How Greece has got itself in this mess - Daily Telegraph How Greece has got itself in this mess - Daily Telegraph

Sunday, June 17, 2012

How Greece has got itself in this mess - Daily Telegraph

How Greece has got itself in this mess - Daily Telegraph

The Greek government was granted a €110bn bailout in May 2010 from the International Monetary Fund, European Union and European Commission, collectively known as the troika. This was not enough for Greece to keep up with its debts and another €109bn bailout was agreed in July last year. Much of the bailout cash has gone on Greece's running costs, including wages for its massive public sector, which accounts for around 40pc of the total economy. However, €1bn of the most recent tranche of bailout cash was recently withheld as EU leaders were concerned by the failure to form a government. At the time of the last bailout, leaders pledged to slash Greece's budget deficit through a programme of spending cuts and tax reforms.

What is everyone waiting for?

The election on Sunday is not just crunch time for Greece, but a key turning point for the entire eurozone. The country is likely to renege on its bailout commitments if anti-austerity parties such as leftist Syriza hold sway and seek new terms. But this will be difficult as it will require the likes of German Chancellor Angela Merkel to back down. If the new government does not reach an agreement with its eurozone partners, it could be forced from the single currency.

However, if a pro-bailout party, such as New Democracy, gets into power it will still not be an easy ride. With four years of recession behind it, the country will continue to suffer under the stringent austerity measures required by the troika. Many analysts believe Greece will require a third bailout if it remains in the euro.

What if Greece exits the euro?

A Greek exit from the euro would have a mixed impact. The cost of imports - which in Greece includes a lot of its food and medicine - could soar as the new drachma currency plummets in value. The country will find it even harder to borrow money. It is possible fears over the impact on savings would see a run on Greek banks as people empty their bank accounts. Businesses would face extreme difficulties, as they dispute whether contracts should be converted into drachmas or remain under euro valuations. Markets could suffer further turmoil as investors become nervous about the potential "contagion" impact a Greek exit would have on the rest of the continent and world.

In the longer run, Greece's economy would hopefully benefit from having a much more competitive exchange rate, making its exports more appealing and boosting its already strong position as a tourist destination.

How does this all affect the UK?

Greece owes huge sums to European banks including more than €7.2bn to British banks. The financial sector is in such a fragile state that banks might collapse if Greece does not pay what it owes. The "contagion" effect could then see other countries' finances suffer, for example French banks are owed €42bn. This domino effect could lead to another credit crunch, as banks across the eurozone lose confidence in other banks and refuse to lend to each other. A worst-case scenario could see the financial system go into meltdown with banks across Europe, possibly the world, being bailed out by governments, with taxpayers footing the bill.

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