Where does the Greek debt come from? Part 3/3: The crisis of 2008Comments
By Euronews with MARIE JAMET
Greece’s debt has been a concern for the European Union since 2009. Little by little, attention was drawn away from the first countries within the euro zone to have austerity measures imposed – Ireland, Spain and Portugal – and eventually, the focus came to rest on Greece. But where does its debt come from?
The crisis of 2008
Toxic loans: the subprimes
- After 2000, driven by low interest rates and an expanding housing market, US banks increased home loans to households, including cash-strapped Americans. These were the riskier subprime loans. The risk of default by these households was intertwined with complex financial products, sold worldwide via investment funds and intended to be covered by property prices. If a household failed, the house was sold to cover the loss. If not, many Americans were forced to claim bankruptcy.
- From 2008, defaults on mortgages by households increased; too many houses went up for sale without finding a buyer. Real estate markets collapsed, carrying with them subprime loans and banks that had invested.
- Lehman Brothers was sacrificed; other banks were saved from bankruptcy and loss of capital.
From private to public debt
- To avoid the bankruptcy of private banks and avoid a systemic shock throughout the euro area, Member States recapitalised banks and bought back the debts of States held by these banks. Debts held by the private sector went into the hands of States and became public. Jean Arthuis, President of the Budgets Committee at the European Parliament, said, “We have, in fact, transferred the burden from private banks to the States.”
- In 2009 and 2010, noting the difficulties of Greece, the rating agencies Fitch and Standard & Poor’s lowered the rating of Greece to BBB+ and BBB-. This degradation resulted in the rate increase granted to Greece in 2009 and 2010.
Business as usual
- Bailed out without any compensations, such as markets regulations due to the countries inability to agree on them, banks are quickly back to business as usual. The key rate of central banks remained low. In 2009 the ECB key rate dropped to 1% : banks could borrow at low cost..
- Scalded by the subprimes loans crisis, banking institutions began to give the cold shoulder to the stock market, and turn to agricultural products, raw materials … and public debt, through Credit Default Swap CDS (CDS), financial products created to protect against a default of state or business.
- Indeed, this increase in demand for CDS for Greece pushed up their price, an increase which was taken as evidence of the weakness of Greece and a loss of investor confidence. In return, the markets therefore agreed higher interest rates for Greece, at times above 10%.
The vicious circle
- Cornered, Greece is forced to accept a first (2010) and then second international bailout (2012) led by the Troika (IMF, ECB, European Commission). The country accepts a new loan to weigh down its debt. A third plan is being prepared ( summer 2015).
- In return for the loans granted, the country must implement new austerity plans and structural reforms such as the fight against tax evasion. However this austerity and the growing weight of the debt will weaken the economy of the country and make it even more difficult to repay the current loans.
By Marie Jamet