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EXPLAINING THE EUROZONE’S SOVEREIGN DEBT CRISIS

Q. WHAT HAS HAPPENED TO CAUSE THE GREEK DEBT CRISIS?

A. Having rashly spent its way through the past few decades, Greece’s national debt now stands at around 115 per cent of GDP – exacerbated by a culture of tax evasion in the country. Now that the yawning gap between government income and spending has spiralled to new levels, concerns over a Greek default on its debt have increased ahead of a crucial 19 May deadline for it to meet repayments on €8.5bn (£7.4bn) of maturing debt. A proposed €45bn EU and IMF aid package for Greece has been delayed by Germany dragging its feet, with the resulting uncertainty causing spreads between Greek government bonds and benchmark German bunds to reach record levels.

Q. WHICH OTHER ECONOMIES MAY BE AT RISK?

A. Contagion is one of the biggest worries for the eurozone at the moment, as fears grow over the likelihood of Greece’s woes spreading to other economies. Portugal is first in line for a potential hit, after the country’s credit rating was downgraded by Standard & Poor’s to A- on Tuesday, at the same time as the agency dropped Greek bonds to junk status. Spain is following closely on Portugal’s heels (having been downgraded to AA by S&P yesterday), as is Ireland (and, for that matter, California over in the US). Markets are experiencing jitters over the likelihood of future defaults in these economies, though experts are split over the question of whether the economic disarray could spread or whether Greece’s messy credit situation is unique.

Q. WHAT DOES THE GREEK CRISIS MEAN FOR THE EUROPEAN BANKING SECTOR?

A. City analysts have consistently warned that the effect of Greece’s problems on European banks is a more pressing short-term concern than the issue of contagion. European banks hold large amounts of Greek debt – primarily French banks, which have around €75bn of exposure to Greece, and German banks, which hold some €45bn of the country’s bonds. With so much exposure, the worry is that some institutions may fail in the event of a Greek default, with potential ramifications on the same scale as the crisis in the wake of Lehman’s collapse.

Q. WILL GREECE HAVE TO LEAVE THE EURO?

A. Economists are split on the issue of whether Greece will be forced out of the euro. Those who believe the country will be pushed out say that Germany’s procrastination over approving the bailout is tantamount to having already shut the door on the country, adding that Greece’s woes are only getting more serious by the day. On the other side of the coin are those economists who believe that allowing the country to fail would be unacceptable to its eurozone partners as it would signal a failure of the concept of the single currency.

Q. SHOULD THE UK BE WORRIED?

A. Yes, though of course Labour disagrees. Foreign secretary David Miliband cites key differences between the two economies: debt levels (the UK’s at 56 per cent of national income and Greece’s at 115 per cent), growth (the UK has moved out of recession whereas the Greek economy is expected to contract by 2.5 per cent this year), and the current account deficit (the UK’s stands at less than two per cent of GDP and Greece’s at around 10 per cent) as examples. But many economists are much more worried as the UK’s budget deficit is roughly similar to Greece’s and the UK national debt is on an explosive, unsustainable path.