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Greece in Eurozone Debt Crisis

If someone owes you a large amount of money and can't pay there are a number of options open to you: 

a) go to their house and take their stuff (there are legal restrictions on this);
b) take them to court;
c) ask them nicely to pay you back;
d) agree with them that they can pay some back now and some back later;
e) agree with them that they can pay some back and let them off the rest;
f) write off the whole debt and put it down to experience.

These are some of the options open to the people who have been lenders to the Greek government. 

Who are these people?  Banks, insurance companies, pension funds - any institution that was looking for a place to keep their money and earn a return on it (government debt is regarded as a safer place than, for example, the stock market).

Why lend it to Greece?  Because governments are traditionally (and ironically) safe people to lend to and Greece debt gave them a decent return compared to other governments.

Why did the Greek government need to borrow?  All governments borrow money from time to time - to pay for railway projects, new hospitals, the Olympics, or to make up the difference when tax revenues aren't as high as what they are spending.  Of course, they need to pay it back and the theory is that as the economy grows they will earn the tax revenue to pay back the debt.  Simples.

However, the Greeks borrowed a bit too much and these banks and pension funds were a bit too keen to lend to them.  Consequently we are now looking at a number of options for Greece and each one has its own consequences.  If you write off the debt then that could potentially put banks and insurance companies out of business or at the very least cause some damage to them (and they could include YOUR bank and the company that insures YOUR car).  If you force Greece to keep paying then they might end up being unable to pay and then not pay any of it off.  Or if you write off some of it, what message does that send?

A small but significant example of the problem is that large pharmaceutical companies are so worried about not being paid that they have been cutting the credit available to the Greek insurance fund which provides prescription drugs - equivalent to them cutting back on the amount of drugs they are willing to sell to the NHS without the money up front.  The consequences of this are that patients with cancer or heart problems are having trouble getting the drugs they need and people are lined-up outside pharmacies trying to get life-saving drugs for ill relatives.

This is just one example of the current consequences.  However, if Greece ended up having to leave the Euro, this would throw up even more issues.  They would have to have a new currency, this would probably devalue against the Euro but what would happen to someone who had borrowed 100,000 original Euros to buy a house - do they pay back the bank (which could be German) in original Euros (which will cost that person a fortune) or do they pay them back in new Greek Euros (which would lead to a loss for the bank)?  What about contracts with foreign suppliers which involve multi-million Euro agreements?  Are these original Euros or new Greek Euros now?  And if you were Greek, how quickly would you try to get your money out of the bank to keep the value of it as the original Euro?

This is why it's all a bit of a nightmare.  I have heard suggestions that it the debt gets written off then the banks should seize the island of Rhodes as compensation.  Interesting but probably illegal under international law.  However, at least it's an idea.

The Causes of the Eurozone Crisis

Believe it or not, the Euro has been around in its current form since 1st January 1999 when all the member currencies were joined together.  However, at that point there was still no physical Euro currency, it was just that the exchange rates of Francs, Deutschemarks, etc were 'permanently' fixed in value in relation to each other - 1 Euro was equal to 1.96 Deutschmarks, 6.56 French Francs, 1936 Italian Lira (yes, that many), etc, etc (source:

The physical currency as we know it today appeared on 1st January 2002 and there was then a period of weeks when the old currencies were exchanged for the new one.

The arguments for a single currency were numerous but were focused on the existence of a 'single market' in the European Union and the idea that one market should have one currency - this would lead to clearer prices between countries, no exchange rate risk when doing business, a reduction in the costs of doing business and encouragement of more trade.  The United States has one currency - why can't Europe?

In order to join the club you had to prove that you met certain criteria - that your inflation rate, growth rates, and levels of government debt were within certain boundaries.  This was so that you could avoid having economies with huge variations and a potential situation where one country had high inflation and high growth and another was in recession.

Eventually it was thought that there would be movement of goods, service, capital, labour, etc, between countries and everything would even out leading to more efficiency, greater economies of scale, lower prices and higher growth rates.

However, when some countries joined, particularly Greece, a number of economists suggested that they weren't meeting the criteria to join and had too much government debt; there was also a feeling that the state of their economies were too different from economies such as Germany.

Initially no issues arose from this but once the 'credit crunch' hit and economies started struggling it became clear that countries such as Spain, Portugal and Greece did not have the underlying economic strength to deal with it.  Were they not in the single currency they could have even lower interest rates in order to encourage growth (having said that. Eurozone interest rates are very low) and could also devalue their currencies in order to make their exports cheaper and encourage growth that way.  As it is they are now tied to the policies of the whole Eurozone and have no room for manoeuvre.

Of course, part of this problem is their own making due to the large amount of government debt they have accumulated by spending much more than they were getting in taxes.  They are not the only governments to have done this but the markets do not feel they have the underlying ability to cope with the levels of debt and consequently are demanding high rates of interest to lend to them.

If the Eurozone was truly one currency in one 'country' then the central bank would step in and help out with the debt.  However, convincing German and French citizens to back the debt of other countries is a big ask and this is one of the flaws in the Eurozone project.  Would you like to see your tax money supporting debt built up by another country?  Probably not.

So what happens now.  Another blog required I think.