The Greek Financial Crisis explained to the average kopitiam uncle

When you spend more than you earn, bad things are going to happen.

Jonathan Lim| July 06, 05:14 PM

The Greeks have voted 61 per cent in favour of not accepting additional austerity measures in exchange for a bailout of its bankrupt economy.

With all the economic terms, austerity, Eurozone, ECB, etc, being thrown around, all this talk about the Greek Financial Crisis could sound a little, well, Greek to many.

Mothership.sg is here to solve the problem by explaining the Greek Financial Crisis in a way accessible to everyone.

This article is adapted with a Singaporean flavour and modified from a Quora response by user Evan Colvin who answered the question 'What is the Greek financial crisis? How do I explain it to a layman?'

*Editor's note on 8 July 5:00pm: The author of the Quora post has requested for the adaptation to be removed. We still encourage our readers to visit the Quora link above to get an understanding of the Greek debt crisis. We have re-written the article*

*Editor's note on 8 July 10:30pm:  We added Evan Colvin's full post from Quora explaining the Greek debt crisis in layman's terms.*

 

Evan Colvin's post:

Greece really likes taking care of his family. Some of his cousins and his older relatives struggle to find work, others don't like to work, and plenty see themselves as "too old" to work. So Greece helps out by sending them some money [Pensions and Unemployment].

Greece's job doesn't cover all the money he spends on his family, So Greece got a credit card a long-time ago [National Debt].

Greece told himself that he could manage his credit card balances. His friends' credit cards have much higher balances, and they can make their payments without any troubles. But Greece ignores the obvious: his friends make a lot more money than he does, and their credit card companies think that they'll continue to make more money. So they get better interest rates [High Debt-to-GDP, High Interest Rates].

But—for a long time—things seemed alright. When Greece's credit card got too high he used a little accounting trick to say that he had more money than he did and he could make those high credit card payments. As long as he didn't do this everyday his credit card companies didn't mind too much [Printing Money to Fund Deficits].

Then Greece saw his friends set up a cool club. Their club made it easy to do business with each other and that made his friends and their families happy. Greece believed joining that club would make him feel important, but when his friends joined they gave up some of their autonomy. If they got into trouble with their credit cards they couldn't do those accounting tricks that Greece did [Eurozone and the Euro and Ceding Monetary Control to the ECB].

Still, Greece really wanted in. Deep down he knew that he had a problem and he needed to deal with it. Maybe he felt like an alcoholic. "If I join this club," he thought, "I can change my life for the better. I'll stop being so irresponsible with my money." To get into the club, Greece needed to show the other members that he wouldn't wreck their party if he joined. He made the case that they could trust him. He said: "here's all my financial information." He probably lied :/  Fact and Fiction in EU-Governmental Economic Data [Eurozone Reports].

The club let Greece in. He thought: "I've made it! I'm one of the best!" He needed to tighten his belt. He knew that. But his family still counted on him to pay their rent. The club didn't allow Greece to spend so much money above his income, but Greece did it anyway. He felt an obligation to support his family. Maybe—like an alcoholic—Greece thought: "Tomorrow I'll change." Always tomorrow. But Greece didn't change fast enough[Greece Continues to Rack Up Debt].

It didn't bother his club or his credit card companies too much at the time. When Greece got in trouble he just took out another credit card, and he used those new cards to charge the payments for his old cards [Issuing Debt to Make Debt Payments].

Greece lost his job. He found another, but it only paid about 75% of what his old job paid him. And that job didn't always pay him what he deserved[Economic Downturn and Tax Fraud].

Credit card companies got scared. The credit card companies' friends lent to other clients and got burned when some of those clients couldn't make their payments. They knew Greece struggled to get by, so they decided not to loan to him any more. Greece couldn't get another credit card to pay his old cards. How would he support his family? And how would he get a better job if he didn't have money to invest in himself? [2007-2010 Credit Crisis and Greece Gets Cut Off].

Greece's club, with another bigger club, stepped into help. They didn't want to see Greece fail; if he did it might hurt all of them. Greece owed some members of this club, and their families, a lot of money. So they lent Greece the cash he needed to stay afloat. But that didn't make a big, important member happy. The clubs, and this big member, made demands. The big ones? Greece needed to ensure he got paid what he was due, and Greece could no longer support all his family members [ECB and IMF Step In, Germany Doesn't Like It, Conditions on Loans].

Greece takes the money and now he can make his payments for another five years. But he doesn't cut his family off like the clubs told him to, and he can't stand up to his boss to get his rightful paycheck. Admittedly, Greece's family threatens to beat him up if he cuts them off. But still[Greece Doesn't Meet Terms of Loans].

Greece's club worries about him. They make sure that if he can't pay they won't hurt. They buy insurance in case Greece can't pay, and they sell off Greek debt to cousins with a taste for risk [European Banks Hedge Risk of Greek Default].

Payment time. The big club that helped Greece needs a payment. But Greece can't/won't make it. Greece can't bring himself to cut-off his family or ask his boss to stop cheating him. He didn't like the conditions, but he struggled to tell the club "no." So he let his family decide; they yelled "NO!" in their loudest voice, largely as a symbolic act of defiance. While the members of the club certainly feel free to dissent the vote, in general, exasperated them and made them feel like negotiations have just gotten tougher [Referendum on Bailout Conditions, Voting Down Expired Bailout Conditions, Various EU Members Respond].

 

The Greek Financial Crisis explained to a kopitiam uncle

 

Pre-Eurozone Crisis

Greece's has a National Debt - its revenues are not as high as its expenditure therefore it has to borrow money.

Greece has a pension scheme for retirees as well as benefits for the unemployed - this costs money without generating any revenue.

The people lending Greece money set higher interest rates as compared to other countries in Europe. It costs Greece more to borrow money compared to other European countries.

Before Greece joined the Eurozone, it was able to print its own currency (the drachma) to manage its National Debt. This allows it to devalue its currency to make their exports attractive or lower interest rates to make borrowing easier.

Greece then joined the Eurozone. It adopted the euro as its currency. It cannot print euros now because that is regulated by the European Central Bank (ECB).

As a condition of joining the Eurozone, Greece was supposed to ensure that its annual expenditure did not exceed a certain percentage more than its revenue. It did not meet this requirement.

It also borrowed more money to repay debts owed previously.

 

During the Period of the Eurozone Crisis

The European Financial Crisis happened and Greece found itself one of the hardest hit.

It's revenue took a hit while expenditure remained.

It was also found that Greek citizens and businesses were evading taxes. Economists estimated this loss in tax revenue accounted for half the country's budget shortfall in 2008 and one-third in 2009.

Greece was also unable to borrow more money to repay its debt during this period.

 

Greece receives loan in 2010

It turned to the International Monetary Fund (IMF) and the ECB for a loan. But the loan came with conditions. Greece had to raise taxes and cut Government spending, including pensions - this is called austerity measures. This was to attempt to make sure Greece did not spend more than it earned.

This caused unemployment in Greece to soar to 25 per cent. Youth unemployment was 50 per cent. Pensioners staged protests against austerity.

Money from the ECB came from other European taxpayers. It is politically unpopular that taxpayers dollars from one country are used to help others.

 

2015 debt deadline

Greece has to repay the loan it received from the IMF and ECB. The lenders want more austerity measures for Greece to curb its expenditure in exchange for more loans. Greece called a referendum among Greek citizens on whether they will meet these demands for austerity and an extension to loan repayment.

61 per cent of Greeks voted no, which mean Greece may go back to using its own currency and figuring out how it will repay all the debt it has racked up without the help of the IMF or ECB.

 

If you still catch no ball, watch this:

How the euro caused the Greek crisisThe Greek crisis explained in under 3 minutes.

Posted by Ezra Klein on Thursday, 2 July 2015

 

If you like what you read, follow us on Facebook and Twitter to get the latest updates.