Greek Monetary Collapse & Crisis – Will the Country Default?

The Amateur Economist Greece Exit
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Greece has been at the top of most financial reports lately. Most reports concern whether Greece will either receive more monies from the IMF (or EU) and/or stay in the European Union (the “EU”).

Here are some of the details of Greek government’s financial condition and why the country needs monetary assistance;

  • This is not Greece’s first financial crisis or bailout. The first was 5 years ago in 2010 when the EU and IMF loaned Greece of $146 Billion US. These loan monies paid off substantially all commercial and bank lenders that had previously loaned Greece money. These are the loans being discussed and negotiated. The graph below shows the increase in government debt at the start of the recession in 2007. There is a slight drop after the 2010 – 2012 debt exchange deal due to some debt pay-downs and write-offs. 
  • Greek government debt is higher today than before the 2010 – 12 bailout and write-downs. This is mainly  due to the Greek government continuing to run government budgetary deficits. Current debt stands at 180% of GDP or over $350 billion US.
  • Holders of most of the Greek debt are the EU and IMF, though there remains some private debt holders. The EU (through the European Financial Stability Facility) is owed the most at $130 billion – or almost 40% of the total debt owed.
  • Interest (and some principal) have been due on a portion of the debt starting in May 2015. These amounts increase beginning in July 2015 and stretch into August 2015. The total due of principal and interest payments is over $20 billion.
  • Greece is estimated to have excess cash reserves of only $1-5 billion to pay these interest and principal payments.
  • Unlike the United States, Greece cannot “print” money to pay its debts. Greece is a member of the EU Euro monetary system and cannot print Euros. An American analogy would be that Greece would be a state which uses the U.S. dollar as its currency. However, in this analogy Greece can run budget deficits although a U.S. state cannot.

Given these unfortunate circumstances, major holders of Greek debt (the EU and the IMF) are demanding that Greece make substantial reforms to its economic system, government pensions, taxation collection and other monetary reforms before they delay any current and future interest and debt payments. However,the newly elected Greek government is currently rejecting most of these demands.

Should Greece not make the interest and debt payments on a timely basis, the debt will be in default. A default could result in the country being forced out of the EU, though not all economists and politicians agree on this point. Since a default of this magnitude has never happened in the EU before, there is no historical precedent one way or another.

More than likely, since it’s in most countries best interest to keep the EU together and unified, especially the largest member; Germany a compromise will be reached in the next few days or weeks between the debt holders and the government of Greece. The compromise will appear that Greece has agreed to make budgetary concessions and promises of changes. This appearance will be for the people of the EU (mostly Germans) to accept yet another Greek bailout. However, it is highly unlikely that Greece will eventually carry-out whatever requirements as they did not do so (to any great extent) after the last debt restructure in 2010-12.

Ultimately, within the next few years, the EU will be forced to concede that, while having a common currency (the Euro) is a good thing, allowing member countries the budgetary freedom to run their own fiscal affairs may not be. Stay tuned, as these are truly uncharted waters…