“Greece needs a bailout, the EU is scrambling to put together financial assistance to Greece, the Euro tanks and the dollar soars on word of Greece financial crisis”.
Chances are a headline like the ones above has caught your eye in the last week. Like yourself, I saw them and didn’t pay much attention to them. But since the headlines won’t stop, I decided to figure out (for your benefit and mine) what the hell is going on over in the land of Zeus.
In the last few years, the Greek government has been on a spending frenzy. Turns out when you spend money you don’t have, people start to question whether or not you’ll be able to pay it back. But we’re getting ahead of ourselves.
Back in 2001, Greece dumped their currency for the Euro, which propelled to the world stage as an economy. With their debt now backed by the strength of the European Union, they were an unstoppable borrowing machine. The borrowed from anyone willing to give them money at interest rates they previously would have never been able to borrow at.
But in February of 2010, after a sale of new bonds, people started to panic. Perhaps it was the fact that over ¼ of economy operates under the table, or the fact that someone in the Greek government hid some debt and made their financial situation look a lot better than it was a la Enron. Eventually someone found out, and that brings us back to the bond sale in February of 2010. Since then Greece has been in panic mode as the world’s financial markets await a “fix”.
As of February 11th, the other members of the EU have agreed to put together a bailout for Greece. They have every incentive to since they all use the Euro as well. If Greek issues persist, everyone in the EU will suffer.
It looks like the way this bailout would work is the other EU nations will guarantee Greek debt. In exchange, Greece must reign in their spending and probably refinance some of the debt as well. This will keep the country out of bankruptcy which would send the whole world stage into a financial panic. I’m kidding when I say that something like this could (keyword there) create the exact panic needed to send the world into full blown depression.
But things won’t be rosy going forward for Greece. A very large portion of the population is employed by the state. And they are protesting the planned cuts. Since so many people rely on the government for their income, any cuts to the budget could send unemployment through the roof. Spain is already suffering from high unemployment, another EU state going the same route could cause more long term problems.
So Greece is stuck between a rock and hard place. They financed too much debt trying to improve the country and ran out of cash to pay the bills. It’s a big test to see how strong the EU and the Euro are. For additional resources I’ve to a video below about the Greek financial crises and the two links in the post go to good articles about the problems Greece is facing.
 By The Weakonomist |
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Said,
The strikes and protests have already begun. The unions refuse to even consider a cut to their pay/pension obligations. Similar situations are occurring in many US states as well though. Public servants can work 25 years and retire on 90% pension for life – a much longer life now that life expectancy is much higher than when they started 25 years ago. Rather than face unemployment, debt defaults and other maladies, perhaps people living off the public largesse need to accept a more reasonable pay/retiree package in line with what the private sector is offering.
The past argument was that govt employees forgo higher pay for the pensions and benefits, but now they’re getting higher pay raises each year as well. Why? Businesses react to economic conditions. With unemployment at 10% and people scrambling to hang on to a job, nobody’s going to complain about an average 2% pay raise across the company. However, unions will demand a 4% raise w more health care coverage at every negotiation. At some point, the balance is untenable – like what Greece is going through now.
California and several other states are going to have to push some tough choices, if it’s even legal (lawyers are mulling over just how bulletproof these union contracts are no matter what the economic conditions).