A year or so after the panic that gripped Europe in with bailing out Greece’s sovereign debt, the European Union is now facing an additional loan need of $4 billion to keep the Greek country going. The EU has decided that the Baltic country has met its previous loan requirements in changing the country and its financial path. As a result, it qualifies for additional help. However, this staged approval is a bit of a pretext; the EU needs Greece to succeed. It can’t afford for the country to fail and fall out of the EU membership. For all the traders, this is a really great example of what they must avoid as they make investments or use any of the Trading Platforms there, this is going to help them with such disasters.
The optimists among the EU experts expect that Greece will recover in 2014. This may be a fairly optimistic hope versus estimate. The country is reeling with a 27 percent unemployment, one factor that drags on any kind of national recovery. Further, the country’s GDP has been in contraction for six years straight, with the 2013 first quarter following the same pattern. So again, no recovery has yet established itself. More realistic analysts expect Greece to recover in 2021 when its national debt drops to 120 percent of GDP. In the meantime, the Greeks are running a country on borrowed money, with 10 billion Euros still left in the tank prior to the next 4 billion Euro loan being approved.
What Greece Has to Gain
Noted economists don’t pay much attention to the latest tabloids. Instead, they look at clear facts, sound probability, and patterns from the past that resembles similar situations. When it comes to Greece, the scenario of sovereign debt and financial problems has played out before. However, it was clear on the other side of the world from Europe: Argentina in the early 2000s.
Similar to the South American country, Greece is under the onus of a debt burden that is controlled and dictated by institutions outside the country. Argentina struggled under billions of dollars in debt to the U.S. and the International Money Fund until its government finally decided to simply ignore its debtors. The effect was similar to a homeowner walking away from a home underwater with its mortgage. However, the lenders had no house to sell for recovery after the fact. By kicking off the debt burden and delinking its currency from the U.S. dollar, Argentina suffered some immediate ramifications. However, those were minor compared to the South American country’s ability to function again, keeping its production at home versus paying it to loan accounts.
Greece is, in effect, in the same boat as the European Union. The EU demands austerity measures and strict, harsh financial measures to pay back loans backing up the Greek government. However, if the European country decides to walk away from its debt, very little bad happens to the Greeks. The EU banks, on the other hand, lose billions of Euros that won’t be repaid if Greece defaults and steps out of the Union. Greece is not in complete default mind mode yet, but the risk for the EU is real (http://www.bbc.co.uk/news/business-13842763).
Potential Damage to the EU
The EU was established in 1992 after a long period of work starting with the idea after World War II. Once it was put into operation, with France and Germany being the original linchpins, new members qualified by changing their national financial structure to meet specific EU criteria. Those that met the standards were then joined with other EU members, sharing a common currency of the Euro is one of the most visible changes.
In 2008, the EU faced its first signs and challenges of the global crisis, putting together a 200 billion Euro package to offset losses in securities and financial markets. However, the EU was still taking on new members at the same time, straining its resources even more. Many of the new members already have inherent weaknesses that will take years to solidify and stabilize. These issues existed before the EU also had to do deal with the global crisis.
Greece first became an issue when it announced a 300 billion Euro debt problem, far more than anything any other European country had realized prior (http://news.bbc.co.uk/2/hi/business/8406665.stm). At the same time, its debt was rising, already at 113 percent of its GDP. By April 2010 the EU had to put on table 30 billion Euros in loans to the country. By May of the same year, the bailout had jumped to 110 billion Euros.
In 2011, the next year, another major bailout was funded, at 109 billion Euros. At the same time, Greece was running its major problems being able to meet its budget targets and still qualify for lending. Eventually, by March 2012 the crisis was over, with many private banks taking losses on the country, and Greece receiving a stable platform to stand on financially. In doing so, Greece took on another plan to cut 325 billion Euros from its spending, much to the bitterness of the Greek people. This solution was good until May 2012 when the country’s leadership was thrown out and the bailout deal rejected. However, the new election produced a government that was still committed to budget cuts, so the financing deal stayed in place (http://www.bbc.co.uk/news/business-13856580).
Today, the damage risk to the EU represents a total loss of almost 250 billion Euros in bailout loans, not to mention all the financial support the country received prior to that point. Greece has to be supported because to let it go means a serious blunder for the EU. It could also trigger a cascade of members separating from the EU to isolate themselves from the financial losses that would occur as a result. The EU most likely wouldn’t survive such an event; Germany and France would have to firewall themselves from the losses and the remainder would run in separate directions.