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Greece 101: An Intro to the Greek Crisis

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While you may be able to fake knowledge of the current events in Greece by shaking your head, mumbling "Merkel," and occasionally citing the latest headline that you've read, you'll be able to add much more to the conversation with this quick primer on what's going on and how it happened. Let's start in 2001.

Greece joins the eurozone. According to a BBC article from 2001, "To qualify for euro membership, the Greek Government had to adopt a tough austerity programme, making deep cuts in public spending." Sounds familiar...

Even with relatively high debt to GDP when joining the eurozone, the Greek government was able to claim a deficit of less than 1% of GDP. Unfortunately, those numbers were compiled with creative accounting, and it was actually more than 3% in 2000 and every year since:

While Greece's government was still hiding its true budget numbers, France and Germany both overspent beyond the terms originally outlined for eurozone members under the Maastricht Treaty. These rules included government debt no higher than 60% of GDP and annual deficits no more than 3% of GDP.

Unfortunately, the French government carried a deficit of 3.1% in 2003, and in the nine years since has only had a deficit less than 3% three times. Germany had a deficit amounting to 3.7% of GDP in 2003, and in the nine years since it has only had a deficit less than 3% a total of four times. Instead of punishing the two relatively massive economies for failing to follow the guidelines meant to keep overspending in check, the European Commission decided to let both slide.

As the BBC quotes the former finance minister of Greece, "The view was that, OK, if the big boys won't adhere and impose discipline on themselves, they're going to be more relaxed in enforcing the treaty [on us]."

Greece elected a new government, and the new bookkeepers realized the financial deception. While the previous government's budget stated the deficit would be 1.5% of GDP, the true deficit would actually be around 8.3%. However, the 2004 Olympics in Athens took precedence over any major cuts or reforms.

Meanwhile, creditors saw Greece's link to the euro and stronger economies as a guarantee on any lending to the country. The 10-year bond yields for Germany and Greece remained close up until late 2008.

Standard & Poor's cuts Greece's credit rating from "A" to "A-," and it will end the year at "BBB+." Rather than falling to within the original guidelines of 60% debt to GDP, it's clear that Greece's ratio is heading the other direction:

Greece plans to reduce its deficit to less than 3% in 2012. It will miss by roughly 4%. Around May, S&P cuts Greece's credit rating to junk, and the eurozone and International Monetary Fund bail out the country with 110 billion euros after Greece agrees to implement budget cuts. Greek citizens protest the cuts, and three are killed in a riot.

Greece aims to cut its deficit to 1% by 2015. The latest forecast puts that number at 3.1%. The first bailout isn't enough to extinguish the worry and structural financial issues of Greece, and in October, with its 10-year bonds yielding more than 20%, it receives another 130 billion euro bailout, while its private creditors are forced to take a 50% loss on their bonds' value.

The forecasts for the second bailout putting Greece's debt-to-GDP ratio under 120% by 2020 were a bit optimistic, as the latest forecasts put 2020 debt to GDP at 156%. Each debt deadline for Greece is a hurdle that it could trip over and default on -- the latest being a 5 billion euro debt repayment due Friday, which it has successfully raised enough money to fulfill. Unemployment keeps rising: It's now at 25%, with youth unemployment past 58%. European Central Bank president Mario Draghi said this summer that the ECB will do anything it takes to protect the euro, but he also recently declared the ECB was "by and large done" with helping Greece.

The (debt) cliff notes
The Greek debt crisis contains many major themes, all of which can be brought up at a cocktail party to deflect attention from what you may not know. Who's to blame for out-of-control credit? Lenders, rating agencies, governments, or Greek citizens? Who should pay for the cost of fixing Greece? Can the eurozone dictate policy to a sovereign country? Is the eurozone strong enough to revive a failing state, or strong enough to stay together if a state defaults?

European companies like Vodafone (Nasdaq: VOD  ) , which in its first half of the year saw revenue from southern Europe decline nearly 10% and realized a smaller-than-expected rise of almost 2% in Germany, could continue to struggle across the continent. Meanwhile, American companies with large exposure to Europe like Ford (NYSE: F  ) , which expects to lose more than $1.5 billion in Europe over the year while it closes three factories, are also exposed to risk from this Greek saga. Even a cigarette company like Philip Morris International  (NYSE: PM  ) can't catch a break; its cigarette volume fell in the double digits in Greece, Spain, and Italy in its latest quarter.

While businesses flee Greece -- even Coca-Cola Hellenic Bottling (NYSE: CCH  ) , which is moving its headquarters to Switzerland and its primary stock listing to London -- there are still opportunities elsewhere for those seeking global stocks. Our free report "3 American Companies Set to Dominate the World" gives you three examples of such opportunities. Click here to get your free copy before it's gone.

Read/Post Comments (11) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2012, at 6:36 PM, lramos4200 wrote:

    Can you also discuss things like:

    Greek tax collections over the years

    Greek collections versus expenses

    and how the Greeks might have avoided having their economy ruined.

  • Report this Comment On November 14, 2012, at 6:47 PM, gene132 wrote:

    Frankly, Greece is a country that is more 3rd world than Western Europe. Its economy is mostly agriculture (olive oil, wine), and tourism (hotels and cruise lines). It has no high tech infrastructure or significant manufacturing. Hence, it should never have been made a part of the Eurozone. When it was on its own, it could provide a reasonable (3rd world) lifestyle for its inhabitants-but as a member of the eurozone, now cheap hotel rooms in Greece cost >$300 a night! That is why its tourist economy collapsed-it is a much better deal to vacation in Turkey or Croatia.

    A cautionary tale-you cannot make a country have a modern economy by waving a wand!

  • Report this Comment On November 14, 2012, at 6:51 PM, NOTvuffett wrote:

    I guess there is no such thing as free suvlaki after all, lol.

  • Report this Comment On November 15, 2012, at 6:38 AM, SeptimusOctavius wrote:

    Who will default first, Greece or Spain? Or will Germany ride to the rescue by quitting the euro?


  • Report this Comment On November 16, 2012, at 12:30 PM, Johny205 wrote:

    That's where the US is heading is we don't stop spending money and start raising more money to pay down our 16,000,000,000,000 debt.

  • Report this Comment On November 16, 2012, at 12:52 PM, callumturcan wrote:

    Very good article, congradulations. The Greeks need to privatize all their state owned POS and use that money to pay down their debt. LEARN TO LIVE WITHIN YOUR MEANS.

  • Report this Comment On November 16, 2012, at 12:54 PM, XMFHelloNewman wrote:


    Great ideas, I'll look into those topics.


    Tourism, according to Wikipedia, contributes 15% to Greece GDP. Definitely a large portion. I think it could make it on agriculture, though. Have you seen the price of feta?


    Free as in suvlaki or free as in tzatziki? But really, Greek food is amazing.


    Throwing the baby out with the bath water?


    Thankfully we're a long way off from that scenario, with roughly half as much debt to GDP, our own currency, standard accounting, and some killer industries.

  • Report this Comment On November 16, 2012, at 5:36 PM, NoOracleHere wrote:

    My take on it is that Greece gave up their sovereignty when they took up the euro, meaning they gave up the right to print drachmas. Some in the US would have us do the same thing and go back on a gold standard. If you want the US to go the way of Greece, then just put us back on the gold standard. Actually, Greece, if they've shown us anything, is that that's not really the answer. How about balanced budgets? How about tax what you spend? Don't spend what you don't tax? Now that's the kind of conservatism I can get behind.

  • Report this Comment On November 18, 2012, at 5:50 AM, MNU34 wrote:

    If you want it a little broader including some history and graphs, check out Prof. Bagus speeach "The Eurocrisis"

    I would sum up the issues in the ClubMed as follows: "This is what happens when after decades of socialism, the money to pay for the freebies finally runs out."

  • Report this Comment On November 18, 2012, at 5:52 AM, MNU34 wrote:

    If you want to have a real good laugh, you should run the numbers on total tax revenues / GDP for the European countries.

    Greece will have a lower figure than Switzerland, which the Eurocrats call a tax haven...

  • Report this Comment On December 21, 2012, at 6:10 PM, Neil1236 wrote:

    1.) It seems plausible that the Greek people were fooled by their own ministers. The ministers either didn't know what they were doing, or intentionally lied about Government finances.

    2.) I think Goldman Sacs supplied the "creative accounting" with derivatives. Derivatives are simply complicated bets .... and if it's complicated, then it cannot be valued; if it cannot be valued, then it cannot be put on a Balance Sheet. Thus, off-balance sheet financing was the strategy.

    3.) France and Germany weren't in a position to chastise Greece, as they were breaking the rules as well, and doing business with other Bankers in similar derivatives.

    4.) Bankers are supposed to be the best and brightest. They ought to know better than the rest of us. They ought to have a higher duty to be responsible when dealing with such large sums of money that an entire country, perhaps the entire world economy, can be negatively effected if the deal goes south. As it did. As did the world economy.

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