February 21, 2012
The Greek government-debt crisis is one of a number of current European sovereign-debt crises.
Beginning in late 2009, fears of a sovereign debt crisis developed among investors concerning Greece’s ability to meet its debt obligations due to strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the eurozone, most importantly Germany.
The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets. On 2 May 2010, the eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on the implementation of austerity measures. In October 2011, Eurozone leaders agreed to offer a second €130 billion bailout loan for Greece, conditional not only the implementation of another austerity package, but also that all private creditors holding Greek government bonds should sign a deal accepting a 53.5% facevalue loss. This proposed restructure of all Greek public debt held by private creditors, which constituted a 58% share of the total Greek public debt, would according to the bailout plan reduce the overall public debt burden with roughly €110 billion. A debt relief equal to a lowering of the debt-to-GDP ratio from a forecasted 198% in 2012 down to roughly 160% in 2012, with the lower interest payments in subsequent years combined with the agreed fiscal consolidation of the public budget, expected to give a further debt decline to a more sustainable level at 120.5% of GDP by 2020.
The second bailout deal was finally ratified by all parties in February 2012, and became active one month later, after the last condition regarding a successful debt restructure of all Greek government bonds, had also been met. The latest bailout plan is to cover all Greek financial needs from 2012-2014. If Greece can comply with all economic targets outlined in the bailout plan, the country is set to be self-financed with yearly governmental budget surpluses from 2015-2020, followed by a possible return in 2020 to start using the private capital markets for debt refinance and the place to establish new debt to cover its future financial needs.
In mid-May 2012 the crisis and impossibility to form a new coalition government after elections, led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as “Grexit” and started to affect international market behaviour. A second election in mid-June, ended with the formation of a new government supporting a continued adherence to the main principles outlined by the signed bailout plan. The new government however immediately asked its creditors to be granted 2 extra years, extending the deadline from 2015 to 2017, before being required for the first time in more than 35 years to start posting annual accounts with a public budget surplus instead of a deficit. The creditors are currently examining this request in the light of an updated and recalculated sustainability analysis of the Greek economy, and are expected to publish a report with their findings by the end of August 2012. If Greece is granted extra years to restore their fiscal balance, this will either require creditors to: 1) fund Greece with a new extra third bailout loan, or 2) launch a new debt restructure to decrease the debt repayment (i.e., by imposing additional haircuts on governmental bonds, or by offering Greece to pay some lower interest rates).
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