1. Running head: The causes of the debt crisis in Greece
The causes of the debt crisis in Greece
Oleksandr Zaviriukha
300686394
Centennial College
Author Note
This paper was prepared for Economics 401
Taught by Professor Aurelia Best

2. Table of contents
Abstract
The causes of the debt crisis
The possible ways out
Conclusion
References

3. Abstract
Nowadays, it is so strange to observe economical crisis in the prosperous countries of
West, all of which seems to be rich and strong. But today, after the 2008 crisis, Europe is facing
new debt crisis, which has already affected Greece, Ireland, Portugal, Spain and Italy.
http://www.guardian.co.uk/business/blog/2011/oct/17/europe-debt-hangover-alarm-
bells
Greece was one of the poorest countries, when it became a member of European Union
in 1981. However, Greece had a strategic importance in the Balkans, which caused huge amount
of investments in country and its economy. Furthermore, homeland of the European civilization,
Greece started to attract a lot of visitors from North America and Western Europe. All these
factors create a new economical environment for Greece and it was one of the fastest growing in
euro zone in earliest 2000s.
Now, Greece is one of the poorest countries of euro zone and it’s facing huge problems
with a sovereign debt crisis, 175% of GDP of the country. There are numerous demonstrations
all the time in the different cities of the country, the governments change each other almost every
months. Although, it has started more than 2 years ago the situation is more likely to get even
worth despite the cutting of expenses and assist of the Germany and leaders of the EU. IMF and

4. ECB (European Central Bank) are taking the negotiations to provide Greece with a new bailout
package and this is expected to reduce Greek sovereign debt to 117% by the end of the year. One
more problem is that Germany is a main owner of Greek bonds and obligations and default of
this country will affect not just themselves but whole union.
So, what had happened to the Greek economy? Why this problem had appeared so fast
and is growing so rapidly? In this paper I will cover and discuss all the reasons which caused a
Greek debt crisis as well as possible ways out for the country.

5. The causes of the debt crisis
There is number of reasons which caused a debt crisis in Greece:
1. Firstly, Greece was affected by the 2008th year crisis particularly hard because its main
industries — shipping and tourism — were especially sensitive to changes in the business
environment. Tourism – one of the main points which caused a growing of Greece economy
earlier, appeared to be one of the most important causes of its crisis later. By the time when
Greece entered the euro zone in 2002 its rapid growth in tourism industry began to decrease
for several reasons. The main is the enormously high prices for the trips and services for the
visitors. Greeks decided that they can easily make the prices higher than it should be and
overcharge the tourists because of natural beauty of the country and its historical and cultural
places. However, the tourists started to choose often a close alternative – Turkey. Turkey has
beautiful beaches, excellent service and many places to visit as well for much lower price.
So, Ankara started to struggle with Athens for the tourists and was doing well, inevitable
beating Greece with a number of tourists. When in 2008 the crisis began, it has added one
huger problem to the previous one.
2. Furthermore, in 2004 Greece was hosting for the summer Olympic Games. The costs were
huge. Government had to build new airports, roads, hotels, facilities and stadiums around the
Athens. Moreover, Greece had to complete new transportation plan of rebuilding the Athens
infrastructure and clean up the whole city. The costs of doing all of these points were
astronomically high, these costs created a high budget deficit in the next year, beside the
decrease in tourism.
3. Finally, I have mentioned before, that Greece had an important strategic position and has
experienced high rate on investments in 80th-90th. This fact played a negative role for Greece
also. From the observations of my friend and his family, who have been living in Athens
from 1993 till 2009, Greeks enjoyed the new financial opportunities, taking huge loans

6. without any fear and not paying for some usual taxes. For example, there is no tax on
property. The famous business in Greece was to take loans and to buy many apartments our
houses for rent. What is more, after the crisis has come, Greeks refused to start paying higher
taxes in order to save economy and began the demonstrations and protests.
“ In November 2004, the media reported that Greece had misrepresented its financial
situation in order to join the Euro zone in 2002. It had never met the criteria and should not have
been allowed to become a member of the single currency zone. With this kind of attitude towards
spending and debt, one would think that the other member states would have been keeping a
close eye on Greece's spending and economic situation. There have been several cases of
corruption involving politicians in the country over the last decade, with money allegedly being
misappropriated. There also seemed to be no repercussions for those involved in such scandals.
Just as in some countries in the developing world, a walk around Athens would show that the
black economy is thriving.” (1)

7. The possible ways out
On 23 April 2010, the Greek government requested an initial loan of €45 billion from the
EU in order to eliminate the debt in the 2011. There are a lot of controversy what is the best way
fir Greece and Europe to deal with the debt crisis.
Those, who stand for united Union claim that Europe will eventually save Greece
economy and eliminate the sovereign debt. The analytics say that despite the huge amounts of
new loans paid to Greece in the last few years, the default and secede from the Union will fatally
affect Greece and whole EU. To prevent the civil strikes and disorders in Greece the IMF, EU
and ECB eventually agreed to provide Greece with new 130$ billion package in order to
eliminate the debt level to 120% of GDP. “For the first time, the bailout deal also included a
debt restructure agreement with the private holders of Greek government bonds (banks, insurers
and investment funds), to "voluntarily" accept a bond swap with a 53.5% nominal write-off,
partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and the
maturity prolonged to 11-30 years (independently of the previous maturity). It is the world's
biggest debt restructuring deal ever done, affecting some €206 billion of Greek government
bonds. “(2)
“The debt write-off had a seize of €107 billion, and caused the Greek debt level to fall
from roughly €350bn to €240bn in March 2012, with the predicted debt burden now showing a
more sustainable size equal to 117% of GDP, somewhat lower than the originally expected
120.5%.” (3)

8. http://seekingalpha.com/article/201597-european-debt-crisis-right-around-the-corner-u-s-
housing-collapse-redux-on-the-way
From the other hand there are those, who is sure that Greek default is just a matter of time
and it will be more beneficial for Greece and EU, if Greece will claim default as fast as possible.
According to these economists there are several reasons for that:
- “Greek default is inevitable. It is not a matter of if, but how. A default is built into
the terms of the proposed second bailout package, in which private creditors are
expected to swap or roll over their holdings of Greek bonds, taking a loss in the
process. “ (4)
- “Investors are already assuming Greece will default, and are preparing for it. Greece
has been on an obvious downward spiral for nearly two years now. Its one-year
bonds are trading at a yield well over 100% — clear indication investors believe a
default is coming. Since the markets are already anticipating a default, there isn’t as
much downside in actually having one.” (4)
- Many economists and analytics assume a default will happen and the bailout
program is not working. There is no big progress despite of hundreds of billions of

9. Euros and 2 years of struggling. The main reason the bailout is failing is that no one
believes that Greece can fix its finances and reform its economy under this program.
- “The euro zone would do more good by using the Greek bailout money elsewhere.
The leaders of the zone could, for example, utilize the funds to support Spain and
Italy, the crises in which are the real threat to the future of the euro. Or maybe it’s
best to use the Greek bailout funds to recapitalize and shore up the European
banking sector, which would minimize the impact of a Greek default.” (4)
- The bailout program is pushing Greek social and economical environment towards
complete disaster. GDP shrank is growing, protesters are almost always on the
streets, unemployment rate is higher than 16% and it is not the worst situation, many
economists claim.

10. Conclusion
In this paper work I have pointed main reasons of the dept crisis in Greece and the ways they can
choose to follow in order to stabilize the economy of the country. I reserve my judgment,
because this is extremely tough issue, even best world economists are not sure about the future of
Greece. To my mind, European Union will continue its tries to save Greek economy and keep it
in euro zone, despite the weakness of Greek government and social protests. I venture to assume
that this tactic will succeed in some way, but leaders of the EU such as Germany and France will
spend huge amounts of money on that.
Greeks need to understand that the world has changed since their entry to the EU. The country is
no longer as strategically important to Western Europe as it once was. They have to work hard
and to sacrifice a lot in order to save their economy and their country.

11. References
1. http://www.chillibreeze.com/articles_various/Greek-debt-crisis-810.asp
2. http://www.investmenteurope.net/investment-europe/opinion/2155438/greek-rescue-
package-term-solution-hsbcs-willem-sels
3. http://www.reuters.com/article/2012/02/29/us-europe-greece-idUSTRE81S0NP20120229
4. http://business.time.com/2011/09/23/six-reasons-why-greece-should-default/
5. “ Europe and financial crisis” , 2011, edited by Pompeo Della Posta and Leila Simona
Talani