Causes of The Greek Financial Crisis

What is wrong with Greece?

Its Government failed to reform the economy and reduce public spending, including the huge military budget, when it joined the eurozone. Greece entered the recession ill equipped to cope. Government debt was bigger than the economy last year and is forecast to exceed 120 per cent of GDP this year.


Why is Greece troubling the financial markets?

It needs to borrow €50 billion this year to pay its bills but its credit rating has been cut to just above “junk” level so it must pay much higher interest on its borrowings than other eurozone states. On April 20 it has to pay back €8 billion to bondholders.


Why is that a problem for the euro?

Greece is heavily in breach of eurozone rules, the Stability and Growth Pact, requiring members to keep their deficit below 3 per cent of GDP. Greece’s deficit is 12.7 per cent and the Government lied about the true state of its finances. Drastic cuts in public spending and tax rises are now necessary to bring the deficit down by 2012.


So that’s OK, then . . . ?

Not necessarily. The financial markets are betting that Greece won’t make it and investors have turned their attention to other states on the eurozone periphery such as Spain, Portugal and Ireland, which are also burdened by big deficits. A rescue by the European Central Bank, the European Union, the International Monetary Fund or all three would constitute a big loss of credibility and cause the euro to fall against major currencies.


Does that mean the eurozone might fall apart?

That is highly improbable. There is no legal mechanism for ejecting a state that has joined the euro.


So no chance of a week in Crete on cheap drachmas?

Unlikely. If Greece quit the euro it would be courting disaster.


Will Greece get a bailout?

The markets reckon so. The country may be forced to swallow some loss of sovereignty over financial affairs.


Will we have to pay for this?

Britain is not part of the eurozone. In theory, we are not involved — but British taxpayers already pay for Greece through EU structural funds.