For over a year, the crisis surrounding the Euro and the high levels of debt for a number of EU countries has sparked concerns that the worst may not be completely over. This is because of fears in those countries that are unwilling, to take the steps necessary in preventing these situations from becoming worse (most notably: severe cut backs in government spending). This has led to concerns that any kind of assistance will cause further pain down the road. As, these are only temporary measures designed to mitigate the negative fallout from the crisis over the short term. At which point, the odds increase that: one or several different member nations could face the possibility of defaulting on their debt. Recently, these fears have become a reality surrounding: Greece and the potential debt crisis that is looming in the shadows of Europe as a whole.
The Greek Bailout and its Lasting Effects
In 2010, Greece received a massive three year bailout total $146.2 billion. This was a combination of: the EU and IMF working together, to help prevent an imminent default on their debt. At the heart of this strategy, was providing this assistance, so that the government could reign in spending and control their massive amounts of social programs. However, since that time, Greece has engaged in smaller than expected efforts to control its expenditures. Part of the reason for this, is because of a massive public outcry about what these cuts will mean to citizens (who are receiving these benefits). This is when protests began to occur and the politicians yielded to the demands of the people. The results were that Greece did not curtail these programs, which is leading to the current crisis.
As the government, is facing the realistic possibility that they could begin to default on their debt in the near future. Evidence of this can be seen with credit default swaps that have been occurring inside the bond market. As, this surged to record levels, indicating that there is a 92% probability that Greece will default on its obligations. This is having impact on borrowing costs for the government, with yields jumping 217 basis points to a record 3,022 basis points. At the same time, the economy has continued to be drag on the rest of the EU with: GDP growth coming in at -7.3% (up from the -8.1% reported one year earlier). These different factors are important, because they are illustrating how the debt crisis in Greece has the possibility of leading to renewed problems for other EU countries.
What will happen to the rest of Europe?
Many of the different EU nations have already started to prepare for the probability that Greece will default on their debt. Evidence of this can be seen by looking at Germany, as they have created a Plan B. Under this kind of scenario, the government’s bank rescue fund will provide assistance to those financial institutions that could be exposed to Greek debt. The way it would work, is they will provide additional amounts of liquidity to these banks (who are facing the possible losses of up to 50% on these assets). This is problematic, because it is an indication that Europe could be looking at a financial crisis worse than the one that was experienced in the US three years ago. If this were to happen, this could have an effect on the amounts of capital available to businesses and consumers. Once this occurs, it means that the credit markets in many different EU nations could potentially freeze. This will have an adverse effect throughout: the rest of Euro Zone and on stock prices.