Greece's Sovereign Debt Crisis

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Greece began to gain public attention when the new government reported that the real budget deficit was likely to be 12.7% of GDP (almost three times more than the estimated figure), as a result of the financial crisis as well as the government's uncontrollable spending over the years. Greece did not escape from the outcome of the financial crisis, even though its EU membership still enabled them to borrow easily in the bond markets at considerably low rates. Its GDP growth rate shrunk by 2.5% in 2009 due to falling tax revenues and consumer spending. On top of that, Greece's uncontrollable spending in the public sector, such as higher pay and more jobs also led to the bloated budget deficit.^[1]

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The burgeoning government deficit (12.7% of the GDP) and escalating public debt (113% of GDP in 2009) led to rising borrowing cost, where Greece's 10-year government-bond spreads over the German bunds widened to 312 basis points in 29 March.^[2] Panic spread across investors with worries that Greece might require a bailout if it fails to refinance its €20 billion in loans that are maturing in April and May 2010.^[3]

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In February 2010, Greece's prime minister, George Papandreou, announced higher taxes, budget cuts and public sector wage freeze to bring deficit down to 8.7% by 2010. The European Commission's endorsement in Greek government's plan managed to ease the panic among investors.^[4]

References

1. ↑ New York Times: Is Greece's Debt Trashing the Euro?
2. ↑ Business Week: EURO GOVT-Greek yield spread wider as new bond launched
3. ↑ Times Online: Merkel has saved Greece – but not the euro
4. ↑ The Economist: A Very European Crisis