THE BIG RECESSION IN GREECE

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Thousands of people protest against European Union policies

Greece had been faking accounting data for a decade.

European Union set a very strict guide that Hellenics couldn´t avoid.

Evolution of the recession that damaged Balcanic Peninsula 

Greece was the most affected country in the EU during the economic crisis. The large issuance of public debt to finance its deficit reached a point that was worrisome at the end of 2009.

Causes

The effects of the Great Recession provoked in the USA was contagious to the Eurozone, and Greece suffered soon that effects due to the vulnerable economy structure of the country.

The structural weaknesses of the Greece economy; the Greek system was destabilized due to the bad planning  of the government through the years, as an excessive military expense, lost of fiscal income and the international imbalance created by the design failures of the eurozone, caused the structure of the Greek economy to weaken, making it susceptible to changes in the economy and the economy crisis. The debt and deficit reached levels of GDP, and this situation is unsustainable for any State, so the bankruptcy of the system was uncontrollable. 

A growing banking crisis caused by the exposure of European and Greek banks to a drastic increase in private debt in Greece, after the adoption of the common currency, the euro. These events led to the bankruptcy of the banking system in Greece, so the credit was over and no company was able to access financing, so the liquidity of these was reduced to nothing.

A sudden crisis of the creditors due to the scandal about the falsification of the macroeconomic data related to the levels of public debt and budget deficit by the Greek government of Karamanlis since 2001, before entering the euro zone. This fact was the trigger for the large declines in the Athens stock exchange caused by the crisis of confidence of creditors. After this, a rating agency assessed sovereign debt at the level of junk bonds, leaving the country out of the markets with the impossibility of financing itself and with the need for a rescue by the IMF and the EU. The inability to finance the debt forced to make important cuts in the public sector, which caused social demonstrations and riots in the streets.

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How Greek GDP reached as low rate levels as U.S. in 1930’s

The First Bailout

In 2010, the Greek government had to ask for a ransom from Europe due to the impossibility of maintaining public debt and the threat of bankruptcy of the system. The Troika formed by the IMF, the European Commission and the ECB, granted the first rescue to Greece, a loan of 110,000 million euros. This rescue contained conditions for the government, which had to impose these measures, such as austerity policies, structural reforms and the privatization of government assets. The cuts in social spending caused many general demonstrations, and the Greek Parliament’s decision on the pensions of public officials ended in protests by this group of workers.

The Second Bailout

The Greek government could not maintain the situation, so it was forced to ask for the second financial bailout in 2011. This request generated a lot of tension with the Central Bank and the International Monetary Fund, which considered ignoring the problem to cause bankruptcy of the Greek system.

However, the 240,000 millions outlay of funs took place in 2012, ratifying the second bailout programme that would increase Greek debt but also would try to join the reductionary policies that EU had set for the mentioned country. It seemed to have kicked in during almost 2 years, but it soon turned to a deterioration of the recession, what increased importantly inestability in the government and on the streets.

Uncertainty reached its highest level when SYRIZA Party won the national elections in 2014, since their ideas were far from respecting EU plans and returning European funds. This provoked the fall of Greek stockmarket prices and liquidity crisis became worse.

President Alexis Tsipras convoked a referendum to consult opinion about renegotiate EU Bailouts, what caused controversy around many sectors.

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We can see Spanish politician Pablo Iglesias supporting Alexis Tsipras during a conference.

The Third Bailout

Under these circumstances, the Prime Minister applied a banking block (“corralito”) in order to avoid banking panic or masive deposites extraction.

Despite the fact that referendum results meant refusal to EU and international organuzations policies and adjustments, Greek Government requested a new bailout programme that was finally applied in 2015. It consisted in 86,000 million funds that avoided country bankruptcy and Grexit, which is the current that is in favour of leaving the Euro-Community and European Union.

The conjunction made Alexis Tsipras resign of his charge and convoke elections, that would win again but in coalition with another political party.

Grexit

It is known as the idea that rised during the Greek crisis to leave the European Union in order to act independently. This would allow the country to devaluate its own currency (possibly the dracma).

Markets from around the world would interprete this reaction as if Eurozone had not credibility since one member can exit and return when it is convinient for its own. Nevertheless, this choice was not effective and Greece stayed in EU after long periods of negotiations.

Consequences of Grexit would have been suspension of payments on the one hand,and on the other hand it would have led German and French credit institutions to bankruptcy.

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It was positive having stopped this current since it could have spread to other countries like Spain or Italy, and Eurozone would have lost too much estability.

Social consequences of Greek Recession

It obviously damaged people situation as they saw how their incomes got reduced more and more, violence increased since the country ran out of basic resources.

Public system got worse, so sectors such as health one cuased a decrease in life expectancy and an increase in suicide rate (among others).

Poverty grew noticeably and too many children suffered from alimentary problems according to several population analysis.

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“I’m retired. I can not live in these conditions. I refuse to look for food in the trash. That’s why I’ve decided to end my life “. This was a suicide note of a 77-years-old Greek man that was found during this period.

Greek poverty levels almost doubled from 2008 to 2017

EUROZONE CRISIS

The European Union set a strict path that members had to follow

Eurosceptic movements gained power among population

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The economic crisis of 2008 undermined the solidity that the Eurozone economy had had during that decade. The disequilibrium of the PIIGS economies (Portugal, Italy, Ireland, Greece and Spain) worried rating agencies that increased their sovereign risk rate and, therefore, caused the weakening of the common currency, the euro.

The beginning of the Greek crisis fiscal collapse in 2010 was one principal sequel in the economic crash, and overcame this crisis would be a challenge for the European Central Bank and the European Union, related to the future of the euro.

From 2002 to 2008, the dollar-euro exchange rate change from 0,859 to 1,55 reflecting a high strong of the community currency, but the explosion of the crisis provoke a great appreciation of the dollar because investors sold their assets nominates in euros to acquired American Treasury Bounds.

The principal stock indexes of Europe failed notoriously, the Ibex 35 from Spain failed53%, the German Dax 30 failed 40%, the FTSE from UK lost a 38% and the French CAC failed 50%.  One consequence of this disaster was the bankruptcy of Lehman Brother in 2008, the fourth bigger investment bank in the world.

In this graph we can see the behavior of the principal European stock indexes and the Dow Jones from USA, between 2002 and 2009.

Since the bankruptcy of the German banks HRE and Deutsche Bank, and of the Lufthansa airline, and its subsequent rescue by the German government, the European Union initiated the European Economic Recovery Plan with a rescue of 200 billion by the ECB, equivalent to 1, 5% of The GDP of the European Union. This plan prevented the bankruptcy of many European states since their debt had become unsustainable.

The main problem that caused the recession in Europe was the freezing of credit for the real economy. This was a problem for the companies, because their liquidity was exhausted and they became agents with a high risk for the banks, so the credit did not arrive and the companies could not continue with their activities in a normal way. As far as production, income, GDP and employment across Europe, among others, drastically decreased.

In the following graph we can appreciate the differences between the European GDP and the GDP from United States

Causes

Eurocrisis took place as a consequence of several complex concepts such as financial globalization, easy access to credit during the 2000’s, real state bubbles that failed and poor management by bank entities that went bankrupt and disappeared or were injected millionary funds from central banks (rescues).

In addition, governments were not prepared enough to deal with this recession, since economic previsions could not predict it accurately. This led to political changes and internal disputes along the continent. 

Finally, credit agencies did not elaborate their reports on national economies by calificating them correctly, because they were too conservative when evalutating. Some experts agree these agencies should have been faster when making public their results.

Consequences

Responses were very often controversial, since there have always been eurosceptics who did not rely on these steps that EU provided but at the same time imposed indirectly.

First of all, European Union created the European Financial Stability Facility(EFSF), an organism that was in charge of promoting economic stability. Moreover, EU made governments carry out very strict policies (reducing wages, increasing taxes…) in exchange of a economic rescue that would increase national debts.

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In addtion, as the union is composed by very different states that do not have the same economic power and importance, most important ones were a little reluctant at the moment of keeping on lending money to save the most affected ones. Even UK started the process to exit the EU (“Brexit” idea).

The end of the crisis

It is commonly known that states have improved their macroeconomics data, although there is still much work to be done. Since 2014, unemployment rate has fallen noticeably all around the Eurozone, in addition to the growth of the common GDP (1’4% increased just that year).

This results have been possible due to the role of ECB estimulating economies and elaborating adjusted plans for every EU-member. In addition, the euro depreciation, the increase in internal demand and fall of petrol prices granted this improvements.

Controversy. There have been several trends that have critized EU policies. They have reported that not-keynesianist steps and deflationary adjustments can make economies as Greek or Italian ones be deeper. 

Barack Obama during a press conference.

Even the former president of the United States, Barack Obama, suggested that reduction in consumers’ income would lead to decrease in consumption, among other effects. According to him, it was necessary to apply more flexible policies.

To sum up, we can watch this brief video in which Eurozone crisis is described and accurately explained.

THE CRASH OF 2008

The fall of a global inefficient system.

A predicted colapse that nobody could avoid.

Despite the fact that the crisis was thought to take place in 2008, at the end of 2007, several minor banks went bankrupt and started an unstoppable crash of the globalised economies that would be devastated.

The economic signs: several noticeable causes

The increase in the raw materials price. United States, one of the biggest economies in the planet and one that holds the system in great part, had took several policies (such as free-market regulation, low interests…) after being damaged by the terrorist attack in 11th September of 2001. These procedures led to a real state bubble that was joined by the high costs of Afghan and Iraqi Wars. 

2000’s decade meant the rise of raw materials, although they had had their prices reduced from 1980 to beginning of XXI century. In 2008, petrol and food resources became so expensive that discomfort was spread all around the world, what provoked stagflation  not only in developing countries, but also in the most powerful ones.

Progressive inflation and deflation

According to IMF reports, in 2008 prices reached a historical level in petrol-exporter countries, dute to the increase of currency reserves. However, interest rates were still low in euro-zone and United States.

Eventually, one year later, the situation was completely inverse: deflation had took place and consequences were interest rates close to 0%, as well as extremely high unemployment rate.

Crisis spread throughout the States

Globalised system leads to contagious reactions among economic agents, since situations of uncertainty make investors be more sensible when they have to decide, what reduces investment and economy contracts itself.

Besides this fact, markets are more and more interconnected, so this works as a chain that gets affected step by step.

Comparisons of GDP rates among the most important economies during the crisis.

 United States’ situation

The American country felt is first struggles in 2006, when its real state bubble exploded and it was followed by the credit crisis that had been born in the uncertainty provoked by the rumors of the national investors about a possible recession (data was clearly showing that economy was going to became worse.

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Both consumer and firms suffered from this disaster

In 2007, banks needed liquidity that was finally provided by a central banks intervention; nevertheless, unemployment rate was progressively growing and financial entities went bankrupt, leading to the 2008 collapse of the economy (affecting stockmarkets notoriously too).

Lehman Brothers

Lehman Brothers Holding Inc. was an inversion bank established in 1850 that had become the forth firm according to importance in the sector (with 680 millions of dollars in assets). However, Richard S. Fultz Jr. as CEO of the company, could have sold the company to Barclays and Bank of America so as to save both Lehman Brothers and its employees, but refused to continue with negotiations and he was forced to declare bankruptcy 15th September of 2008.

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Lehman Brothers’ stock prices evolution during September