Greece’s Latest Bailout

February 23, 2012

INTERNATIONAL DEBT CRISIS: The Euro Zone

Bailouts, riots, austerity. Greece’s looming default has left European leaders grappling to save Greece and the euro from a fiscal crisis threatening to break apart1 the Euro Zone (or countries which share the euro as a common currency). What is the latest bailout, what does it mean, and will it be enough?1

GREECE’S LATEST BAILOUT

The Situation
The Plan
Reactions & Looking Forward

The Situation

As mentioned in detail in our Greece Debt Crisis Fact Sheet, allegations arose a couple of years ago that Greece altered statistics about its spending in order to gain admittance into the Euro Zone (an thus share the Euro as a common currency)2. Eventually, the Greece government revised its numbers, and it came to light that Greece was spending much, much more than it took in. Greece was approaching a fiscal crisis3.

The European Union (EU), European Central Bank (ECB), and International Monetary Fund (IMF) have been collectively managing Greece’s fiscal assistance. Together, these entities make up what is called the Troika4.

In May of 2010, Greece received its first bailout, totaling $158 billion if the country institutes certain austerity measures5. However, that bailout was not enough and Greece’s looming default now threatens the euro6.

The Plan
This new bailout is the second Greece will receive. For $172 billion and the avoidance of collapse, Greece will have to implement further austerity measures.

  • Banks holding Greece’s debt have agreed to take further losses, for a total 75 percent loss on the debt’s face value.
  • The interest rate Greece pays on its debt will be reduced.
  • A firewall will be put in place to protect the Euro Zone from future fiscal issues.
  • Greece will have to cut spending on pharmaceuticals by more than $1.3 billion, cut doctors’ overtime payments by $66 million, cut $396 million from military procurement, and reduce deputy mayors and their staffs to save $40 million.
  • Greece, known for it’s weak tax collection enforcement, will have to step up its efforts.7

Reactions & Looking Forward
After the bailout was announced, European markets remained fearful Greece would be unable to sustain the austerity measures8Forbes. Greece Secures Second Bailout But Default Risk Remains. February 21, 2012. http://www.forbes.com/sites/abrambrown/2012/02/21/a-step-forward-for-greece-bailout-but-eurozone-still-a-risky-place/print/.

In fact, a leaked Troika memo shows that even this bailout may not be enough. Furthermore, measures included in the bailout will make it much more difficult for Greece to obtain new investors in the future.9

Forbes reports the bailout is not tailored to Greece’s needs, but the needs of the banks. The magazine speculates this could be an effort to: “…keep alive the illusion that Greece isn’t going bankrupt, ‘cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction’…”

However, as Forbes also rightly points out, “Greece is indeed going broke… [and the bailout] isn’t actually going to fix Greece: rather it’s an attempt to buy time so that it doesn’t become Germany, France, and the rest of the EU’s problem.”10

In a time of fiscal crisis, Greece is forced to answer to its creditors over its citizens. Washington would do well to learn from Greece. We need to stop spending before it’s too late and get our own fiscal crisis under control.

To view this fact sheet as a .pdf, click here.

  1. New York Times. Europe Agrees on New Bailout to Help Greece Avoid Default. February 20, 2012. http://www.nytimes.com/2012/02/21/world/europe/agreement-close-on-a-bailout-for-greece-european-finance-ministers- say.html?_r=1&pagewanted=print
  2. Domenico Lombardi, The Brookings Institute. Hearing on “The European Debt and Financial Crisis: Origins, Options, and Implications for the U.S. and Global Economy.” September 22, 2011. Pp. 2. http://www.brookings.edu/testimony/2011/0922_european_debt_crisis_lombardi.aspx
  3. Domenico Lombardi, The Brookings Institute. Hearing on “The European Debt and Financial Crisis: Origins, Options, and Implications for the U.S. and Global Economy.” September 22, 2011. Pp. 2. http://www.brookings.edu/testimony/2011/0922_european_debt_crisis_lombardi.aspx
  4. Forbes. Greek Bailout Deal a Farce to Benefit Banks At The Expense of Greece. February 21, 2012. http://www.forbes.com/sites/afontevecchia/2012/02/21/greek-bailout-deal-a-farce-to-benefit-banks-at-the-expense-of-greece/print/
  5. CRS: Greece’s Debt Crisis: Overview, Policy Responses, and Implications. Pp. 6. August 18, 2011. http://fpc.state.gov/documents/organization/171382.pdf
  6. New York Times. Europe Agrees on New Bailout to Help Greece Avoid Default. February 20, 2012. http://www.nytimes.com/2012/02/21/world/europe/agreement-close-on-a-bailout-for-greece-european-finance-ministers- say.html?_r=1&pagewanted=print
  7. New York Times. Europe Agrees on New Bailout to Help Greece Avoid Default. February 20, 2012. http://www.nytimes.com/2012/02/21/world/europe/agreement-close-on-a-bailout-for-greece-european-finance-ministers- say.html?_r=1&pagewanted=print
  8. Forbes. Greece Secures Second Bailout But Default Risk Remains. February 21, 2012. http://www.forbes.com/sites/abrambrown/2012/02/21/a-step-forward-for-greece-bailout-but-eurozone-still-a-risky-place/print/
  9. Fiscal Times. Greek debt nightmare laid bare. February 21, 2012. http://www.ft.com/intl/cms/s/0/b5909e86-5c0f-11e1-841c- 00144feabdc0.html#axzz1mxzrO1dR
  10. Forbes. Greek Bailout Deal a Farce to Benefit Banks At The Expense of Greece. February 21, 2012. http://www.forbes.com/sites/afontevecchia/2012/02/21/greek-bailout-deal-a-farce-to-benefit-banks-at-the-expense-of-greece/print/

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