Debt Quicksand Europe Fights the Growing Currency Crisis

By Carlo Angerer, and

Greece: Tough Measures

Violence on Syntagma Square in Athens: The people are not happy.

Violence on Syntagma Square in Athens: The people are not happy.

How did the crisis start?

Greece was the first EU nation to stumble after the global financial and economic crisis of 2008-2009. It had to be protected in 2010 with a multi-billion-euro safety package. The catalyst for the crisis was gigantic government debt, which towers over the rest of Europe's at 160 percent of the nation's gross domestic product. The country lost investor confidence and has managed to borrow money only at horrendous interest.

Behind the debts lie deep structural problems. Compared to other euro-zone members, Greece's economy was never particularly strong. When it joined the euro zone, moreover, borrowing became less expensive, and cheap loans heated up domestic consumption. Since Greece exported so little to start with, a large trade deficit developed -- a huge imbalance between outgoing payments and incoming goods.

What has been achieved?

Greece has steered a severe course of government savings since the crisis began. Several multi-billion euro austerity packages have lowered the nation's new indebtedness from about 15 percent in 2009 to 9.5 percent in 2011. Thanks to a new statistics office, these numbers are now considered realistic. In the past Greece regularly spruced up data about its state finances.

George Papandreou's Socialist government has tightened the belts of long-privileged state officials, and the whole population will face higher taxes. The rich will also have to reach for their wallets. Greece's notoriously inefficient tax officials will do more to find millionaires who are trying to hide income.

What are the obstacles?

Greece's largest problem hasn't changed since the start of the crisis: Government debt is still at record levels and promises to rise. One reason is the enormous interest due on older debt, but another is a downturn in the Greek economy. The outlook for significant growth is dim, so calls for long-term economic stimulus have risen. The Athens government will set its hopes on privatization, which alone would make up €50 billion of the latest €78 billion savings package. But it's doubtful whether state assets in their current condition can be sold at reasonable prices.

Political protest against further cutbacks has proved to be a growing problem. Some opposition has taken to the streets, where many thousands of protesters have mobilized recently. But Papandreou's chief political opponent, Antonis Samaris, and his conservative party Nea Dimokratia, have staunchly refused to support to the government's austerity packages -- though they bear as much of the blame for the nation's current misery as Papandreou's Socialists.

In light of the changing situation, a restructuring of Greek debt seems ever more likely. In that case creditors would be asked to prolong their loans or reduce their claims. A more radical debt-reduction plan now has prominent supporters like Martin Blessing, head of Commerzbank. The problem with all restructuring models is that ratings agencies intend to view them as default by another name. In that event not only Greek bond issues, but also bonds in the other PIIGS nations will be more difficult to sell.


Economic Indicators 2008 2009 2010 2011 2012**
Debt (in percent)* 110.7 127.1 142.8 157.7 166.1
Economic Growth (in percent) 1 -2 -4.5 -3.5 1.1
Budget Deficit (in percent)* -9.8 -15.4 -10.5 -9.5 -9.3
Unemployment (in percent) 7.7 9.5 12.6 15.2 15.3

*Percent of annual economic output, **Forecast
Source: European Commission; As of May, 2011

The Crisis Countries Compared


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