This paper is going to discuss the European sovereign debt crisis of 2010 to date, and especially the crisis that hit two particular governments in the sovereignty, Greece and Ireland. The two governments have recently received bailouts, or financial support from the EU/ IMF following the two nation’s financial crisis of 2010. The two countries had similarities in regards to the support owing to the fact that the two states had troubles with their government finances. The causes of the troubles, in addition to the terms of the support received by each nation, and the prospects of the two nation’s bailouts however, had various differences as well as similarities. It is through these differences that the paper is going to address the causes of these bailouts, the terms of the support, and the hovering threats to these bailouts and/ or the future finances of the governments.
Introduction
As a result of the 2010 Euro Crisis, fears arose in several European states; fears in regards to a debt crisis in the sovereignty. Some of the states that were under the greatest threat of this crisis included five European Union Members, four of which are commonly known as PIGS, Portugal, Ireland, Greece, and Spain (Wearden, 2010). The fifth European member under threat was Belgium. A confidence crisis resulted from this in addition to a widening of risk insurance and spreads on the yield breaks between the affected nations and other better faring European Union nations such as Germany. Soon after this, the financial markets became affected because of the raising concerns over the increasing debt and deficit levels of various governments through out the globe, with a greater wave of this crisis hitting and further downgrading the financial situation of the European government (Matlock, 2010).
Greece vs. Ireland
Various economists have compared the two nations in regards to their financial status, and most of them have argued that the situations are very different from each other. For one, Ireland has been found to have been only cash strapped, unlike its counterpart Greece that was thought to have been near bankruptcy by the time the nation was seeking financial aid. According to some EU officials, the financial situation in Ireland was of a lesser magnitude, despite the massive degradation of the nation’s public finances, something that was blamed on the nationalization of the failed banks (Wearden, 2010).
The same officials pointed out the Ireland government hand a remarkable record when it came to implementing cuts on budgets unlike the Greece government. However, contradicting reports showed Ireland to be in a much more difficult situation than Greece, especially with the state’s 32 per cent deficit in its GDP, gross domestic product. This value is an enormous figure, with serious implications on the government’s financial status. It was also thought that the economic structure of Ireland, as well as its tax collection abilities put Ireland ahead of Greece despite the fact that the two nations needed bailouts from the European Union rescue funds (Interactive Map of the Debt Crisis).
Causes of Seeking Bailout/ Support
The economy of the Greek government was one of the most rapidly growing amongst the other European Union members during the 2000s. For example, the nation’s economy grew by an annual rate of 4.2 percent between the years of 2007 and 2001. This was majorly accredited to the foreign capital that was flooding the nation at the time (Wearden, 2010). The government of Greece therefore, deriving its confidence from falling bond yields and a strong and stable economy, started running huge structural deficits. Several economists have observed that such public deficits have been a very common occurrence in the social model of the nation since 1974. In order to introduce the portions of the population with left leaning tendencies into the mainstream economy, the Greek government has for a long time run and allowed huge deficits in pensions, finance public sector jobs, and other types of social business. As a result, the nation’s debt to gross domestic product has remained extremely high, more than 100 percent, since the year 1993 (Deconstructing Europe).
The government’s borrowing was initially financed by currency devaluation. This was especially made easier by the introduction of the euro in early 2001. This made it very easy for Greece to borrow because of the interest rates that were very low. This made the country’s financial status to be very vulnerable, as evidenced by the great negative impact the financial crisis had on the economy of the country. The country’s largest revenue generating industries, shipping and tourism were very much affected by the crisis, and the nation’s revenues fell by 15 percent at the end of year 2009 (Interactive Map of the Debt Crisis).
Down the line, it was found out that the government had been misreporting its economic statistics deliberately and consistently, so as to meet the guidelines set up by the monetary union. In the early 2010, the Greek government was implicated for paying several banks millions of dollars, as remuneration for arranging transactions and reports that hid the actual borrowing level of the state; this was since the year 2001. It was clear that subsequent Greek governments had lied to the European Union about their borrowing, and as a result they were able to spend well beyond their means without any suspicion (Interactive Map of the Debt Crisis).
When the country’s deficit was revised in 2009, it was estimated to be between 6- 12.7 percent. By mid 2010, the nation’s deficit had risen to an alarming level of 13.6 percent; one of the highest levels of deficits in relation to the gross domestic product, the world had seen (Lachman, 2011). The estimated debt of the government was very high as well, which was estimated to be around 216 Euros by 2010. The economic forecasts also were estimating the accumulated government debt to hit a high of 120 percent of the gross domestic product by the end of 2010. The fact that up to 70 percent of the market bonds of the Greek government were held externally, made the financial situation of the country worse. The tax evasions by the Greek government were also estimated to be very high, around 20 billion dollars per annum. With all these situations, the Greek government was left with no choice but to request support from the International Monetary Fund and the European Union (Interactive Map of the Debt Crisis).
The down fall of the Irish financial status can be largely attributed to the hidden loans controversy involving the Anglo Irish Bank in 2008. The bank is the third largest in the country. The banks chairman came forth in late 2008 and admitted that he had hidden more than 87 million Euros, from the bank, in loans (Deconstructing Europe). This triggered a series of events most of which led to the nationalization of Anglo in early 2009. The chairman together with the non executive director and the chief executive of the bank resigned soon after this discovery. The Irish government followed this with a provision for the emergency nationalization of the bank through the Anglo Irish Bank Corporation Act of 2009. These events, together with the 2 years consecutive increase in the country’s bond yields contributed largely to the financial downfall of the country that led to the bailout by the IMF/ EU (Bank government announcement on recapitalization).
Though the causes and circumstances under which these two countries received bailouts from the International Monetary Funds were different, the two countries shared a few similarities. One of these similarities is that the public finances of these two countries were on a path that was largely unsustainable as reflected by the ratio of debt to gross domestic product, which was more than 80 percent. The unsustainable path of the two countries was also reflected on the two nation’s budget deficits of the gross domestic product, as well as an economy that was highly sclerotic. The second similarity was that the two nations suffered from an acute balance of weaknesses in payments that have a significant impression on a decreased competitiveness, internationally (Matlock, 2010).
The Terms of the Bailouts
The Greek government passed a bill on March 5th that was supposed to protect the country’s economy. The bill was to achieve this through various ways, one of which included reducing the wages in the public sector. This was followed by the activation of the EU/ IMF bailout package that had earlier been granted to the country. By mid May, a loan agreement was reached between the Greece government, the other European Union members and the International Monetary Fund. It was agreed that Greece will be granted a loan worth 45 million Euros in 2010, with other funds to follow in the subsequent years (Thesing & Krause-Jackson, 2010).
The total loan was supposed to amount to 110 billion dollars. The interest for this loan was very high when compared to other bailout loans; it had a 5 percent interest rate. The bailout loan for Ireland had different terms. The European Union had agreed to the requests by the Irish government to get financial aid, and it reciprocated by providing the government with a loan worth 133 billion dollars in total to help the nation out of its poor financial state. The terms were that the Irish government would pay the money back in addition to an interest rate of 5.8 percent (Deconstructing Europe)
The country’s officials deemed this to be a better solution, cost wise, when compared to borrowing money from the open markets. Unlike Greece, Ireland had fewer austerity measures that included using an amount of not less than 23 billion dollars from its pension reserves. Some of the Greek austerity measures included a significant increase in VAT, reintroduction of special tax to high pensions, cutting of the public allowances, a significant increase on luxury taxes, and taxes on fuel, alcohol, and cigarettes, among others. These harsh austerity measures resulted to a strike in Athens to protest the increase in tax and spending cuts (Lachman, 2011).
Prospects of the Bailouts
The EU/ IMF loans package was put together and granted to Ireland and Greece to help pull them out the huge debt crisis. Greece for example, had a significant amount of debts totaling to more than 300 billion Euros, as a result, the country needed the European Union and the International Monetary Funds to provide it with more than 54 billion Euros a year. In mid April 2010 it was decided that there was a rescue kit for Greece if the country needed to borrow. And so the country took the initiative and borrowed some bailout funds from the European Union rescue fund. This was offered at an interest rate of 5 percent, unlike the Irish rescue kit that was offered at an interest rate of 5.8 percent. These bailout funds were supposed to be utilized in combination with several austerity measures on the part of the affected countries, like spending cutbacks, increases in taxes, and cutbacks in the public sector workforce (Thesing & Krause-Jackson, 2010).
The bailouts granted to the Irish and Greece governments by the EU/ IMF were supposed to provide for a way to help these countries over come their financial challenges. However, the results have not been particularly encouraging. For example, the high interest rates that have been imposed on the Irish and Greek government debts reflects the way the market regards these states; that they are insolvent, and that they have a very high probability of defaulting their loans (Lachman, 2011). The high interest rates also reflect the domestic credit crunch continuation of these two nations that must be expected to increase the negative impacts, on the nations’ prospects to grow economically, of the continued harsh fiscal retrenchment.
There is therefore a very high possibility, in regards to the public debt sustainability of the two countries that Greece and Ireland will not be able to grow their way out of their financial status. This is especially because of the sustained euro membership that limits the two countries from boosting their exports through devaluation of their currencies, at a time when the Irish and Greek domestic demand is significantly being undermined by sustained and deep fiscal retrenchment (Lachman, 2011).
The inefficiency and ineffectiveness of the bailout plans has been witnessed in the both countries since the activation of the loans. For example, since the Irish government activated and started its fiscal austerity program two years ago, its economy has contracted extensively, by a percentage of more than 11(Wearden, 2010). The Greek government is experiencing the same contractions since the bailout. For example, between the two fourth quarters of the years 2010 and 2009, its economy has contracted by a percentage of 6.5. The country’s annual retail sales also decreased by more than 20 percent, this was found to be so when compared to the sales of the previous year. More notably, the bailout plan outlined by the EU/ IMF loans has affected the country’s revenues by leading to a collapse of its tax revenue collection system (Lachman, 2011).
This inefficiency of the bailouts reflected the looming threat of a double dip recession. This was because the new credit availed to the two heavily indebted countries did not mean that their economic fortunes would be immediately revived. This was owed to the fact that the available money came with numerous conditions that limited Greece and Ireland to very few economic revival activities like structural reform and fiscal adjustment. Though the aid package to the both countries has played a very big role in averting the prior financial panic in the European sovereignty, most of the previously indebted countries are still not out of the woods, and they continue to experience significant economic difficulties (Wearden, 2010). This reflects a deeper problem, more than the alleged liquidity problem, something like issues to do with solvency, which cannot be simply solved through fiscal retrenchment in an exchange system that is fixed (Lachman, 2011).
Conclusion
Ireland and Greece had to seek the help of the European Union and the International Monetary Fund after being marred with numerous debts in the year 2010. The two countries had landed themselves in this situation after several discrepancies in their public finances. As a result, the countries got in financial debts too large that their economies could not survive. EU/ IMF offered varying bailouts to the two, each with different terms, and expected the two countries to combine these kitties with various austerity measures to grow out of the public finance debt. This however, did not work as expected, because the two economies continued to contract two years down the line, after these funds had been availed to them
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