Why is Greece in the news so much?!

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There has been a ton about Greece in the news lately. So obviously I wanted to throw my hat in the ring. The idea here though is to give a little insight on how and why this is happening to Greece and not just to update you on the latest in developments necessarily. There are enough news outlets doing that already.

In order to join the EU of the last decade or so and take advantage of operating under the umbrella of the European Central Bank (ECB) countries have to meet some serious economic standards. A country had to have these indicators on par with EU averages: inflation, GDP, interest rates, unemployment and budget deficit restrictions.  It all started with the Maastricht Treaty signed in 1992 in the Netherlands where the Euro Zone decided to work in conjunction with each other to create economic and political efficiencies. Throughout the 1990’s and early 2000’s Greece worked hard to meet these criteria and had its currency fixed against the euro in 1999. By 2002 Greece was using the euro as its physical currency and had been well on their way to enjoying access to a tremendous amount of debt at exceptionally low costs due to the size of the European Central Bank.

It was over the next few years that Greece would start taking larger and larger amount of debt on and making some poor spending choices with it. In order to pay back the ECB Greece would have to issue its own debt to raise the money to pay back the ECB. How this works is Greece has to offer debt paying a higher interest rate than other financial instruments to attract investors so that the capital to repay the ECB can be raised. Only by the time this was happening, the Greeks and the rest of the international community saw the results of the poor fiscal decisions allowing debt and deficit to creep up and overshadow GDP. Demand can’t be forced so cuts have to be made to try to satisfy the immediate repayments Greece was responsible for. The rub here is that the Greek people didn’t take it lightly when the programs and pensions that were set up for them disappear. So now there is less incentive to work, political unrest, debt that essentially reached junk status and a looming tab to cover. What now then?

Greece is a sovereign nation. What this means is that it can’t go into default and what happens is the debt that they owe gets restructured, renegotiated and reissued. With the help of countries the world over and the IMF an emergency financial package has been put together to help get Greece back on track, and it’s to the tune of about $110B.   

This is a nutshell is how and why Greece ended up where they are today. The reason why it seems to be happening so fast is that their economy is not as deep or as liquid as the US economy so there is less resilience to financial uncertainties. Why this is also a big deal is that in Forex markets this instability in Greece creates uncertainty and extra risk for the euro inherently.  That risk translates to changes in the price of the euro and its purchasing power. So now all over the EU the cost of doing business has increased and their exports are now generating less revenue.  Those increased costs and reduced revenues make it harder for other countries in similar situations to Greece, like Spain and Portugal, to maintain their economic stability. See why it's so important to get Greece back on track now?

Comments

[Melissa Cibelli]

My first reaction to the title was, "Because of their awesome baklava!" But seriously, great post- I can't believe I'm just reading it now. I need a translation of the financial gobbled-y gook (yes, that's the technical term) that I don't quite understand.