Beware of Greeks Bearing Bonds

a) pg. 4
"For most of the 1980s and 1990s, Greek interest rates had run a full 10 percent higher than German ones, as Greeks were regarded as far less likely to repay a loan. There was no consumer credit in Greece: Greeks didn’t have credit cards. Greeks didn’t usually have mortgage loans either. Of course, Greece wanted to be treated, by the financial markets, like a properly functioning Northern European country. In the late 1990s they saw their chance: get rid of their own currency and adopt the euro. To do this they needed to meet certain national targets, to prove that they were capable of good European citizenship—that they would not, in the end, run up debts that other countries in the euro area would be forced to repay. In particular they needed to show budget deficits under 3 percent of their gross domestic product, and inflation running at roughly German levels. In 2000, after a flurry of statistical manipulation, Greece hit the targets. To lower the budget deficit the Greek government moved all sorts of expenses (pensions, defense expenditures) off the books. To lower Greek inflation the government did things like freeze prices for electricity and water and other government-supplied goods, and cut taxes on gas, alcohol, and tobacco. Greek-government statisticians did things like remove (high-priced) tomatoes from the consumer price index on the day inflation was measured."


-I found this passage to be very interesting because it gave a concise description of one of the major reasons that the Greek financial system is falling to pieces. Greece wanted to be treated like a properly functioning economy, but their actions were everything a functioning company shouldn't do. This also reflects badly on the Euro zone because they did not have anybody keeping up with the Greek finances as they went along. If they had done that then Greece might never have started their poor financial practices.


b) Greece has a debt of $1.2 trillion. That is a third of Germany's, the richest European economy, GDP. That debt is four times greater than the annual GDP of Greece. That makes it impossible for Greece to ever pay off her debt. The debt then falls upon the Euro zone members to pay off. Greece's debt along with that of Spain and Italy will lower the value of the Euro in the international market and it could lead to even greater debt in the other parts of Europe.


c) GDP=Consumption + Investment + Government Spending + Exports - Imports
Cuts in government spending would directly lower the GDP and increases in taxes would decrease the amount of spending cash held by the Greek public. Lower spending cash would decrease the levels of consumption which would further lower the GDP.