The Summer Olympics of 2004 were an unforgettable dream for Greece, with over 11,000 athletes from around the world coming to Athens to participate in the world’s most competitive multi-sport event. The games, however, cost Greece a hefty sum of more than 9 billion euros. Just one year after the games, the European Commission placed Greece’s public finances under strict monitoring, marking the first sign of Greece’s debt problems. From 2010 to 2018, Greece received three bailouts from the European Union and the International Monetary Fund, without which it would have defaulted on its loans to creditors and put its position in the European Monetary Union and ability to access finances from public markets in severe jeopardy.
How Did Greece Get Here?
Greece, generally seen as an advanced economy by economists, went from hosting the dream games in 2004 to fighting off creditors from most of the 2010s. In 1999, 11 European Union countries adopted the euro as their national currency, while Greece wanted to adopt the euro but could not due to restrictions under the Maastricht criteria. Greece finally adopted the euro in 2001, but only because it had lied about its finances. This allowed Greece to borrow heavily from public markets at low interest rates, which the Greek government used to develop many social programs, lower taxes, and expand its pension system. However, when the great financial crisis hit the global economy in 2008, Greece’s finances were already in a sorry state, with a debt to GDP ratio of roughly 127 percent and a budget deficit of roughly 15 percent of GDP. By 2009, many analysts saw the beginning of Greece’s debt crisis, as a newly elected government revealed that its predecessors had been underreporting the true budget deficit.
The Consequences of Default
If Greece defaulted on its loans to investors, it would face prohibitively high interest rates in the future or receive very few loans at all, forcing it to either raise taxes or lower government spending, which would severely contract the Greek economy for a long time. A Greek default would also be untenable for the rest of the monetary union, as it could lead to a domino effect of defaults throughout the rest of the eurozone.
When you borrow money from a bank, the bank checks your credit history to determine the interest rate they will charge you. If you have a history of paying back your loans on time and in full, the bank will charge you a low interest rate. However, if you have a history of missing loan payments or refusing to repay loans altogether, the bank will charge you a high interest rate or may even refuse to loan you money. This was the problem Greece faced, as if it defaulted on its loans to investors, it would face prohibitively high interest rates or receive very few loans at all.
The Greek debt crisis was a long and complicated series of events, starting with Greece’s adoption of the euro in 2001 and its subsequent borrowing from public markets at low interest rates. The great financial crisis of 2008 put Greece’s finances in a sorry state, and by 2009, Greece’s debt crisis had begun. If Greece had defaulted on its loans to investors, it would have faced prohibitively high interest rates or received very few loans at all, severely contracting the Greek economy for a long time and potentially leading to a domino effect of defaults throughout the rest of the eurozone. The bailouts from the European Union and the International Monetary Fund prevented this outcome and allowed Greece to avoid default, but the consequences of the crisis are still being felt today.