With a mounting crisis in the eurozone, heads of government met in an emergency meeting in Brussels on 21 July.
The task was a massive one: how to tackle Greece’s growing debt crisis and stave off default; how to protect other highly indebted countries which have already had to seek emergency bailouts, namely Ireland and Portugal, from falling market confidence and thus rising interest rates, thereby making their debts harder to service; how to prevent speculative pressures extending like a contagion to other highly indebted countries, such as Spain and Italy; how to prevent speculation against the euro and even to prevent its break-up; how to reduce the size of budget deficits at a time of low growth without jeopardising that growth. A problem is that Greece has already adopted the required austerity measures for it to receive a second bailout from the EU agreed at the end of June, and yet its debt burden is likely to rise as growth remains negative.
Eurozone leaders recognised that the stakes were high. Failure could see contagion spread, interest rates soar and perhaps one or more countries leaving the euro. No agreement was not an option. As it turned out, the agreement was more comprehensive than most commentators had expected. Markets reacted positively. Stock markets in Europe and around the world rose and the euro strengthened.
So what was the agreement? Has it solved the Greek and eurozone crises? Will it prevent contagion? Or has it merely put the problem on hold for the time being? Will more fundamental measures have to be put in place, such as much fuller fiscal union, if the eurozone is to function as an effective single currency area? The following is a selection of the hundreds of articles worldwide that have reported on the summit and the agreement.
Articles
Greece thrown lifeline by eurozone leaders BBC News, Chris Morris (22/7/11)
A Marshall plan with ‘haircuts’: The draft agreement Guardian, Chris Morris (21/7/11)
Banks forced to share pain of bailout for Greece Independent, Sean O’Grady and Vanessa Mock (22/7/11)
EU leaders agree €109bn Greek bail-out Financial Times, Peter Spiegel, Quentin Peel, Patrick Jenkins and Richard Milne (21/7/11)
Greece to default as eurozone agrees €159bn bailout The Telegraph, Louise Armitstead and Bruno Waterfield (21/7/11)
Europe steps up to the plate The Telegraph, Ambrose Evans-Pritchard (21/7/11)
Greek bailout boosts global markets Guardian, Julia Kollewe, Ian Traynor and Lisa O’Carroll (22/7/11)
Greek bailout deal: What the experts say Guardian (22/7/11)
Bailed out – again. Eurozone throws Greece €109bn lifeline Guardian, Ian Traynor (22/7/11)
New package for Greece must match last year’s if it is to stave off default Sydney Morning Herald, Malcolm Maiden (22/7/11)
Russian or Belgian roulette? The Economist, Charlemagne’s notebook (21/7/11)
Saving the euro: A bit of breathing space The Economist, Charlemagne’s notebook (22/7/11)
Europe’s ‘safe haven’: corporate bonds Financial Times, Demetrio Salorio (21/7/11)
Summit that saved the euro? Financial Times, John Authers and Vincent Boland (21/7/11)
Greece aid package boosts stock markets BBC News (22/7/11)
Q&A: Greek debt crisis BBC News (22/7/11)
Timeline: The unfolding eurozone crisis BBC News (22/7/11)
Eurozone summit: It may be a solution, but doubts remain Guardian, Larry Elliott (21/7/11)
German taxpayers are being asked to socialise Europe’s debts The Telegraph, Jeremy Warner (22/7/11)
The eurozone is not a nation state Financial Times blogs, Gavyn Davies (20/7/11)
One step back from the abyss BBC News blogs, Stephanie Flanders (22/7/11)
For long-term gain, the EU will have to share the pain Independent, Sean O’Grady (22/7/11)
Greek debt deal ‘not the last word’ BBC Today Progrgamme, Stephanie Flanders and Sir John Gieve (22/7/11)
Questions
- Outline the measures agreed at the eurozone heads of government summit on 21 July.
- Explain what is meant by a ‘haircut’ in the context of debts. What types of haircut were agreed at the summit?
- How big a reduction in Greece’s debt stock will result from the deal? Why may it not be enough?
- Explain how the European Financial Stability Facility (ESFS) works? How will this change as a result of the agreement?
- What vulnerabilities remain in the eurozone?
- What are the arguments for closer fiscal union in the eurozone? Is more required than merely a return to the Stability and Growth Pact?
Today (16/6/11) in Greece, the Prime Minister is trying to form a new government that will help the country tackle its large and growing debts. Austerity measures have been put in place by the Greek government and these cuts and subsequent job losses (unemployment now stands at 15.9%) have resulted in massive riots.
Critics of the eurozone and Greek membership are suggesting that the price Greece has to pay to remain a member might be too high. Billions of euros have already been given to the bankrupt country and yet it seems to have made little difference – more money is now needed, but Finance Ministers have so far been unable to agree on how best to finance another bailout. These concerns have adversely affected financial markets, as investors sell their shares in light of the economic concerns surrounding Greece. The trends in financial markets over recent weeks suggest a growing feeling that Greece may default on its debt.
If an agreement isn’t reached between European leaders and/or Greece doesn’t accept the terms, then it could spell even more trouble and not just for the Greek economy and the eurozone. Banks across Europe have lent money to Greece and if an agreement isn’t reached, then this will mean losses for the private sector. Whilst these losses may be manageable, further trouble may arise due to contagion. Other countries with substantial debts, including Spain, Ireland and Portugal could mean a significant increase in these potential losses.
As the crisis in Greece continues, doubts remain over whether the European leaders even know how to deal with the crisis and this creates a lack of confidence in the markets. Activities over the coming weeks will play a large part in the future of Greece’s eurozone membership, trends in financial markets and the direction of the UK economy. The following articles consider Greece’s debt crisis.
Greece debt crisis sends financial markets reeling BBC News (16/6/11)
Euro slumps vs Swissie, Greece intensifies concern Reuters (16/6/11)
EU and IMF agree Greek debt deal Financial Times, Peter Spiegel (16/6/11)
Greece crisis: Commissioners fear ‘future of Eurozone’ BBC News, Joe Lynam (15/6/11)
Stocks slump as Greece crisis turns violent Bloomberg Business Week, Pan Pylas (15/6/11)
Euro slides as Greek default fears deepen Financial Times, Peter Garnham (16/6/11)
Germany insists all of EU must pay for Greece bailout Guardian, Ian Traynor (15/6/11)
US stocks slump on US, Greek woes Associated Press (16/6/11)
More time to argue about Greece BBC News, Stephanie Flanders (16/6/11)
Greece: Eurozone ministers delay decision on vital loan BBC News (20/6/11)
Greece crisis: Revolution in the offing? BBC News, Gavin Hewitt (19/6/11)
Greece crisis: Not Europe’s Lehman (it could be worse) BBC News, Robert Peston (20/6/11)
Greek debt crisis: eurozone ministers delay decision on €12bn lifeline Guardian, Ian Traynor (20/6/11)
Eurozone must act before Greek crisis leads to global meltdown, IMF warns Guardian, Larry Elliott (20/6/11)
Greece: Private-sector voluntary aid may be impossible BBC News, Robert Peston (21/6/11)
Greece crisis and the best way to cook a lobster BBC News, Stephanie Flanders (22/6/11)
Questions
- What is meant by contagion and why is this a potential problem?
- What are the options open to European leaders to finance the bail out?
- If an agreement is not reached or Greece do no accept the terms, how might the UK economy be affected?
- What has been the impact of recent events in Greece and Europe on financial markets and currencies across the world? Explain your answer.
- Why are critics suggesting that the price of Greece remaining in the Eurozone might be too high? If Greece was not a member state what would it mean it could do differently to help it deal with its mounting debts?
The International Monetary Fund consists of 187 countries and is concerned with its members’ economic health. It promotes co-operation, economic stability and is also there to lend to those countries facing difficulties. The role of the IMF as a lender has come into question, as critics argue that the conditions placed on loans to countries can cause more problems than they solve, as the cause of the problems is not always identified. However, despite the criticisms and the current charges facing the former IMF Chief, the International Monetary Fund continues to play an important role in the global economic environment.
Many countries have used IMF credit and over the past two decades it has predominantly been the transition and the emerging market economies that have demanded the IMF’s resources. Whilst its lending did drop off in the mid 2000s, the global financial crisis of 2008/09 saw an increase in the demand for IMF funds from emerging economies to some $60 billion. In May 2010, we saw the IMF together with the EU put together a rescue package for Greece and it is now the turn of Egypt. The uprisings in Egypt put the stability of the economy in jeopardy, as investment declined, tax revenues decreased and the usually buoyant tourist industry started to struggle. Despite the efforts of the government to stabilise the economy, it remains short of cash and the IMF looks set to agree a loan deal of $3 billion (£1.8 billion). Egypt would have five years to repay the loan at an interest rate of 1.5%, after a three year ‘grace period’.
Other countries to receive loans include Ireland, Belarus, the Ukraine and Iceland, the latter of which owes the IMF $2,828.67 per person of its population. The UK has used the IMF back in 1976 and it may be something to look out for, depending on how our recovery continues. The following articles look at the IMF and its role in promoting global financial stability.
Articles
IMF to lend Egypt $3 bn: Ministry Associated Press (6/5/11)
IMF agrees $3bn financing deal with Egypt BBC News (5/6/11)
Timeline: Greece’s debt crisis Reuters (5/6/11)
Egypt strikes $3bn IMF deal to ‘re-launch’ economy Guardian, Jack Shenker (5/6/11)
The IMF versus the Arab Spring Guardian, Austin Mackell (25/5/11)
EU/IMF/ECB statement on Greek bailout Reuters (3/6/11)
Belarus wins $3 billion loan from Russia-led fund, still seeks IMF’s help Bloomberg, Scott Rose and Daryna Krasnolutska (4/6/11)
IMF frees up $225mn for Iceland Associated Press (4/6/11)
IMF loan: which country owes the most? Guardian (24/5/11)
International Monetary Fund
International Monetary Fund Homepage
IMF outlines $3 billion support for Egypt International Monetary Fund, IMF Survey Online (5/6/11)
Questions
- What is the role of the IMF and how is it financed?
- What are the objectives of the loans to countries such as Greece, Iceland and Egypt?
- What other countries has the IMF lent to and what are the conditions that have been placed on these loans?
- What has been the impact on the Egyptian economy of the uprisings? Think about all the industries that have been affected and the wider impacts.
- Can you find any examples of circumstances in which the conditions of an IMF loan have made problems worse for the recipient?
- Why are the conditions of the IMF loan to Egypt favourable and how will the loan help the economy?
- Look at the trend in IMF lending. What factors explain the peak and troughs? In particular, what is the explanation for the incresae in lending during the financial crisis?
The Greek economy is suffering. In April 2010, a €45 billion bailout package was agreed between Greece and the IMF and the EU. This was increased to €110 billion in May 2011. (The bailout loans expire in 2013.) In return for the loans, Greece agreed to tough austerity measures, involving tax increases, clamping down on tax evasion and government expenditure cuts. These measures have succeeded in cutting the deficit by 5 percentage points, but it still stood at 10.5% of GDP in 2010. Public-sector debt rose from 127% of GDP in 2009 to 143% in 2010. The market cost of borrowing on two-year government bonds currently stands at 23% per annum – a sign of a serious lack of confidence by investors in Greece’s ability to repay the loans.
The austerity measures have brought great hardship. Unemployment has soared. In February 2011, it reached 15.9%; in February last year it was 12.1%. According to the IMF’s World Economic Outlook (Table A2), Greek real GDP fell by 2.0% in 2009, by 4.5% in 2010 and is forecast to fall by 3.0% in 2011. But with GDP falling, this brings automatic fiscal stabilisers into play: lower incomes mean lower income tax revenues; lower expenditure means lower VAT revenue; higher unemployment means that more people claim unemployment-related benefits. This all makes it harder to meet the deficit reduction targets through discretionary tax rises and government expenditure cuts and makes it even more important to cut down on tax evasion. But, of course, the more taxes rise and the more government expenditure is cut, the more this suppresses aggregate demand. The austerity measures have thus worsened the recession.
On May 9, the ratings agency Standard & Poor’s downgraded Greece’s rating to B (15 points below the top rating of AAA and 6 points into ‘junk’ territory). It now has the lowest rating in Europe along with Belarus.
Worries have been growing that Greece might be forced to default on some its debt, or choose to do so. This would probably mean an extension of repayment periods. In other words, bondholders would be paid back in full but at a later date. This has been referred to as ‘debt re-profiling’. This could cause a renewed loss of confidence, not only in the Greek economy, but also in banks that are major lenders to Greece and which would be exposed in the case of default or restructuring.
The IMF and the ECB have been quick to stress that Greece can continue to manage its debt and that, if necessary, another loan might be negotiated. Anticipations are that Greece could indeed ask for a further bailout. But is this the answer? Or would it be better if Greece sought a restructuring of its debt? The following webcasts and podcasts consider the issue.
Webcasts and podcasts
Greece may need second financial bail-out BBC News, Stephanie Flanders (11/5/11)
Greece needs revised bail-out Financial Times Global Economy Webcasts, Luke Templeman and Vincent Boland (9/5/11)
Why Greece must stick to the plan Financial Times Global Economy Webcasts, Ralph Atkins, Frankfurt Bureau Chief, talks to Jurgen Stark (11/5/11)
Will Greece need more money? BBC News, Matina Stevis (9/5/11)
Economists debate Greek crisis BBC News, Thomas Mayer and David McWilliam (9/5/11)
Greece at ‘a very difficult stage’ BBC Today Programme, Stephanie Flanders and Vassilis Xenakis (11/5/11)
The Business podcast: PPI scandal and Greece’s debt crisis Guardian Podcast, Aditya Chakrabortty (11/5/11) (listen to last part of podcast, from 19:20)
Greece: Eurozone ministers discuss terms of second bailout BBC News, Nigel Cassidy (16/5/11)
Greece dominates eurozone talks in Brussels BBC News, Matthew Price (17/5/11)
Articles
S&P moves to cut Greek credit rating Financial Times, Richard Milne, Tracy Alloway and Ralph Atkins (9/5/11)
One Year After the Bailout, Greece is Still Hurting Time Magazine, Joanna Kakissis (12/5/11)
What price a Greek haircut? BBC News blogs: Peston’s Picks, Robert Peston (10/5/11)
What is debt ‘reprofiling’? BBC News, Laurence Knight (17/5/11)
Reprofiling: Greece’s restructuring-lite Channel 4 News, Faisal Islam (17/5/11)
Questions
- What are the arguments for and against tough austerity measures for Greece and other eurozone countries with high deficits, such as Portugal and Ireland?
- Should Greece seek a restructuring of its debts?
- What is a ‘haircut’ and is this a suitable form of restructuring?
- What are the arguments for and against a default, or partical default, by the Greek government on its debt?
- Is it in the intesests of European banks to offer a further bailout to Greece?
- What should be the role of the IMF in the current situation in Greece?
It doesn’t seem that long ago when Greece was in the news regarding its deficit and need for bailing out. Back then, countries such as Spain, Portugal and Ireland were being mentioned as the next countries which might require financial assistance from the EU. It is now the Irish economy that is in trouble, even though the Irish government has not yet requested any financial help. The EU, however, is ‘ready to act’.
The Irish economy experienced an extremely strong boom, but they also suffered from the biggest recession in the developed world, with national income falling by over 20% since 2007. Savers are withdrawing their money; property prices continue to collapse; and banks needed bailing out. Austerity measures have already been implemented – tax rises and spending cuts equal to 5% of GDP took place, but it has still not been enough to stabilise the economy’s finances. All of these problems have contributed to a large and unsustainable budget deficit and a significant lack of funding and that’s where the EU and possibly the IMF come in.
If the Irish economy continues to decline and experiences a financial crisis, the UK would probably be one of the first to step in and offer finance. As our closest neighbour and an important trading partner, the collapse of the Irish economy would adversely affect the UK. A significant proportion of our exports go to the Irish economy and, with Irish taxpayers facing troubled times, UK exporting companies may be the ones to suffer.
One thing that this crisis has done is to provide eurosceptics with an opportunity to argue their case and blame the euro for the collapse of Ireland. With one monetary policy, the Irish economy is tied in to the interest rates set by the ECB and low interest rates fuelled the then booming economy. The common currency also increased capital flows from central European countries, such as Germany, to peripheral countries, such as Ireland, Spain and Portugal. In themselves, capital flows aren’t a problem, but when they are used to fund property bubbles and not productive investments, adverse effects are inevitable, as Ireland found to its detriment.
As prices collapsed and banks simply ran out of money, the government stepped in and rescued not only the depositors of Irish banks, but also their bondholders. Unable to devalue their currency, as it’s the euro, the Irish economy was unable to boost exports and hence aggregate demand and in turn economic growth. Although, the Irish government has not requested any financial help, as the French Finance Minister commented about a potential bailout: “Is it six months or a few days away? I’d say it’s closer to days.” The following articles look at this developing situation in Europe.
EU plays down Irish republic bail-out talks BBC News (17/11/10)
Ireland bailout: the European politicians who will decide Telegraph, Phillip Aldrick (17/11/10)
Don’t blame the Euro for Ireland’s mess Financial Times, Phillipe Legrain (17/11/10)
Britain signals intention to help Ireland in debt crisis New York Times, James Kanter and Steven Erlanger (17/11/10)
Ireland will take aid if ‘bank issue is too big’ Irish Times, Jason Michael (17/11/10)
Irish junior party says partnership strained Reuters (17/11/10)
Ireland resists humiliating bail-out as UK pledges £7 billion Telegraph, Bruno Waterfield (17/11/10)
Markets stable as Ireland bailout looms Associated Press (17/11/10)
The implausible in pursuit of the indefensible? BBC News blogs, Stephanomics, Stephanie Flanders (16/11/10)
Ireland bailout worth ‘tens of billions’ of euros, says central bank governor Guardian, Julia Kollewe and Lisa O’Carroll (18/11/10)
The stages of Ireland’s grief BBC News blogs, Stephanomics, Stephanie Flanders (18/11/10)
Q&A: Irish Republic finances BBC News (19/11/10)
Could Spain and Portugal be next to accept bail-outs? BBC News, Gavin Hewitt (19/11/10)
Questions
- Why will the UK be affected by the collapse of the Irish economy?
- If Ireland were not a member of the eurozone, would the country be any better off? How might a floating exchange rate boost growth?
- The Financial Times article talks about the euro not being to blame for the Irish problems, saying that ‘tight fiscal policy’ should have been used. What does this mean?
- Why is the housing market so important to any nation?
- What are the arguments (a) for and (b) against the euro? Would Ireland benefit from leaving the euro?
- Should the UK government intervene to help Ireland? What are the key factors that will influence this decision? What about the EU – should Ireland ask for help? Should the EU give help?
- Austerity measures have already been implemented, but what other actions could the Irish economy take to increase competitiveness?