Q&A: Greece's debt crisis

by Aditya Chakrabortty

Guardian
July 31, 2011

Just how bad is the Greek economy?

Of all the economic horror stories produced since the banking crisis, Greece must be the most frightening. It has easily the worst economy out of all the 16 nations in the eurozone. The country is in its third-straight year of recession, with national income on course to plunge by nearly 5% in 2011 – and to fall further in 2012. Fifty-thousand businesses closed last year, and unemployment has shot up. Over one in six workers are out of a job, and 40% of young people can't get into the labour market. That's not all: George Papandreou's government is more heavily indebted than Silvio Berlusconi's administration in Italy, which is some feat. Ministers in Athens have spent much of the past 18 months unsure whether they will be able to borrow enough from financial markets or other governments even to pay social security cheques and their own civil servants.

How did this happen?

That question has as many answers as Greece has islands. But to keep it simple: soon after getting elected in autumn 2009, the leftwing Pasok government discovered that the public finances had been fiddled: a budget deficit of 3.7% of national income was in fact touching 14%. This would have been bad at any time, let alone in the wake of the near-collapse of the banking system. Big investors who Athens would normally have approached for a loan, in return for a government bond, would only lend at punitive interest rates – or not at all. After much foot-dragging, the European commission, the IMF and the European Central Bank (otherwise known as the troika) agreed in May 2010 to lend Greece €110bn (£96bn). The deal had three big problems. It was far too late; the loan was offered at an interest rate of about 5% – five times the official ECB rate; and the cash came with a series of tough demands on Athens to slash state spending and jack up taxes. Papandreou could barely afford the loan, and his attempts to implement the troika's austerity plans have depressed the economy further and met with ferocious popular opposition, with strikes and huge demonstrations in Athens and elsewhere.

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