Global Snapshot: The Greece Debacle
Greece has used complex currency and derivative structures to circumvent Maastricht Treaty which limited public debt and spending. It also borrowed heavily from creditors and spent huge amounts of capital over the past few years, an unsustainable system of borrowing and cheap lending that collapsed like a house of cards once the global economic downturn and credit freeze occurred.
Greek economy is in shambles right now. It is $490 billion dollars in debt, or 160% of GDP. Its credit rating has been downgraded to the status of “junk,” creating further problems for Greece and its ability to borrow money The EU, mindful of the disastrous repercussions of a potential Greek default, has tried to bail out Greece with $200+ billion dollars Greece's economy is expected to shrink 5.5% this year. Greek's crisis has been mirrored by other EuroZone countries, just not to its extent: The PIGS (Portugal, Italy, Greece, and Spain) are the main struggling economies in the EuroZone.
The Potential Solution
Yesterday, a deal was reached among European leaders to combat the sovereign debt crisis. According to Yahoo! Finance, here are the main details:
The European Financial Stability Facility (EFSF) — aka "the bailout fund" — will increase from roughly $600 billion to $1.4 trillion and will be used to help create a firewall around the EU's most troubled countries, such as Greece, Spain and Italy.
China and the IMF could help raise money for that bailout fund.
Private bondholders of Greek debt have agreed to 50% haircuts, which will reduce the country's debt burden from 160% of gross domestic product to 120% by 2020.
Greece will receive $180 billion in fresh aid.
Recapitalize the banks with a 9% reserve requirement by June 2009. Estimates show this will cost roughly $147 billion.
Do you guys think this will be enough to not only combat the Greek crisis but the entire EuroZone sovereign debt crisis?