Question

The Greek Crisis: Tragedy or Opportunity Case Objectives Greece suffered from the highest debt to GDP ratio in Europe and chronic budget deficit. A new Government was formed following a general election in October 2009, revealed that previous deficit estimates for the year had been optimistic, and announced that they were over 15% of GDP, more than twice previously claimed. The interest rate on newly issued Greek sovereign bonds increased dramatically over concerns by market participants that the country might not be able to repay its debt in full. By May of 2010, as the interest on the two year notes reached 19%. Greece had effectively lost access to the capital market and the ability to refinance its debt. With over 20 billion euro coming due within a few weeks, it faced the very real possibility of having to default by a country of the European Monetary Union since the introduction of the euro in 1999. And there were profound motives to avoid Suggested Questions 1. How did Greece get into this difficult situation? a. Was the fiscal crisis unequivocally Greece's fault? Was it irresponsible, dishonest? Were the cause's structural/political/cultural? b. Was Greece assuming it would be bailed out? c. Could you have seen this crisis coming from the data? Was it inevitable? d. Was the crisis fault of the euro? e. Was it wise to allow Lareece to borrow at such cheap rates after joining the euro? f. Why did the German and the French banks lend so much? 8. Why did it take so long on a rescue of an economy that is only 2.6% of the Eurozone? h. Was it the fault of the markets? Were they overoptimistic in marking the spreads down so much so fast? Are they over pessimistic now? 2. Exactly one year after the package was announced, the 10 year GGB could be bought for 50% of par, yielding 15.3% in euros. That is a yield to maturity of over 30% in euros would you have invested in it knowing what you knew at that point in time? 3. Does the Greek crisis spell doom for the future of the euro and the euro area?

Answer 1

a. Yes it was Greece government fault for taking up more debt then the revenue from taxes.

b. By taking up such a step we can consider that Greece was assuming it will bailed out.

c. Yes it is quiet clear from the data. As the government brought more debt than the revenue of the tax in the crisis time it can be expected that this will be the result.

d. Yes Euro was also one of the reason as if it wasn't the part it would have boosted the economy.

e. It wasn't the wise decision as borrowing more than the revenue of taxes will lead to instability in the country as the taxes will get high and burden common people above that Greece is a poor nation also.