Introduction
When the world had started to believe that economic crisis of 2008 is almost over, it came across the news of new round of financial turmoil in Europe. In the end of 2009, Greece's government debt is exceptionally large which gross debt-to-GDP ratio is nearly 115 % (European Commission, 2010). This means its debt is greater than its annual GDP. Greece's current economic problems have been caused by a mix of domestic and international factors. The aim of this essay is to evaluate what the major causes of the Greek debt crisis are. People' s views on this vary from person to person. Some believe it was due to high government spending (Nelson, 2010), some argue the euro played the most important role (Belien, 2010), however others blamed to the declining of international competitiveness. Limited by the length of the essay, it is going analyse four causes which been widely discussed: economy structure, Olympic Games in Athens, global financial crisis and Goldman Sachs's tactics.
Economy structure
Greece has seen an incredible speed of GDP increase at 7% every year between 2004 and 2009. However, this relay on only two major economic sectors: Tourism and shipping which are too fragile to stand for the changes of world import demand. Specifically, tourism profit accounts 18% of the GDP of Greece, the number of traveler from the US reduced 24.2% in 2009 compare with 2008's; at the same time, the number of Europe travelers also reduced one fifth, this cut down 16.2% and 14% of the national income respectively. The Greek shipping industry also met depression that 2009 annual income dropped 27.6%. Moreover, the inertia effects of high level of social welfare make Greek financial condition worse and overstaffing and poor productivity in the public sector still an obstacle to improved economic performance.
This argument seems convincing if not compare with other developed countries which relay on service industry. Singapore is a good illustration, which has same pillar industries as Greece while not only survive from the global financial crisis, but also enjoys healthy government financial condition. As a result, the industry structure is not the main cause of Greek debt crisis.
Olympics Game in Athens
Some sport economist attempting to link the 2004 Summer Olympics in Athens to the factors are behind the crippling debt crisis. They argue that the Olympics cost double the initial budget while more than half of Athens' Olympic sites are barely used or empty now (Gatopoulos, 2010). Therefore, money was squandered in a thoughtless way.
However, the data shows that the money spent on the Olympics is equivalent to one quarter of 2009 budget deficit (Alevras, 2010). Moreover, Athens is still reaping the benefits from its pre-games overhaul of the city's transport systems and infrastructure. Therefore it is little evident to considered the amount spent over seven years of preparation for the Olympic Games end up being responsible for the crisis.
Sequel of global financial crisis
Some economists maintain that Greek crisis is caused by the ripple effects of the 2008 global financial crisis.
Over the past three decades, there are four serious debt crises around the world: Latin America's debt crisis (1980s), Russian debt crisis (1998), Argentina debt crisis (2001) and Greek debt crisis which happened recently. These debt crisis have some characters in common: basically, the country where crisis erupt are not bellwethers of world economy; furthermore, the crisis do adversely impacted global economic status and caused panic around the world; above all, historically speaking, there are more tremendous crises before the eruption of the debt crises(see Graph 1) . In proper order, these crises are global galloping inflation crisis (1980s), Asian financial crisis (1997), Internet bubble crisis (2001) and the US's subprime lending crisis (2007). Notably, these crises always have direct relevance to the debt crisis on economic procedures.
Graph 1. Debt crises always follow the global crises
After the eruption of the subprime lending crisis in 2008, Greece took the advantage of Expanding Financial Policy and Currency Policy of Keynesianism deal with the economy depression, significant drop of private sectors' investment, shrink of consume and raise of unemployment. When the economy bottom out after strong stimulate, Greek government debt also been enhanced.
According to the research of Uri Dadush, senior associate and the director of the International Economics Program at the Carnegie Endowment for International Peace, sovereign debt boosted from 62% to 85% of global GDP in 2009 and 3.4% of GDP was used to rescue the bank which was going to bankrupt. When it comes to Greece, government debt increased from 95.6% of national GDP to 111.5 %( Uri Dadush, 2010).
Nevertheless, the cost of the bank rescue is not the whole story of financial inflicts. The Greek unemployment reached 9 percent in 2009(US Bureau of Labor Statistics, 2010) and conflicts of unemployed workers are increasingly fierce and frequent. Therefore, as another the effect of global financial crisis, the recession on tax receipts and the automatic increase of spending on unemployment and other safety nets pull Greece into the abyss of debt.
the financial strategy devised by Goldman Sachs
A spokesman for George Soros attempt to claim that the well-known hedge fund operator is guilty of no wrong-doing in connection with the financial upheaval currently affecting Greece and Europe as a whole(Kincaid,2010). However, Wall Street tactics akin to the ones that fostered subprime lending in the US have worsened the financial crisis shaking Greece by enabling Greek governments to hide their mounting debts over the last decade.
In 2001, Greece traded away the rights to airport fees and lottery proceeds in years to come, entered into 1 billion cross currency swaps hedging USD and JPY and restructured its portfolio with Goldman Sachs at a historical implied foreign exchange rate. In the documented case, Goldman Sachs was able to raise the extra 1 billion dollars for Greece "off balance sheet" because the derivative essentially transformed a loan into a currency trade. These transactions reduced Greece foreign debt by 2.367 euro and in turn decreased Greece debt as a percentage of GDP by 1.6 %--within the limits on deficit spending that was the key to Greece joining the EU (The New York Times, 2010).
Apparently, although the trade can ease the debt pressure for Greek government in short-term, the situation of income falls short of the expenditure still not be improve. Moreover, the swaps end up with long-term damage to the Greek state while Goldman Sachs was handsomely rewarded US$ 300 million in the deal (The New York Times, 2010).
When later, the global financial crisis and depression altered the investor's positive predict of Greek national debt. Goldman Sachs together with other investment bank began Badmouth to Greece. With the Greek Standard & Poor's credit rating decline, financial market began panic, people began invest in credit default swap( CDS) , an instrument that allows speculators to make a profit from a worsening economic situation in Greece, and even make loan conditions worse for the Greek government. As a result, the price of CDS rocketed. The fact is, Goldman Sachs purchased 20 year term 1 billion euro CDS to diversification of risk after swap with Greek(The New York Times, 2010). Therefore, Goldman Sachs not only divert the risk before head, but also reap huge profits by short sell collateralized debt obligation and takeover CDS at a low price as a person in the know. That makes loan conditions worse for the Greek government.
Conclusion
The following conclusions can be drawn from the present study. Admittedly, the Greek economy was influenced to some extent by unitary economy structure, even 2008 Summer Olympic Games. However, the main reasons why Greece suffered from the High sovereign debt levels are the ripple effects of the 2008 global financial crisis and the contribution from the US investment banks which played a role in creating the spiraling Greek debt crisis. Although Greece benefited from 750 billion of bailout from the European finance ministers and IMF, there is still a long way to go for the Greek economy fully to recover from the decline. Nevertheless, there are still issues of concern for other countries, which maybe do not have the exactly the same fiscal problems as Greece, as Warren Buffet said, "You don't know who's swimming naked until the tide goes out".
