Greek Financial Crisis Case Study

7598 Words 31 Pages
Register to read the introduction… Although the outbreak of the global financial crisis in fall 2008 led to a liquidity crisis for many countries, including several Central and Eastern European countries, the Greek government initially weathered the crisis relatively well and had been able to continue accessing new funds from international markets. That said, the global recession resulting from the financial crisis put strain on many governments’ budgets, including Greece, as spending increased and tax revenues weakened.

Reliance on financing from international capital markets left Greece highly vulnerable to shifts in investor confidence. Investors became jittery in October 2009, when the newly-elected Greek government revised the estimate of the government budget deficit to nearly double the original number. Over the next months, the government announced several austerity packages and had successful rounds of bond sales on international capital markets to raise needed funds. In late April, when Euro stat, the European Union (EU)’s statistical agency, further revised the estimate of Greece’s 2009 deficit upwards, Greek bond spreads spiked and two major credit rating agencies downgraded Greek bonds.
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Trying to explain the rampant tax evasion, Prof. Schneider says countries like Spain, Portugal and Greece have had continuous democracies only since the 1970s, and people aren't used to governments representing the public interest.

"In most of these countries, what matters is your family. … There is less of a sense of duty towards the state," says Alberto Alesina, a professor of political economy at Harvard. "Evading taxes is something you can freely talk about—and be proud of—at a dinner party in these countries."

Debt & budget deficit:

As Greece was not able to meet its monetary requirements, it was forced to lend money from other nations. This was due to the accumulation of black wealth and considerable reduce in the number of tax payers. Over spending and over borrowing had become the order of the
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Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels. Even countries such as the US, Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy. According to Niall Ferguson in the Financial Times: "Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries by the Federal Reserve and reserve accumulation by the Chinese monetary authorities. But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last

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