Greece triggered the European sovereign debt crisis by fudging the convergence data when it successfully sought to join the Euro in the first wave of members. The true figures emerged following a change of government as Greece and the rest of the world was struggling to deal with the worst of the global financial crisis. This was enough to make lenders query Greece’s ability to honour its debt obligations in light of its current account deficit and accumulated public debt. The upshot was that borrowing costs spiralled ever higher, reaching unsustainable levels which forced Greece to seek a bailout from the IMF and EU amid talk of its forced exit from the single currency.
In the end, Greece has needed two bailouts to help stabilise the economy totalling €240 billion. The loans attracted interest, of course, and came with conditions attached which were designed to reform the Greek economy and place it on a sustainable footing. The funds were to be disbursed in tranches, conditional upon satisfactory progress of the reforms as judged by a “troika” of representatives from the EU, the IMF and the ECB. The troika is currently in Greece to determine if conditions have been met for release of the next tranche of funds worth €1 billion.
The reforms demanded by Greece’s creditors have required painful austerity measures in Greece which have been deeply unpopular with the public who blame politicians for the mess that the country has got into. The Troika’s visit has been greeted by a general strike, the 30th such strike since 2010, called over the continuing cuts programme. The Troika has expressed concern that Greece will miss its spending cut target for next year by up to €2.5 billion, potentially requiring further austerity measures to be implemented. German politicians have claimed that Greece will need an additional €10 billion loan to resolve its problems, but the Greek government is reluctant to inflict further austerity measures on its citizens and hotly disputes both contentions.
The Greek government expects that the economy will return to growth next year, ending six years of recession. They believe the shortfall will be €0.5 billion and can be covered by structural reforms and argue that a further loan is not necessary since they expect to be able to return to the money markets in 2014 and can extend the maturity of some Greek debt. Time will tell.