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Mediterranean Mayhem: Understanding The Greek Debt Crisis

International finance may be Greek to you, but national bankruptcies are surprisingly similar to personal ones. To understand the current financial crisis in Greece, it helps to think of the Greek nation as an individual caught in a cycle of debt:

Of Autos and Austerity

Imagine a person who falls into debt. The bank gets tired of her making minimum payments and repossesses her car. Without a car, she cannot work, forcing her to borrow even more money. In seeking compensation for their loans, the bank has condemned her to a cycle of increasing debt.

This situation illustrates austerity’s effect on Greece. When it first became clear that Greece was in serious debt, the other European countries agreed to bail the country out. In return, however, Greece had to raise taxes and reduce government spending. Higher tax rates and spending, however, led to lower economic growth, and a sluggish economy. Greek tax revenues thus fell, forcing the country to borrow even more money.

Besides austerity, Greece has also suffered from being part of the Eurozone, a union of 19 countries that use the same currency. Ordinarily, when a country falls into debt and depression, it can devalue its currency. This makes the country’s exports cheaper relative to other countries’ goods, increasing sales and jump-starting economic growth. Because Greece is in the Eurozone, however, it does not have this option, giving it few opportunities to generate more wealth.

Future Forecasts

Despite this difficult situation, Greece still has several options to escape its financial woes. One option would be for Greece to negotiate longer deadlines to repay its debt. Greece owes two-thirds of its debt to other Eurozone countries, and must repay it by 2023. If it can convince the Eurozone to extend the deadline to 2050, its economy will have time to stabilize, begin growing again, and generate enough money to repay the debt. This will not affect the debts that Greece owes to the IMF, however, and it will only work if other countries are willing to wait to get their money back.

Another, more radical solution is for Greece to leave the Eurozone. This would allow it to establish and devalue its own currency, which may generate long-term economic growth. In the short term, however, exiting the Eurozone will paralyze the Greek economy, lead to higher prices on imports, and substantially lower Greeks’ standard of living. For this reason, most Greek economists consider this strategy a last resort at best.

Greece’s choices may be limited, but if you accrue more debt that you can handle, Morgan Lawyers can help. Contact us today to learn more about your options for dealing with debt.

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