The Greek Debt Crisis and the Debt-Trap

Updated: Aug 10, 2020

The Financial Crisis of 2008-09 wreaked an economic havoc on many nations. It was the worst of its kind since the Great Depression in the United States which started in 1929, only to be overshadowed by the recession brought about by the Coronavirus Pandemic. While many European countries were affected quite badly, Asian giants like China and India and also Australia were not affected that badly.

To better understand this crisis, we first need to know what is Debt Trap. The Oxford Dictionary defines debt trap as 'a situation in which a debt is impossible or difficult to repay, typically because high interest payments prevent repayment of the principal.' Debt Trap has been remarked as a hallmark of predatory lending and is the consequence of high rates of interest and short time period.

When we hear the phrase 'the impact of the Financial Crisis', Greece is what comes to mind. The country was among the worst affected. This turmoil brought about the Greek debt crisis and the vicious cycle of debt trap.

At the time, the Eurozone countries were required to submit their Fiscal Deficit. (Fiscal Deficit is equal to the total expenditure minus the total revenue except the loan and the borrowings. In other words, fiscal deficit is essentially the loan and the borrowings. FD was expressed in terms of GDP.). However Greece had not entered the correct figures.The Eurozone countries were required to keep their Fiscal Deficit within the Maastricht Limit which stated that government Fiscal Deficit should be 3% of the GDP. However, in 2009, Greece's FD was over 15% of the GDP.

Greek had joined the Eurozone in 2001 and had adopted the euro as its currency. It posted a fiscal deficit which was around the Maastricht Limit. However in 2004, it was announced by Greece that it had posted the wrong figures. The Eurozone could have imposed sanctions or expel the country out of the Eurozone but it didn't do so in order to maintain the powerful status the euro enjoyed in the foreign exchange market (the Forex market). Also at the time, France and Germany had FD over the Maastricht Limit and so the Eurozone turned a blind eye.

Another reason for the Greek Government Debt Crisis worth mentioning was its pension policy. It offered several benefits to retirees in Europe. Earlier Greek citizens were retiring at an early age to reap the benefits of the pension policy. Before the Crisis, A Greek man could retire at the early age of 58 and a Greek woman as early as 50. Greece's average growth of pension expenditure between 1991-2009 was 8.3% which was quite high as compared to other countries like France.

While sitting on the verge of bankruptcy, Greece was bailed out by several European countries as well as the International Monetary Fund (IMF) on the grounds of drastic and dynamic reforms in its economic system and so was the Greek Government Debt Crisis which has caused its citizens to live by stiff austerity measures.

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