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Global Snapshot: The Greece Debacle



October 28, 2011 – Comments (4)

The Cause

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.


The Effect


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?

4 Comments – Post Your Own

#1) On October 29, 2011 at 8:15 AM, MoneyWorksforMe (< 20) wrote:

Not a snowball's chance in hell...The country is insolvent...This is not a liquidity problem but an issue of solvency; and as such, providing liquidity to an entity that is fundamentally broke, is akin to throwing it into a black hole. 

When Greece rapidly goes through $180 bill, all the fears that have been momentarily subdued will return with even greater vigor as the prospects for another bailout will be greatly reduced, and accepting the reality that throwing money at the problem is insufficient, will elicit panic... 

Greece, Italy and Spain, must dramatically restructure their economies. That is the only long term solution. 

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#2) On October 29, 2011 at 10:51 AM, dbjella (< 20) wrote:

Where does the IMF get their money?  And what is the currency in?  Dollars?  Trinkets?  Gold? 

Who runs the IMF?

I suppose I could look it up on the google, but someone far smarter has an answer :) 

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#3) On October 29, 2011 at 3:23 PM, XXX222 (< 20) wrote:

Nope, but as long as the punch is still spiked the party goes on.

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#4) On October 29, 2011 at 8:59 PM, jwebbzor (< 20) wrote:

Great concise blog.

Like the other commentors, I don't believe this will solve the problem. However, it will put off the inevitable default/restructuring of the struggling PIGS.

As long as it gets us through 2012 I'll be happy. I'm tired of hearing fear-mongering about how 2012 will be an economic/societal apocolypse.

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