The Greece fiscal issues were not only affecting Greece as a nation but were spreading to other countries like Spain, Portugal and Italy. The continuous fiscal crisis meant that other parties had to come in in the rescue of Greece. It is important to note that Greece crisis is attributed to the 2004 Olympics and her joining the euro zone (Darden Business Publishing, 2011). The continued financial deterioration and increased debt, Greece had to look for a way to resolve her financial problem. The Euro zone countries and the IMF agreed on the bail out on three major incentives, implementation of austerity measures, privatization of government assets and implementation of outlined structural reforms.
Financial institutions, European banks, come out to give these countries, Portugal, Italy, Ireland, Greece and Spain (PIIGS), a chance to borrow(Smaghi, 2011). This was the only way to redeem them from the financial fix. However, this would not be successful because Greece’s debt was so high that if it were to be financed, many banks would fail and this would result into other countries following Greece’s footsteps of huge debts and financial fix. Other financial institutions like the International Monetary Funds had to intervene.
The ECB and IMF responded to this crisis in the year 2010 by extending a EUR110 billion bailout package to Greece. This was on a condition that it would implement austerity packages equal to fourteen percent of the GDP. The ECB increased its purchases of sovereign debt in the secondary market in the attempt to keep markets from moving away from Greece and her debt hit allies (Smaghi, 2011). The move kept the interest rates down allowing the troubled nation borrow at lower rate and fix their problem.
European Stabilization Mechanism was launched by EC worth EUR60 million, which was used as collateral to rise funds which, were then given to the PIIGS. The fund was sufficient since non-euro EU countries like the UK contributed.
European Financial Stability Facility (EFSF) worth EUR440 billion, came in after the first EUR60million from the European Commission. The EFSF was established as a special-purpose vehicle that was backed by all Euro Zone countries (Prinz & Beck, 2012) The EFSF issued bonds and distributed the discovered capital to the struggling countries, the PIIIGS. The rate charged by the EFSF to these nations was modeled to equate those offered by the International Monetary Fund.
Other alternative solution meant to eradicate the deficit were increasing exports and decreasing imports, increasing taxes and using debt. However, some of this solution were impracticable, for example increasing taxes would be ineffective as there were no formal structures that were required for efficient tax collection(Darden Business Publishing, 2011)..
If a country defaulted, that is, failed to meet her legal obligation in servicing the debt or violets the debt contract, other countries that were part of the EFSF would contribute funds to service the debt. This was however concentrated in the bonds that would mature after 2013 as the EFSF facility was to expire in this year. That means any bond that mature before 2013 was effectively utilized by the facility. The EFSF had to remain adequately capitalized enough to lessen any fears that a country who had borrowed from the facility may default meaning the facility would service its debt again (Prinz & Beck, 2012).This would mean the facility paying double sum for the country.
Darden Business Publishing (2011). The Euro Zone and Sovereign debt crisis. University of Virginia, 5652. Retrieved from file:///C:/Users/user/Downloads/Group%20Assignment-Casestudy.pdf
Howden, D. (2011). Institutions in crisis: European perspectives on the recession. Cheltenham, U.K: Edward Elgar.
Prinz, A., & Beck, H. (January 01, 2012). Fighting debt explosion in the European sovereign debt crisis. Intereconomics, 47, 3, 185-189.
Sinn, H. W. (2012). Forum. THE EUROPEAN BALANCE OF PAYMENTS CRISIS, 13. Retrieved from http://www.cesifo-group.de/portal/pls/portal/docs/1/1215229.PDF
Smaghi, L. B. (2011). The European debt crisis. European Central Bank. Retrieved from http://www.ecb.europa.eu/press/key/date/2011/html/sp111017_1.en.html