Camille Van Vyve
18 Apr 2024
Stories of crises and recoveries: the Greek debt crisis
Weakened by the global economic crisis of 2008, Greece finds itself in a very difficult situation with high debt and a high budget deficit, which is contrary to the principles advocated by the European Union of which Greece is a member. A “debt crisis” followed which shook the markets… and very nearly caused the Union to explode.
What is the context?
In 2010, Greece was not only in difficulty, but it was also accused of having concealed its situation in the presentation of its public debt to Europe, which contributed to the aggravation of the crisis. This is no longer just economic; it is also becoming political. The crisis peaks when difficulties threaten to reach Ireland, Portugal and Spain. At that point, Europe has no choice but to put in place a massive rescue plan.
A historic agreement
In mid-May, an agreement was reached with Athens, which obtained 110 billion euros credits from the European Union and the IMF over three years. In return, Greece must apply a series of drastic measures to its economy, which will be closely monitored: slashed salaries in the public service, increase in VAT, strengthening of the flexibility of the labor market... measures which will give rise to strong social protest.
Along with a new Fund
At the same time, the Union is creating the European Financial Stability Fund, initially with a capacity of 440 billion euros, to provide financial assistance to EU countries in economic difficulty. However, this fund will not be ratified and therefore able to operate until December, leaving a lot of uncertainty hanging over the markets.
It's not enough
In the spring of 2011, it seems that these measures will be insufficient: Greece could still default. Tough discussions start between European leaders, some in favor of a restructuring of the Greek debt, others not. What is at stake is not only the rescue of Greece itself, but also of all the banks that finance it.
Markets sink
On July 25, the rating agency Moody's downgrades the rating of Greek debt. On July 27, Standard & Poor's confirms this decision. We are entering a vicious circle where interest rates are rising and with them the already insurmountable debt burden of Greece. On the investor side, there is a crisis of confidence: they fear being called upon in the event of debt restructuring and that the Stability Fund is neither sufficiently competent nor in a position to react if other large countries should be helped.
The ECB takes action
To counter the fall in the markets, the European Central Bank is activating its asset buyback program (Securities Markets Programme) set up in 2010. During the month of August, it is thus buying Greek, Irish and Portuguese debt in order to reinject liquidity into the system and reassure the markets. Later on it will also buy Italian and Spanish debt.
Greek debt restructuring
At the end of October, it was agreed, not without difficulty, that the private banks would abandon more than 50% of the debt they held on Greece. These banks will then have to be recapitalized.
2015: the epilogue
After two years of calm, 2015 was marked by a new tense episode with the arrival of SYRIZA in the Greek government, elected on a program very hostile to the reforms suggested by the European authorities. After a semester of negotiations, tensions are such that Greece's exit from the euro zone is being considered. The government of Alexis Tsípras organizes a referendum on July 5, 2015 on the acceptance or not of the plan proposed by the creditors which ends with a "no". Nevertheless, a similar plan is finally accepted in the following days, then approved by the Greek parliament.
A storm in a glass of water?
Although having caused a lot of ink to flow given the political stakes, the Greek debt crisis ultimately had a fairly limited impact on the markets. In 2010, between the beginning of April and the end of June, the markets fell by around 15%. By mid-October, they had already recovered to their pre-crisis level. In 2011, the decline is of similar magnitude, but the recovery will take a year and a half. In 2015, the equity market remained stable, the bond market lost 5% and took a year to recover. Between 2010 and 2015, global markets rose by 45%, boosted by the accommodative policies of central banks initiated after the 2008 crisis and significantly strengthened in Europe following the Greek setbacks.
Debt vs bubble, the vicious circle
Unlike bubbles that eventually burst, public debt problems are generally more complicated to overcome, leading the country concerned into a vicious circle from which it is difficult to escape. Because when a country is over-indebted, it must implement austerity policies. In doing so, it depresses its economic activity. If its activity is depressed, it risks recession. And in the event of a recession, solving the debt problem becomes almost impossible.
Morality: diversify!
Although having finally affected almost all of Europe, the Greek debt crisis confirms the absolute need to diversify one's portfolio, both in terms of geography and in terms of asset classes. Investors exposed to the global market will ultimately not have suffered so much from this crisis… In the end, they will even have largely benefited from the unconventional policies carried out at that time by the Fed and the ECB, which strongly stimulated the global economy.
Read other episodes in this series about market crashes and recoveries : the tulip crisis, Black Monday, the Gulf War