By Michael Antuono, International Business Writer
The Greek debt crisis is seemingly seems to be resurfacing, following reports released by the IMF regarding the situation. In 2009, amidst the world’s economic collapse, Greece announced its budget deficit would be 12.9% of GDP. That is nearly four times the amount allowed by the EU. Consequently, rating agencies including Fitch, Moody’s, and Standard & Poor’s lowered Greece’s credit. This raised the cost of future loans, and reduced Greece’s ability to find funds to repay sovereign debt .
Greece then announced austerity measures in an effort to lower their deficit to the 3% allowed by the EU, in an effort to regain confidence. Regardless, they announced a few months later that they were on the verge of default.
The EU and IMF were forced to contribute €240 billion so that Greece could pay interest on its debt and keep their banks solventfunctional. Despite this, the Greek economy continued to worsendeteriorate, and unemployment reached 25%.
Subsequent years were met with more bailout funds and a mountainous pile of debt that Greece could still not repay. Finally, in 2012, bondholders agreed to exchange €77 billion in bonds for debt worth 75% less, after Greece’s debt-to-GDP ratio had reached 175%.This lightened the load on the country, but by no means eliminated the problem.
The IMF has recently released reports showing that Greek debt could be “explosive” in the coming decades if it does not reduce itss burden is not reduced in the near term future.
This problem is compounded by the fact that a decision should be reached by February 20th, the next meeting of eurozone finance ministers, or be delayed until the summer months following the Eeuropean election season.
During these summer months, however, Greece is due to pay back €10.5 billion in loans, a figure that would further cripple the struggling economy.
The IMF has stated, in a baseline scenario, Greece’s debt will amount to 275% of its GDP by 2060, at which point financing costs it will account for 62% of GDP.
Because of this, the IMF has repeatedly called for more extreme measures to reduce the Greek debt load. Extending maturities and slashing rates simply is not enough anymore.
The real solution would be to cut slash the principal amount that Greece owes to creditors, thus allowing them to climb out of the hole they have been in since pre-2009.
While the economics of the solution make sense to the eurozone as a whole, the problems arise politically. European leaders have refused to agree to a deal such as this for the fear of it being wildly unpopular, albeit necessary. In an election season, decisions such as this are shied away from.
If Greece decided to leave the Euro, it could reissue the drachma as its own currency and end the unpopular austerity measures. The government could then more easily hire workers and reduce unemployment, and consequently boost growth. They could then convert their debt into drachmas, print currency, and lower exchange rates.
This would ultimately reduce debt, lower export prices and attract visitors to Greece. While this may sound positive for Greece in the short term, long term effects may be negative.
Plummeting currency values could lead to hyperinflation and wildly expensive imports. This is unsustainable for a country that imports nearly 40% of its food and 80% of its energy.
A version of this article appeared in the Tuesday, February 7th print edition.
Contact Michael at