Newspaper article The Tuscaloosa News

How We Got Here: Flawed Bailouts, Political Missteps Brought Greece to Brink

Newspaper article The Tuscaloosa News

How We Got Here: Flawed Bailouts, Political Missteps Brought Greece to Brink

Article excerpt

FRANKFURT, Germany | After two bailouts totaling 240 billion euros ($266 billion) and six years of depression, spending cuts and lost jobs, Greece teeters on the edge of collapse.

How did it come to this? Why couldn't all that money and all that sacrifice turn around a country that makes up less than two percent of the 19-country eurozone economy?

On Sunday the country will hold a referendum on whether or not to accept the tough creditor conditions attached to loans needed to avoid default and a banking collapse.

A "no" may lead to a chaotic departure from the shared euro currency. Even "yes" is no guarantee the creditors will agree to lend.

Ahead of the vote, here are seven short explanations of how Greece got into today's mess:

THE CREDIT BINGE

There is no way around it: Greece engaged in a three-decades- long credit binge starting in the early 1980s, spending the money on plush government jobs for supporters of the country's two major political parties -- the center-left PASOK and center-right New Democracy. Taking turns in office, they paid their followers well -- driving up private sector wages and making Greece a costly place to do business. They also looked the other way on widespread tax evasion. Independent professionals -- including doctors and lawyers - - often reported less income than factory workers.

THE EURO ARRIVES

Despite its rickety finances, Greece shaped up a little for a few years and qualified to join the single currency in 2001. It was a time of euphoria and confidence in the euro, seen as a rival to the dollar as a global currency. New members were desired to boost the EU's biggest hope for European integration. Greece was waved in, and promptly went back to its old ways.

LET THE GOOD TIMES ROLL

The arrival of the euro only fueled the debt binge. German and French banks found they could now buy Greek government bonds in euros, not drachmas that might devalue. Greece borrowed at what in retrospect were ridiculously low interest rates, just a bit more than those charged to rock-solid Germany.

They were in the euro, the thinking went, what could go wrong?

In October 2009, after the global financial crisis had made investors more wary of risk, Greece revealed its deficit was far higher than advertised, and its finances were out of control. Its borrowing costs shot up. It couldn't pay.

BAILOUT AUSTERITY

When the party ended, Greece got a 110 billion euro bailout in 2010 from the other eurozone countries and the International Monetary Fund. The creditors attached tough conditions to cut spending and deficits, and to tackle the rampant bureaucracy and corruption. Yet the cuts quickly undermined growth, which fell below the optimistic estimates of the creditors who miscalculated how much they would weigh on the economy.

There was a contradiction that couldn't be resolved: cuts in public spending were needed to reduce Greece's cost base because it couldn't devalue. …

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