In Brief: Examining the Eurozone Crisis
23 November 2011
When the financial crisis hit in 2008, Greece began to feel the consequences of a shrinking economy and soon realised they could not afford to repay their debt.In May 2010, as Greece edged closer and closer to default, the European Commission, the International Monetary Fund, and the European Central Bank agreed to offer Greece 110 billion euros – paid out over three years - providing Greece slashed their public spending and raised taxes.
2. So, why did Greece need more money?
The original bailout was to help Greece restore their economy and reduce their cost of borrowing commercially. However, Greece still cannot afford to borrow commercially and has outstanding debt as the original bail out did not pay-off.
3. Will the latest bailout stop the problem from spreading?
Like the original bailout, the purpose of the latest Greece bailout is to help stabilise Greece’s economy and prevent the crisis spreading to other European countries.
As part of the latest settlement, to further aid recovery, any private bank holding Greek debt, have agreed a loss, or “haircut” of 50 per cent in transforming their existing bonds into new loans.
4. If Greece defaulted, what could happen?
It could prove exceptionally difficult for Europe’s banks. Many banks have money owed to them by Greece and a "disorderly" default could mean a substantial amount of the debt will never be paid back. Bank aid could become near enough impossible, unemployment levels would increase and creditor countries will be faced with large losses -meaning exports and imports would dramatically decrease. If Greece defaults, it could cause other unstable countries like Ireland and Portugal to follow.
5. How could a default by Greece affect the UK?
If Greece defaulted, the indirect effect on the UK could prove immense. Compared to other banks in Europe, it is believed that UK banks hold a fairly small amount of Greek sovereign debt, however the UK's exposure to Irish debt could be made much worse following the trouble surrounding Greece.
To give Greece further bailout funds or to let it default – this has proven to be a passionate debate. The extent of Greece’s deficit is extensive yet the leaders in Europe have agreed to reduce their debt by providing Greece with a new €100bn bailout early next year.
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