Academy of Economic Studies, Bucharest

The financial crisis in Greece and its

impact on the euro area

Professor: Agoston Simona Students: Sindile Andrei

Stamate Victor
Stanescu Andrei
Tache Andrei
Tanase Robert
Group: 135
Series: B
Abstract
Due to the 10 Iactors which postponed the Iinancial crisis in Euro Zone and Greece, The
Iinancial crisis has had a pervasive impact on the real economy oI the EU, and this in turn led to
adverse Ieedback eIIects on loan books, asset valuations and credit supply and like many
countries Greece, the Greek government relies on borrowed money to balance its books making
the recession harder to achieve, because tax revenues are Ialling just as welIare payments start to
rise. And even with the IMF assistance, will be enough to save Greece Ior the current situation?
But the current state oI Greece is related to the state oI aIIairs in Greece is hot, no doubt about
that. This is not new, nor is it directly correlated to the current Iinancial crisis; rather, we have a
scaling oI the tension that is deIinitely related to the Iact that the Greek oriented capital manages
to achieve very high rates oI proIitability, while there is a very strong political movement. Even
though all the negative reports a Iorecast has been made and a return to sustained positive growth
is projected Ior 2012 as external demand strengthens, competitiveness improves and the Iar-
reaching structural reIorms implemented in response to the Iiscal crisis start to take hold.

Financial crisis outburst
The crisis was the product oI 10 Iactors. Only when taken together can they oIIer a suIIicient
explanation oI what happened:
Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained
housing bubble in the UK (Iactors 1 and 2). Excess liquidity, combined with rising house prices
and an ineIIectively regulated primary mortgage market, led to an increase in nontraditional
mortgages (Iactor 3) that were in some cases deceptive, in many cases conIusing, and oIten
beyond borrowers' ability to pay.
However, the credit bubble, housing bubble, and the explosion oI nontraditional mortgage
products are not by themselves responsible Ior the crisis. In the UK losses Irom the housing
downturn were concentrated in highly leveraged Iinancial institutions. Which raises the essential
question:
'Why were these firms so exposed?`
Failures in credit-rating and securitization transIormed bad mortgages into toxic Iinancial assets
(Iactor 4). Securitizers lowered the credit quality oI the mortgages they securitized, credit-rating
agencies erroneously rated these securities as saIe investments, and buyers Iailed to look behind
the ratings and do their own due diligence. Managers oI many large and midsize Iinancial
institutions amassed enormous concentrations oI highly correlated housing risk (Iactor 5), and
they ampliIied this risk by holding too little capital relative to the risks and Iunded these
exposures with short-term debt (Iactor 6). They assumed such Iunds would always be available.
Both turned out to be bad bets.
These risks within highly leveraged, short-Iunded Iinancial Iirms with concentrated exposure to a
collapsing asset class led to a cascade oI Iirm Iailures. We call this the risk oI contagion (Iactor
7). In other cases, the problem was a common shock (Iactor 8). A number oI Iirms had made
similar bad bets on housing.
A rapid succession oI 10 Iirm Iailures, mergers and restructurings in September 2008 caused a
Iinancial shock and panic (Iactor 9). ConIidence and trust in the Iinancial system evaporated, as
the health oI almost every large and midsize Iinancial institution in Europe was questioned. The
Iinancial shock and panic caused a severe contraction in the real economy (Iactor 10). ...
It is dangerous to conclude that the crisis would have been avoided iI only we had regulated
everything a lot more, had Iewer housing subsidies, and had more responsible bankers. Simple
narratives like these ignore the global nature oI this crisis, and promote a simplistic explanation
oI a complex problem. Though tempting politically, they will ultimately lead to mistaken
policies.
I don't think the conclusion that better regulation would not have stopped the crisis Iollows Irom
the Iactors they list.
By their own admission, the reason that Iactors 1 and 2 led to Iactor 3 was "an ineIIectively
regulated primary mortgage market." So right away better regulation could have stopped the
chain oI events the led to the crisis.
Factor 3 was "nontraditional mortgages that were in some cases deceptive, in many cases
conIusing, and oIten beyond borrowers' ability to pay." Sure seems like regulation might help to
prevent deception and conIusion (through, among other things, a Iinancial protection agency).
One thing is clear in any case. The market didn't prevent these things on its own.
Factor 4: Securitizers lowering credit standards, a Iailure oI credit agencies, and buyers Iailing to
do their own due diligence. Once again, regulation can help where the private market Iailed. The
ratings agencies exist because they help to solve an asymmetric inIormation problem. The typical
purchaser oI Iinancial assets does not have the resources needed to assess the risk oI complex
Iinancial assets. Instead, they rely upon ratings agencies to do the assessment Ior them.
UnIortunately, the ratings agencies didn't do their jobs and this is where regulation has a role to
play.
Factor 5: the accumulation oI correlated risk.When regulators see this type oI risk building up,
they should do something about it. The question, however, is how to give regulators better tools
Ior assessing these risks. Backing oII on regulation, as implied above, won't help with this.
Factor 6: holding too little capital relative to the risks and Iunded these exposures with short-
term debt. Mandating higher capital requirements is the solution to this problem.
Factors 7 and 8: risk contagion and widespread exposure to a common shock. The private sector
didn't prevent these risks Irom getting too high so, again, why wouldn't we want a regulator to do
something about excessive risks oI this type? False positives is one worry but that is a matter oI
how high to set the threshold Ior action, not an argument against regulation itselI. II anything, the
threshold Ior action was too low prior to the crisis.
Factor 9: A rapid succession oI 10 Iirm Iailures, mergers and restructurings in September 2008
that endangered the Iinancial system.
Factor 10: EIIects on the real economy. I'll concede that regulation could not have helped much
here. Once the Iinancial system crashed in the way that it did, the real economy was sure to
Iollow. These Iactors are, Ior the most part, a chain oI events. II the chain had been broken by
more eIIective regulation anywhere along the way, the chain oI events is interrupted and Iactor
10 does not come into play.

Strategies proposed by the European Union for recovery from the Financial Crisis:
The strategies developed by EU to the Iinancial and economic crises can be categorized
under three groups:
O The Iirst group oI strategies devoted to the restore oI conIidence in markets with
stimulus plans.
O The second group oI strategies developed Ior the proper supervision and
governance oI the Iinancial system
O The third group comprises the strategies to enhance economy policy coordination
among Member States through economic governance mechanisms.
Right aIter the crisis enters the most critical stage in September 2008; European
Economic Recovery Plan was the Iirst stimulus package introduced by the EU. The strategic
objectives oI the plan were to recover the economy by considering the long-term objectives such
as enhancing competitiveness and creating green economy and to mitigate the social costs oI the
crisis. In order to attain these objectives, the plan proposed a number oI strategic actions in
accordance with Lisbon Strategy and was supported by a budget oI 200 billion Euros.
As the crisis spread the eurozone periphery` countries, namely Greece, Ireland and
Portugal, European Financial Stabilisation Mechanism (EFSM) and a European Financial
Stability Facility (EFSF) were introduced as new mechanisms to avoid Iinancial distress in euro
area. Within the Iramework oI EFSM the Commission can contract borrowings Irom Iinancial
markets on behalI oI the EU, and then lend it up to t60 billion to the Member State in Iinancial
diIIiculties. Additionally, EFSF was as a special purpose vehicle, which can issue bonds up to
t440 billion Ior lending to Eurozone Member States in diIIiculties. Both EFSM and EFSF were
adopted Iollowing the EcoIin Council in 9 May 2010, became Iully operational since August
2010 and will remain in Iorce until June 2013. AIter June 2011, European Stability Mechanism
(ESM) will replace ESFM and EFSF as a permanent instrument to saIeguard the stability oI euro
area.
The second group oI strategies has started when European Union gave a mandate to a
high level group chaired by Mr. Larosiere, in order to identiIy what has to be done to undertake
more deep-rooted reIorms. Based on this Larosiere`s group report, European Commission
launched a set oI strategies intended to constitute a more transparent European Iinancial system.
In March 2009 a communication was adopted Ior the Iormation oI European Financial
Supervision System.
With the establishment oI the new system, three existing Committees (Committee oI
European Banking Supervisors, Committee oI European Insurance and Occupational Pensions
Committee, Committee oI European Securities Regulators) will be replaced by more
strengthened Authorities, which will operate at European level and in coordination with national
supervisors. In accordance with the Communication oI March 2009, European Commission
published a second communication two months later which details the European Financial
Supervisory Framework. The Commission proposes a system based on two dimensions:
O The Iirst dimension establishes European Systemic Risk Board (ESRB), which
will be responsible Ior monitoring the macro risks in the Iinancial
system. The decisions oI ESRB will not be binding on Member States, but an action or
explanation mightbe demanded in case they didn`t act on ESRB`s recommendations. The
organizational structure oI ESRB will be composed oI members and observers. President and
Vice-President oI European Central Bank, governors oI national central banks, chairpersons oI
three European Supervisory Authorities and one person Irom the European Commission would
have a right to vote as members in the ESRB. The representatives oI national supervisory
authorities and chairperson oI European and Financial Committee would join the organization as
observers.
O The second dimension oI Iinancial supervision is the European System oI
Financial Supervisors (ESFS). The main objective oI ESFS is to identiIy micro risks stem Irom
Iinancial institutions, other sectors` players or consumers. It transIorms three existing
Committees oI Iinancial regulation into the Authorities (European Banking Authority, European
Insurance and Pensions Authority and European Securities and Markets Authority) with more
power and responsibilities. The Authorities can take binding decisions when a disagreement
occurs between national authorities or actors. The organization oI ESFS consists oI a steering
committee, board oI supervisors and management board. One representative Irom each authority
would work in Steering Committee to determine the cross-sectoral risks. The Board oI
Supervisors in each Authority will be composed oI the chairperson oI that Authority and
representatives Irom relevant authorities in Member States, moreover, a representative oI
European Commission, oI ESRC and oI EFTA-EEA country would be involved in as observers.
A management board will be responsible Ior operational tasks, which comprise national
representatives and the Commission.
European Commission presented legislative proposals Ior the European Financial Supervisory
Framework in September 2009 and one year aIter European Council and European Parliament
approved the new Iinancial supervision structure was created. Both ESRB and three Authorities
started to work oIIicially in January 2011.As mentioned above, while dealing with the global
Iinancial crisis, Europe has to cope with sovereign debt problems oI some Member States since
November 2009. European Monetary Union has been widely criticised because it is based on a
single central bank without a common Iiscal policy among Member States. The lack oI
supranational Iiscal coordination has become more apparent in the absence oI immediate and
mutual response to the Greek crisis. Hence, EU initiates a new strategy to 'reinIorce economic
policy coordination by the invitation oI EC Commissioner Olli Rehn in April 2010. European
Union`s new economic governance strategy is based on three pillars; strengthening oI Stability
and Growth Pact, enhancing macroeconomic coordination within EU and harmonisation oI
national budget Irameworks oI Member States.
As a Iiscal surveillance mechanism oI Euro area member states, Stability and Growth
Pact plays a key role in European economy policy coordination, however, recent debt crisis has
shown that Member States could not perIorm in compliance with rules and principles set by the
Pact. To enhance its implementation and to avoid the breaches oI the rules, Commission set out a
strategy that will reinIorce so-called the 'preventive and 'corrective parts oI the SGP.
The existing preventive arm oI SGP operates through stability and convergence programmes in
which Member States outline medium-term objectives (MTO) oI their budgetary positions in
accordance with the rules oI SGP. However, as the current crisis proved, Member States are
insuIIicient to achieve their MTO`s and a new tool is added to the existing mechanisms, namely
'prudent Iiscal policy-making, which ensures that 'annual expenditure should not exceed a
prudent medium-term rate oI growth. With the help oI prudent Iiscal policy-making it is aimed
to use unexpected extra revenues Ior debt reduction instead oI spending it. On the other hand, the
existing corrective arm oI SGP is implemented through excessive deIicit procedure (EDP) - EDP
is an instrument to prevent excessive deIicits and debts oI Member States. While current EDP
mainly Iocuses on deIicit criterion (3 oI GDP), the new strategy puts more emphasis on debt
threshold (60 oI GDP); in addition to this, the evolution oI debt levels would be monitored
more tightly. II a Member State`s debt level exceeds 60 criterion, that Member State should
take appropriate actions in order to decrease the diIIerence between its debt level and the
reIerence debt values at a rate 5 per annum over the last three years.
Both Ior the breach oI preventive and corrective practices, the Commission developed
new sanctioning mechanisms Ior the Member States in the euro area. II a Member State Iails to
adopt preventive actions, 0.2 oI its GDP would be held as an 'interest-bearing deposit. In the
case oI corrective action, the amount deposited would be the same; however, Member States in
would not bear any interest as such, these sanctions, Commission developed a 'reverse voting
mechanism in order to strengthen their implementations. Through this mechanism, the
Commission`s recommendation would be adopted, unless Council disapproves oI it by the
qualiIied majority. The rationale oI second pillar`s Iormation oI economic governance is to
prevent and correct macroeconomic imbalances. The reactions oI Member states to the Iinancial
turbulences could be wide ranging as a result to manage the process more eIIiciently, Iirst
mechanism introduced is an alert system based on Member States` scoreboards in which a series
oI macroeconomic indicators represented and analyzed. An alert threshold would be speciIied Ior
each indicator that will give a signal to experts Ior the in-depth evaluation oI the problematic
situation. The evaluation process oI the scoreboards would be conducted on a regular basis. In-
depth reviews can lead to two diIIerent outcomes Ior Member States. The Iirst option is to take
no action when macroeconomic indicators are stable. The second option is to recommend
preventive actions iI there is a risk oI macroeconomic imbalance.
II the macroeconomic imbalances oI a Member State produce severe negative consequences Ior
other Member States, the mechanism oI 'excessive imbalance procedure (EIP) would be put
into eIIect. In such cases, Member States are obliged to take a corrective action within a speciIic
time period. Similar to implementation oI the Iirst mechanism, iI the macroeconomic imbalance
corrected, EIP will be closed. II the Member State took corrective actions, but its eIIects didn`t
occur simultaneously, the procedure will be closed but monitoring would be continued. II a
Iailure in implementing corrective action or noncompliance with the recommendations continued
repeatedly, a set oI sanctions would be imposed Ior the Member States oI euro. A Member State
in euro area has to pay 0.1 oI its GDP as a yearly Iine iI it Iails repeatedly to correct
macroeconomic balances under EIP. The decision oI enIorcement will be taken by the reverse
voting mechanism.
Third pillar oI economic governance aims to harmonize budgetary Irameworks oI the
Member States. This encapsulates the convergence oI public accounting systems, Iorecasting
methods, numerical Iiscal rules and transparency.
All three pillars have been presented in six legislative proposals to the Council oI the
European Union in September 2010, and they were planned to be operational in June 2011 with
the consent oI European Parliament. On the other hand, European Commission has already
started the new Iramework oI budget surveillance, so-called 'European Semester. Within the
scope oI the European Semester, a schedule oI activities is organized in order to coordinate and
evaluate the preliminary draIt budgets oI Member States which will start each year in January
with the adoption oI the Annual Growth Survey, and aIter a series oI reviews and debates on
national budgets oI Member States it lasts in June.
Greece
Greece has a capitalist economy with the public sector accounting Ior about 40 oI GDP.
Tourism provides 15 oI GDP. Immigrants make up nearly one-IiIth oI the work Iorce, mainly
in agricultural and unskilled jobs. Greece is a major beneIiciary oI EU aid, equal to about 3.3
oI annual GDP. The Greek economy grew by nearly 4.0 per year between 2003 and 2007, due
partly to inIrastructural spending related to the 2004 Athens Olympic Games, and in part to an
increased availability oI credit, which has sustained record levels oI consumer spending. But
growth dropped to 2 in 2008. The economy went into recession in 2009 and contracted by 2,
as a result oI the world Iinancial crisis, tightening credit conditions, and Athens' Iailure to
address a growing budget deIicit, which was triggered by Ialling state revenues, and increased
government expenditures. Greeceviolated the EU's Growth and Stability Pact budget deIicit
criterion oI no more than 3 oI GDP Irom 2001 to 2006, but Iinally met that criterion in2007-
08, beIore exceeding it again in 2009, with the deIicit reaching 13.7 oI GDP. Public debt,
inIlation, and unemployment are above the euro-zone average while per capita income is below;
debt and unemployment rose in 2009, while inIlation subsided. Eroding public Iinances, a
credibility gap stemming Irom inaccurate and misreported statistics, and consistent
underperIormance on Iollowing through with reIorms prompted major credit rating agencies in
late 2009 to downgrade Greece's international debt rating, and has led the country into a Iinancial
crisis. Under intense pressure by the EU and international market participants, the government
has adopted a medium-term austerity program that includes cutting government spending,
reducing the size oI the public sector, decreasing tax evasion, reIorming the health care and
pension systems, and improving competitiveness through structural reIorms to the labor and
product markets. Athens, however, Iaces long-term challenges to push through unpopular
reIorms in the Iace oI oIten vocal opposition Irom the country's powerIul labor unions and the
general public. Greek labor unions are striking over new austerity measures, but the strikes so Iar
have had a limited impact on the government's will to adopt reIorms. An uptic in widespread
unrest, however, could challenge the government's ability to implement reIorms and meet budget
targets, and could also lead to rioting or violence.
The impact of the financial crisis in Europe
The Iinancial crisis has had a pervasive impact on the real economy oI the EU, and this in turn
led to adverse Ieedback eIIects on loan books, asset valuations and credit supply. But some EU
countries have been more vulnerable than others, reIlecting inter alia diIIerences in current
account positions, exposure to real estate bubbles or thepresence oI a large Iinancial centre. Not
only actual economic activity has been aIIected by the crisis, also potential output (the level oI
output consistent with Iull utilization oI the available production Iactors labour, capital and
technology)is likely to have been aIIected, and this has major implications Ior the longer-term
growth outlook and the Iiscal situation. Against this backdrop this chapter takes stock oI the
transmission channels oI the Iinancial crisis onto actual economic activity (and back) and
subsequently examines the impact on potential output.
The impact on economic activity
The Iinancial crisis strongly aIIected the EU economy Irom the autumn oI 2008 onward. There
are essential three transmission channels:
;ia the connections within the financial system itself. Although initially the losses mostly
originated in the United States, the write-downs oI banks are estimated to be considerately larger
in Europe, notably in the UK and the euro area, than in the United States. According to model
simulations these losses may be expected to produce a large contraction in economic activity.
Moreover, in the process oI deleveraging, banks drastically reduced their exposure to emerging
markets, closing credit lines and repatriating capital. Hence the crisis snowballed Iurther by
restraining Iunding in countries (especially the emerging European economies) whose Iinancial
systems had been little aIIected initially.
W ;ia wealth and confidence effects on demand. As lending standards stiIIened, and households
suIIered declines in their wealth, in the wake oI drops in asset prices, (stocks and housing in
particular), saving increased and demand Ior consumer durables (notably cars) and residential
investment plummeted. This was ampliIied by the inventory cycle, with involuntary stock
building prompting Iurther production cuts inmanuIacturing. All this had an adverse Ieedback
eIIect onto Iinancial markets.
W ;ia global trade. World trade collapsed in the Iinal quarter oI 2008 as business investment and
demand Ior consumer durables -both strongly credit dependent and trade intensive had
plummeted .The trade squeeze was deeper than might be expected on the basis oI historical
relationships, possible due to the composition oI the demand shock (mostly aIIecting trade
intensive capital goods and consumer durables), the unavailability oI trade Iinance and a Iaster
impact oI activity on trade as a result oI globalization and the prevalence oI global supply
chains.
The impact on labour market and employment
Labour markets in the EU started to weaken considerably in the second halI oI 2008,
deteriorating Iurther in the course oI 2009. Increased internal Ilexibility (Ilexible working time
arrangements, temporary closures etc.), coupled with nominal wage concessions in return Ior
employment stability in some Iirms and industries appears to have prevented, though perhaps
only delayed, more signiIicant labour shedding so Iar.
Even so, the EU unemployment rate has soared bymore than 2 percentage points, and a Iurther
sharp increase is likely in the quarters ahead. The employment adjustment to the decline in
economic activity is as yet Iar Irom complete, and more pronounced labour-shedding will occur
as labour hoarding gradually unwinds. Accordingly, the Commission's latest spring Iorecast
(European Commission 2009a) indicates that, on current policies, employment would contract by
2 this year and a Iurther 1 in 2010. The unemployment rate is Iorecast to increase to
close to 11 in the EU by 2010 (and 11 in the euro area).
Recent developments
Until the Iinancial crisis broke in the summer oI 2007 the EU labour markets had perIormed
relatively well. The employment rate, at about 68 oI the workIorce, was approaching the
Lisbon target oI 70, owing largely to signiIicant increases in the employment rates oI women
and older workers. Unemployment had declined to a rate oI about 7, despite a very substantial
increase in the labour Iorce, especially oI non-EU nationals and women. Importantly, the decline
in the unemployment rate had not led to a notable acceleration in inIlation, implying that the
level oI unemployment at which labour shortages start to produce wage pressures (i.e. structural
unemployment) had declined.
These improvements had been spurred by reIormsto enhance the Ilexibility oI the labour market
and raise the potential labour supply. The reIorms usually included a combination oI cuts in
incometaxes targeted at low-incomes and a redirection oIactive labour market policies towards
more eIIective job search and early activation. Measures to stimulate the supply side oI the
labour market and improve the matching oI job seekers with vacancies were at the centre oI
policies in a majority oI countries. Importantly, however, in many countries the increase in
Ilexibility oI the labour market was achieved by easing the access to non-standard Iorms oI work.

unemployment rate in EU

The Greek debt crisis
Like many countries, the Greek government relies on borrowed money to balance its books. The
recession has made this harder to achieve, because tax revenues are Ialling just as welIare
payments start to rise. It doesn't help that, in Greece, tax evasion is commonplace and pension
rights are unusually generous but, to be Iair, using public spending to even out the bumps oI
the global downturn is what most large developed economies are trying to do right now.
UnIortunately, investors have lost conIidence in the Greek government's ability to walk this
tightrope so they have been demanding ever higher rates oI interest to compensate Ior the risk
that they might not get their money back. The higher its borrowing costs, the harder it is Ior the
Greek economy to grow itselI out oI trouble.
Events began to spiral out oI control when credit rating agencies downgraded Greek government
debt to "junk" status, pushing the cost oI borrowing so high that the country eIIectively had its
international overdraIt Iacility cancelled overnight. Fearing bankruptcy, Greece had to turn
instead to the European Union and the International Monetary Fund (IMF) the world's lender
oI last resort Ior up to 120bn euros oI replacement lending.
But political opposition in Germany and IMF orthodoxy in Washington demands that the rescue
package comes with strings attached: a tough series oI public sector cuts designed to reassure
international investors that the government can become creditworthy again.
The snag is, this traditional market response is complicated by Greece's membership oI the
single-currency euro club. This means it cannot stimulate growth by devaluing its currency, and
nor can it cut interest rates any Iurther, which would help, because these are decided by the
European Central Bank in FrankIurt. Instead, the public sector cuts are almost certain to deepen
the Greek recession, reducing tax revenues and making it even harder to service the debts in
Iuture.
What many investors Iear is that the only way out oI this vicious circle is Ior Greece to walk
away Irom its existing debts and try to go it alone potentially triggering a wave oI similar
deIaults in other indebted European countries, and jeopardizing the euro itselI. In the meantime,
what many Greeks Iear is that the IMF option is just going to prolong the agony and drive the
country to the brink oI political as well as economic collapse.
Eurozone/IMF Financial Assistance to Greece

On May 2, 2010, Eurozone Iinance ministers and the IMF agreed on a three-year program oI
loans to Greece totaling t110 billion (about $145 billion): t80 billion (about $105 billion) Irom
Eurozone member states and t30 billion (about $40 billion) Irom the IMF. The package could
reportedly provide t30 billion (about $40 billion) Irom the Eurozone and t10 billion (about $13
billion) Irom the IMF in 2010 to help ensure that Greece meets its immediate payment
obligations. The breakdown oI the Iinancial assistance package Ior Greece is shown in Figure 1.

Figure 1. Eurozone/IMF FinanciaI Assistance Package for Greece




Eurozone Member States
Details on Eurozone Member State Assistance to Creece
Over the course oI March and April 2010, Eurozone leaders incrementally Iormulated a
mechanism Ior providing Iinancial assistance to Greece. AIter considerable negotiation, leaders
agreed that the Eurozone countries would provide bilateral loans, at a market-based interest rate
(approximately 5, which is lower than what Greece had paid in recent bond sales), iI
supplemented by additional loans Irom the IMF and iI the Greek government implemented
substantial austerity measures over the next three years. On April 23, 2010, the Greek
government
Iormally requested the activation oI this mechanism and the Iinal package was announced the
Iollowing week.
OI the Eurozone member states, Germany is reportedly providing the largest loan, expected to be
22.4 billion (about $29 billion) over the three-year period, Iollowed by France, which is
expected to loan Greece 16.8 billion (about $22 billion). With payment deadlines on Greek
bonds looming, European leaders are aiming to execute the loan arrangements quickly. Due to
diIIerent legal requirements among Eurozone countriesIinal approval requires a parliamentary
vote in some countriesthe loans will likely not all be available at the same time. Advocates oI
quick implementation overcame a major hurdle, however, when the German parliament
approved
German participation in the plan on May 7, 2010.
IMF
Details on IMF Assistance to Creece
Approximately one-third oI the Eurozone and IMF Iinancial package Ior Greece is Irom IMF
resources. The IMF assistance to Greece is a three-year, $40 billion loan made at market-based
interest rates. SpeciIically, it is a three-year Stand-By Arrangement (SBA), which is the IMF`s
standard loan vehicle Ior addressing balance-oI-payments diIIiculties. The IMF does not disburse
the Iull amount oI its loans to governments at once. Instead, the IMF will divide the loan into
tranches (French Ior 'slice) and will only disburse the next tranche aIter veriIying that the
speciIied economic policy reIorms have been met. Urging policy reIorms in this way ensures that
the loans will be repaid to the IMF, and that the required economic reIorms are implemented.
Greece`s loan Irom the Fund is unusual Ior two reasons. First, the IMF does not generally lend to
developed countries and has never lent to a Eurozone member state since the euro was
introduced
in 1999 as an accounting currency and 2002 as physical currency in circulation. Second, it is
unusual Ior its relative magnitude. The IMF has general limits on the amount it will lend to a
country either through a SBA or Extended Fund Facility, which is similar to a SBA but Ior
countries Iacing longer-term balance-oI-payments problems. The IMF`s guidelines Ior limits on
the size oI loans Ior SBAs and EFFs are 200 oI a member`s quota annually and 600 oI a
member`s quota cumulatively. IMF quotas are the Iinancial commitment that IMF members
make upon joining the Fund and are broadly based on the IMF member`s relative size in the
world economy. In 'exceptional situations, the IMF reserves the right to lend in excess oI these
limits, and has done so in the past. The IMF`s loan to Greece is indeed exceptional access at
3,200 oI Greece`s IMF quota and is the largest access oI IMF quota resources granted to an
IMF member country.
The IMF is expected to Iinance halI oI Greece`s loan ($20 billion) using IMF quota resources.
Although the United States has contributed 17 oI IMF quota resources, it is unclear what
portion oI the IMF loan Ior Greece that is Iinanced by quota resources will be Iunded by the U.S.
quotas. The IMF does not disclose country contributions to individual transactions with the
Fund.
In deciding which quota resources to use, the IMF aims to provide a balanced position Ior all
members.
The other halI ($20 billion) oI the IMF loan is expected to be Iinanced by bilateral loans that
have
been committed to the IMF as part oI an overall eIIort to increase IMF resources. None oI this
portion is coming Irom the United States. In 2009, the United States did agree to extend a line oI
credit worth $100 billion as part oI expanding the IMF's New Arrangements to Borrow (NAB).
However, the expanded NAB is not yet operational, so this $100 billion line oI credit Irom the
United States cannot be tapped Ior Greece's package.

Debates over IMF Involvement

At the onset oI the Greek crisis, many EU oIIicials were insistent that the Eurozone take
ownership oI the issue. Analysts asserted that it was important Ior the Eurozone to demonstrate
its
strength and credibility by taking care oI its own problems. The prospect oI 'outside
intervention Irom the IMF was viewed by many as a potential 'humiliation Ior the Eurozone,
with oIIicials at the ECB, among others, strongly opposed.46 In late March, however, the debate
in Europe appeared to shiIt, with the door slowly opening Ior possible IMF involvement as a
number oI member states came to Iavor a twin-track approach combining Eurozone and IMF
Iinancial assistance.

In the end, IMF involvement was reportedly a key condition oI German Chancellor Merkel`s
willingness to provide Iinancial assistance to Greece. Some argue that the policy reIorms
(conditionality) attached to an IMF loan would lend additional impetus to reIorm and provide
both the Greek government and the EU with an outside scapegoat Ior pushing through politically
unpopular reIorms. The EU would also make policy reIorms a condition oI loans, but the IMF is
seen as more independent than the EU and has more experience in resolving debt crises than the
EU.
EU Member States

Despite the enactment oI the Eurozone-IMF assistance package Ior Greece, investor concerns
about the sustainability oI Eurozone debt deepened during the Iirst week oI May 2010. Driven
down by such Iears, global stock markets plunged sharply on May 6, 2010, and the euro Iell to a
15-month low against the dollar. Seeking to head oII the possibility oI contagion to countries
such
as Portugal and Spain, EU Iinance ministers agreed to a broader 500 billion (about $686 billion)
'European Financial Stabilization Mechanism on May 9, 2010. Some analysts assert that such a
bold, large-scale move had become an urgent imperative Ior the EU in order to break the
momentum oI a gathering European Iinancial crisis. Investors reacted positively to the
announcement oI the new agreement, with global stock markets rebounding on May 10, 2010, to
re-gain the sharp losses oI the week beIore.
The bulk oI the European Financial Stabilization Mechanism package consists oI a 'Special
Purpose Vehicle under which Eurozone countries could make available bilateral loans and
government-backed loan guarantees totaling up to 440 billion (about $560 billion) to stabilize
the euro area. The agreement, which expires aIter three years, requires parliamentary ratiIication
in some Eurozone countries. The mechanism additionally allows the European Commission to
raise money on capital markets and loan up to 60 billion (about $76 billion) to Eurozone states.
Previously, such a procedure could only be applied to non-Eurozone members oI the EU, and
was
used aIter the global Iinancial crisis to improve the balance-oI-payments situations oI Latvia,
Hungary, and Romania. Lastly, the ECB may take on a more signiIicant new role: iI necessary to
increase market conIidence, the ECB can now buy member state bonds, an activity in which it
has
not previously engaged.

IMF

The European Financial Stabilization Mechanism was announced with the IMF contributing up
to
an additional 220 billion to 250 billion (about $280 billion to $318 billion). This is in line with
the Greece package, where the Eurozone states contributed roughly 2/3 and the IMF 1/3. IMF
Managing Director John Lipsky reportedly later clariIied the news reports about the IMF
contribution to the European Financial Stabilization Mechanism, saying that these pledges were
'illustrative oI the support that the IMF could provide.54 Reportedly, Lipsky reiterated that the
IMF only provides loans to countries that have requested IMF assistance and that Greece is the
only Eurozone country to date that has requested IMF assistance.

Present situation in Greece
The state oI aIIairs in Greece is hot, no doubt about that. This is not new, nor is it directly
correlated to the current Iinancial crisis; rather, we have a scaling oI the tension that is deIinitely
related to the Iact that the Greek oriented capital manages to achieve very high rates oI
proIitability, while there is a very strong political movement. The key Iactors in this
contradiction are the low level oI organization oI the workers and the historical roots oI the
Communist Party in society. This post is the Iirst oI a series that will highlight some key Ieatures
oI the current situation in Greece, starting with the presentation oI the main Irontiers.

At the time oI writing the Iarmers were in the 9th day oI their blockage oI the highways, borders
and other major roads with their tractors, practically paralyzing the road network. Some oI their
claims are against the Common Agricultural Policy and the policies that shrink the income oI
smaller producers to the beneIit oI big companies. This has been an open Irontier Ior years, and
has its own issues.

In the cities, now, there are two Irontiers. The Iirst one concerns education. The students are
preparing their next move, aIter the demonstrations oI December and those supporting the
Palestinians. The main issues concern the Iounding oI private universities (until now
constitutionally Iorbidden), the abolishment oI asylum (so police can enter the universities), the
equalization oI diplomas Irom universities with those Irom private colleges, the breakdown oI
the undergraduate into two cycles (until now 4 years minimum), the imposition oI Iees, the
salaries and the working conditions oI the proIessors, the Iacilities; practically everything.

The events oI December Iollowing the execution oI a 15-year old by a policeman also deserve
some comment. First, they occurred against a background oI already heightened tension due to
very low wages and incomes, strict Iiscal policy, inIlation, persistent unemployment at the
oIIicial rate oI 9 (the real Iigure is at least 14), state terrorism and government corruption
and, most importantly, no perspective Ior improvement; on the contrary, the country was on the
brink oI crisis. So the murder oI the child was the last straw.

Second, several other Iactors were less reported. Another pupil was shot on the 10th, outside his
school, while discussing with other pupils their participation in next day`s demo. The bullet stuck
in his arm and that prevented him Irom dying. On the 22nd, the secretary oI the union oI the
cleaners, a 44-year old woman Irom Bulgaria was murderously attacked with acid in response to
her Iighting stance the previous period. The murderers even Iorced her to drink the acid! During
the time that the cities were on Iire, the police Iorces were beating and arresting 10- to 15-year
old pupils in the morning, while successIully playing an old game with rioters at night.

Finally, big strikes were held, workers demonstrated in the streets with their children and
teachers with their pupils, but the media oI the bourgeoisie ignored them, presenting only
repeated scenes oI destruction, appalling people and discouraging them Irom participating in the
demonstrations.

Which brings us to the third Irontier: that oI the workers. Despite the Iact that the workers are
struggling, there are serious limits to their Iight. In the next post we will discuss the working
movement and the political situation.

Greece economic forecast

The economy is suIIering a serious recession in the context oI the sizeable, but vital, Iiscal
retrenchment. A return to sustained positive growth is projected Ior 2012 as external demand
strengthens, competitiveness improves and the Iar-reaching structural reIorms implemented in
response to the Iiscal crisis start to take hold. Substantial economic slack and rising
unemployment will keep inIlation pressures subdued. The outlook is subject to important, mostly
downside risks.

Adherence to the Iiscal and structural adjustment program, agreed in May 2010 with the
European Union (EU) and the International Monetary Fund (IMF), is indispensible Ior restoring
credibility and market conIidence, long-term public debt sustainability and competitiveness.
Success depends crucially on rigorous expenditure control and Iurther progress in Iighting tax
evasion, combined with comprehensive reIorms to address chronic rigidities in Iiscal
management, and in labour and product markets.

Are the Domestic Reforms and Eurozone/IMF Package for Greece Enough?

Some economists Iear that Greece`s Iiscal austerity plan, which entails cutting budget deIicits by
9 oI GDP in Iour years, is too ambitious and will be politically diIIicult to implement. As a
result, some economists suggest that the Greek government could still deIault on or, considered
more plausible, restructure its debt. In Iact, some observers regret that debt restructuring was not
included in the IMF package in order to provide a more orderly debt workout. Restructuring
would also push some oI costs oI the crisis onto private banks that, it is argued, engaged in
'reckless lending to Greece. However, a deIault or debt restructuring could accelerate the
contagion oI the crisis to other Eurozone countries, as well as hinder Greece`s ability to regain
access to capital markets. In addition, even iI Greece`s government stopped servicing its debt, it
would still need substantial Iiscal austerity measures to address the government deIicit unrelated
to debt payments.
This has led some economists to argue that Greek Iiscal austerity should be oIIset by more
accommodating monetary policy by the ECB. This seems unlikely in light oI recent reported
comments by the President oI the ECB, Jean-Claude Trichet, on the ECB`s commitment to price
stability.
As a result, some economists have suggested that Greece should or may leave the Eurozone.
This would likely require abandoning the euro, issuing a national currency, and allowing that
currency to depreciate against the euro. The Greek government would also probably have to put
restrictions on bank withdrawals to prevent a run on the banks during the transition Irom the euro
to a national currency. It is thought that a new national currency depreciated against the euro
would spur export-led growth in Greece and oIIset the contractionary eIIects oI austerity. Since
Greece`s debt is denominated in euros, however, leaving the Eurozone in Iavor oI a depreciated
national currency would raise the value oI Greece`s debt in terms oI national currency and put
pressure on other vulnerable European countries. Additionally, some argue that a Greek
departure
Irom the Eurozone would be economically catastrophic, creating the 'mother oI all Iinancial
crises, and have serious ramiIications Ior political relations among the European states and
Iuture European integration.














Bibliography:
:ropean conomy - 7/2009 conomic Crisis in :rope. Ca:ses, Conseq:ences and Responses
L:xembo:rg. Office for Official P:blications of the :ropean Comm:nities
http.//www.bis.org/statistics/consstats.htm.
conomic Ties. Framework, Scope, and
Magnit:de, by William H. Cooper.
Wolfgang Mncha:, 'Why the :ro will Contin:e to Weaken,` Financial Times, March 7, 2010