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E U RO P E A N D E BT C R I S I S

BACK FROM THE BRINK… FOR NOW BY C H A R L E S H E N D R E N ( W ‘ 1 0)

A

s 2009 ended, investors breathed a cautious sigh of relief. The global economy was no longer on the brink of collapse, and for many countries a timid recovery had already begun. Few imagined that events in Greece—a country contributing less than

one percent of world GDP—would threaten to bring us once again to the brink. The resulting sovereign debt crises never managed to push us over the edge; however, the long-term effects of “Europe’s subprime” still threaten to destabilize world economy for years to come. Understanding the causes and consequences of this phenomenon is therefore crucial to ensuring a sustainable economic recovery.

Return to the Brink

comparable

increased

IMF, pledged assistance in March, which

Greece appeared to enjoy considerable

from around 10-40 to over 400 basis

Greece eventually accepted, following a

success since adopting the euro in 2001,

points by January. Surprisingly, the

ratings downgrade.

growing at a higher rate than its European

government was still able to raise funds

peers and avoiding many of the most

in international markets following these

received over $100 billion in emergency

damaging effects of the subprime crisis.

developments—albeit at higher rates.

loans, repayment of which is still not

In October 2009, however, the incoming minister,

George

revised the government’s budget deÀcit upwards, nearly doubling the Àgure from 6.7 to 12.7 percent of GDP; external debt stood at 115 percent.

bonds)

140

dust

settled,

Greece

leading to widespread strikes and violent

130

protests. Fear of contagion in other

120 110

“periphery” countries was rampant, the

100 90

This high debt burden left Greece’s

the

embarked on a strict austerity campaign,

150

1999

When

entirely certain. The government also

GDP over Time

Papandreou Index, 1999 = 100

prime

German

2001

2003 Greece

2005

2007

2009

European Avg.

euro plummeted, and European banks saw their share prices fall due to their

liquidity increasingly dependent on inves-

Even with these funds, the government

large holdings of government debt. For

tor conÀdence, which was compromised

still needed to raise in excess of $70 billion

at least a month, it appeared that the

following the deÀcit revision. Spreads

to meet its 2010 debt obligations. Fellow

European economy was once again on

on

Eurozone member states, along with the

the verge of collapse.

ten-year

20

111210 hq.indd 20

government

bonds

(over

I N T E R N AT I O N A L B U S I N E S S R E V I E W

FA L L 2 0 1 0

11/27/2010 3:13:08 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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