would not allow the eurozone to disintegrate and have linked the survival of the Euro with that of the entire European Union. In September 2011, EU commissioner Joaquín Almunia shared this view, saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration".

See also

• The role of the Institute of International Finance in the Greek debt crisis
• List of acronyms: European sovereign-debt crisis

Analogous:

• 1998 Russian financial crisis
• Argentine economic crisis (1999–2002)

Notes

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References

• Ronald Janssen, 'Greece and the IMF:Who Exactly is Being Saved?' (July 2010) CEPR

• Use dmy dates from February 2012
• Misplaced Pages neutral point of view disputes from May 2012
• Misplaced Pages neutral point of view disputes from July 2012
• Greek government-debt crisis
• European Union member economies
• Financial crises
• Government finances