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1. Could Grexit be just around the corner? The European Union
is on the verge of losing its first member
2. For the last 6 years, Greece has been a country burdened
with bad debt and the threat of default on loans that will take
more than a few generations to pay back. During that time, the
economy has failed to improve, and again Greece is potentially on
the verge of defaulting on its loan obligations, and leaving the
European Union.
3. Two years ago, the threat of a Greek Exit from the EU
(referred to as Grexit), sent the stock markets into a mild panic.
Volatility increased and investors were jittery. Any minor news
headlines triggered investors to sell their shares in fear that
another Global Financial Crisis (GFC) would send markets
plummeting. This time around, investors are complacent. Why?
4. In 2009, Greeces international credit rating was downgraded
as it was deemed the government would default on its ballooning
debt. This resulted in severe spending cuts that the economy has
simply not recovered from. Greece wasnt the first country to
succumb to a debt crisis, however. In fact, over the last 100
years, there have been no less than 83 countries who have defaulted
on their economic debt or required debt restructuring. And were not
talking countries that are so small they barely have a government
to run them.
5. Countries such as China (1921, 1932, 1939), Germany (1932,
1939, 1948), Brazil (too many times to mention, but more recently
in 1990), Russia, Sweden, Turkey, Poland, and the list goes on. Of
course, most of these examples revolved around global wars or
following conflicts.
6. Why does a country create debt? The simple answer is to fund
government operations and expansion. The revenue generated
internally within the countrys economy may not be sufficient for it
to maintain a standard of living, or even grow.
7. Therefore, the country raises capital either through
internal debt or external debt. Both might be through issuing Bonds
or Securities or even selling off Assets, or it might be through
international organizations such as the World Bank or International
Monetary Fund (IMF).
8. Citizens of a country have expectations that the government
will support the community and provide an environment that is safe
and prosperous. Taxes and other revenue streams will fund most of
this, but if there is an economic downturn and the government does
not have the means to fund continued growth, then they will look
towards other means to raise capital to assist in helping the
economy.
9. Much of the debt is held with the countrys very own Central
Bank. The Central Bank is a separate, independent body to the
government. It is usually privately owned and operated, in most
cases by banks and bankers.
10. So what ends up happening is that when a government borrows
from their central bank, it will have to pay interest on the loan.
The Central Bank is not going to Risk lending money to a government
without having a reward. And just like your home loan or car loan,
the Central Bank would prefer that you never pay it off but
continue paying interest as it is how they make their money.
11. For most countries, they are constantly paying interest
that is compounding on itself and the debt is continually getting
bigger. Until such time as the government cannot actually pay the
interest on the debt, and they default. Basically, the country
becomes bankrupt.
12. Cant pay your debt? Bailout! In 2010, Greece was on the
verge of defaulting on their debt repayments. Even after reducing
spending, the threat of default was imminent. Eurozone countries,
the IMF and ECB (European Central Bank), referred to as the Troika,
approved a $145 billion USD rescue package. To date, the bailout
total has amassed to 240 billion Euros.
13. Further spending cuts occurred. Referred to as Austerity
Measures, the government was spending less and less, but citizens
were struggling more and more. Unemployment skyrocketed and
protests lead to clashes in the streets. Basically, the economy
remained in trouble.
14. By 2011, the Troika wanted more budget cuts but Greece
needed more financial support. They received 109billion Euros
through the European Financial Stability Facility, but it did
little to help the economy. At this point, the country is merely
fighting off the wolves.
15. And so it has been over the last 6 years. Greece negotiates
bailout funding but the economy fails to find any traction. Some
argue that it is the mindset of the Greek population that needs to
change (early retirements and being supported by government
pensions, tax dodging, government spending). But economic default
is not new, and it will be something the world will continue to see
in the future as it is how our economies are run.
16. Next Deadline looming On June 5, the Greek government is
scheduled to repay 300 million Euros to the IMF. This is the first
of 4 repayments that total $1.76 billion. Economists expect that
Greece has the ability to pay this first installment, but they
might struggle with the remaining repayments.
17. The global stock markets are certainly not fearing default.
Two years ago this situation resulted in the markets capitulating
and retracing, causing volatility to increase sharply as fear of a
defaulting Greece could lead to an exit from the EU. IMF president
Christine Lagarde was quoted as saying on Thursday 28th May that a
Greek Exit from the EU was a potential. Doomsayers predict that a
Grexit would be the beginning of the end for the EU, but leading
economists are not so sure.
18. An exit of Greece from the EU would have minimal impact on
most of the EU. It is the Banking system that would feel the brunt
with much of the Greek debt owned by Central Banks and the IMF.
Indirectly, the impact would be felt by the larger banking
institutions in Germany and France.
19. Can Europe afford Greece defaulting on their loans? There
is a real case for the default having an economic impact on Europe.
Less money in the system, less ability to lend to more stable
countries, and subsequently, a long struggle to recover.
20. But we have seen America thrive post-GFC, and Japan has
continued to function as one of the largest economies in the world
despite having one of the largest Debt to GDP out of all developed
nations. More recently, we have also seen countries such as Ireland
and Iceland, two of the most recent debt defaulting nations,
recover and prosper.
21. News headlines might scream doom and gloom for world
economics. But in the end, major changes will need to occur for
Greece to start on the road to recovery. Either as the mindset of
its people, or as a nation that plays the bankruptcy card and
starts all over again.
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