Greece - financial crisis

1 Introduction

In 2008 the global financial crisis, which was fundamentally caused by the combination of a credit boom and a housing bubble (Acharya, Richardson, 2009), affected the economy of most countries in Europe. One of the countries that were affected tremendously was Greece. Most countries that were affected by the financial crisis are more or less out of the worst period, but Greece does not seem to have gotten back on their feet yet. They have needed two bailout loans and they are still suffering with a high unemployment rate and a high debt to GDP ratio.
The reason why the crisis in Greece has lasted this long cannot be blamed entirely on the global financial crisis in 2008. Greece’s problems have been building up over several decades, and include reasons at both macro and micro levels. These reasons include the inefficient and over-staffed public sector, the debt explosion, corrupt political systems, uncompetitive economy, and overall lazy Greek culture (Panageotou, 2011). In this project we will take a closer look at these problems and also the affect from the 2008 financial crisis. We will try to find out if any or all of these problems can be categorized as the main causes of the ongoing crisis in Greece.
2 Greek Financial History
Economy in Greece from 1970 to present days:
Financial problem is not a new phenomenon in Greece. The country has had problems before, like the one in the 70’s. In 1971 the collapse of Bretton Woods and the devaluation of the US’ dollar led to a rise in the inflation in Greece, from 4.3 percent in 1972 to 15.5 percent in 1973 (Panageotou, 2011).
Greece’s debt started to rise in the 1980’s. In 1980 the debt to GDP ratio was only 22 percent, and in 1993 it had increased to 98 percent. The ratio then was quite stable for some years until the financial crisis in 2008. The debt to GDP ratio then rose dramatically from 105 percent in 2007 to more than 150 percent in 2012, which was the highest of all the European countries (Linschoten, 2011). A reason for this rise in debt to GDP ratio is that Greece could borrow at a much lower interest rate when they joined the Eurozone. In 1994 the interest rate was about 20 percent, and declined to under 3.5 percent in 2005, this led to a debt explosion in the 2000’s (Panageotou, 2011). Table from economicsinpictures (Linschoten, 2011)
In the 1980’s the Greek prime minister Andreas Papandreou created an inefficient public sector that has persisted into the present day. This public sector grew in inefficiency, corruption, and overstaffing. At the same time wages and pensions increased (Panageotou, 2011).

After joining the Eurozone in 2001 Greece had a positive real GDP growth until the financial crisis in 2008. In 2008 the growth was about zero, but in 2009 and after the growth have been negative (Global Finance, 2012).

The 2008 Financial crisis have affected Greece a great deal. From 1998 until 2013 the unemployment rate has an average of 13.48 percent, with a record low of 7.3 percent in May 2008, and a record high of 28 percent in November 2013 (Trading Economics, 2014). Also the market value of publicly traded shares have decreased in value from US$ 54.72 billion in 2009, to US$ 33.65 billion in 2011, which is a decrease of 60 percent (Global Finance, 2012).