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To What Extent Could the Effective Default on Greek Debt during the Euro Crisis Have Been Avoided?
The Greek government-debt crisis was primarily predetermined by the deployment of the global economic recession in 2008. A series of structural pitfalls of the Greek economy, as well as the failure of the country to meet its obligation, has led to the emergence of structural deficits and debts on public accounts. The outstanding politicians and economists are determined that the effective default on Greek debt through an effective restructuring of the debt is inevitable although strict measures have been taken by the government. The point is that Greece will not be able to survive because of the large debt exceeding 150 % of output.
While analysing the extent of the default of Greek debt, the emphasis should be placed on the debt-to-GDP percentage instead of the countrys budget deficit. This ratio allows to define the ...countrys ability to pay off the entire debt with one years income, regardless of the nations wealth or total debt outstanding. However, high percentage of debt-to-GDP does not imply that a nation is at the edge of default risk. At the same time, the majority of economies have defaulted with the low level of default risk. Therefore, this aspect is not considered to be a decisive factor in defining the extent to which default on debt could be eliminated in Greece.
The historic records prove that the country experienced sovereign debt multiple times. However, the modern crisis differs significantly from the previous recessions because Greece now belongs to the European Union and experiences extreme difficulties with other countries, such as Ireland, Portugal, Greece, Spain, and Italy, which are also subjected to heavy critics. After the creation of the EU, Europe never adhered to austerity policies because the member-states have had to abandon their tax system and focus on the universal fiscal system. Therefore, the nations established the Economic and Monetary Union in 1990s to introduce a single currency. Greece rejected to enter the EMU because it failed to meet the criteria for entering the membership in 1998. However, at the threshold of the twenty-first century, the country was accepted to the Union although it never met all of five criteria predetermined by the European Union. At this moment, Greeces deficit amounted to 103 %, which exceeded the allowed limit of 60 %. This level remained in 2000s. In 2009, the debt ratio increased by 16 %. Although the Greek debt increase is evident, the EU failed to develop an emergency plan if a member-state decided to give up the EUM and the EU. As a result of these pitfalls, Greece will not be able to recover from the debt efficiently or avoid the default of debt.
Despite the dramatic situation in Greece, the European Union still has a chance to safely control Greece through an inevitable default and keep hoping that investors can protect the government from reimbursing the debt. The problem is that Greece fails to pay off 14.5 billion euro; in addition, the agreement with bondholders should be established prior to the debt reimbursement because of a considerable amount of time required for paperwork. Many in markets can support the default, whereas Greeces lenders are less likely to encourage the deal because of their previous commitments to repay if the country manages to avoid painful hard default which could predict the crash of the single currency. A regulated default could promote a pay-off of Credit Default Swaps that propose insurance.
Due to the fact that the problem of Greeces inability to pay off the debt is evident, the economists predict the negative outcomes. While the situation is ambiguous, the outcomes of the financial crisis are always unpredictable. Because of the concern, the country focuses on the cooperation with European nations to eliminate default by introducing austerity measures that should promise the European bailout to help compensate the financial debt. At the same time, some economists assume that the percentage of debt is too large to avoid default. Therefore, the question of whether the outcomes of default may lead to the restructure of the debt could be even more devastating for the Greek economy. According to Thomas, a default would relieve Greece of paying off a mountain of debt that it cannot afford, no matter how much it continues to cut government spending, which already has caused its economy to shrink. However, there is a challenge of the unpredicted outside Greeces boundaries. The overall public debt is about $ 379 billion euros, which exceeds the debts of other countries, such as Argentina and Russia.
Economists also warn that Greeces default can impose pressure on Italy that is fighting with implementing austerity measures and searching for incentives to stimulate growth. Moreover, the consequences of Greek default can relate to the actions carried out by European leaders, particularly by the possibility to create a firewall and take control of possible pitfalls and damages. The task of the country is to make enormous efforts to deserve trust and respect from other countries who could be potential investors offering the bailout for the economy. All that Greece needs is to reach the European Financial Stability Facility to receive emergency loans for reviving their economy. Bailing out the financial funds, therefore, is especially vital for Greece experiencing default and heavy restructuring.
As it can be understood from the above, Greeces economic recession could be a serious threat for other European countries in general and the respectable image of the European Union in particular. According to Gongloff, neutering the default-insurance policies could help keep banks that write insurance policies from having to pay up the next time Greece defaults which seems inevitable. Therefore, there is a small chance that the country can recover from the crisis, as soon as the banking institution will provide the financial assistance in the difficult situation. Over all, the majority of economic is skeptical about the future of Greece. The debt crisis, therefore, has deprived Greece of financial opportunities, and international rescue funds become the only possibility to recover from the economic recession and restore employment rates.
In conclusion, the overview of recent statistics and research has proved that the effective default of Greek debt could not be avoided because of the highest rate of debts, as well as the concerns expressed in the European Union and the EMU. The problem is that the restructuring of the debt can also lead to disastrous consequences. Therefore, the main solution in this situation would be to introduce changes to internal economic infrastructure to persuade the international funding organization that the country is worth recovering. The statistics also shows that there is a small chance to avoid default as soon as the government starts reconstructing the internal economic and financial processes immediately. It should also realize that the process is long-term and require a thorough reconsideration of Greek policies.