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)
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
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
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,
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.
leading to widespread strikes and violent
protests. Fear of contagion in other
“periphery” countries was rampant, the
This high debt burden left Greece’s
embarked on a strict austerity campaign,
entirely certain. The government also
GDP over Time
Papandreou Index, 1999 = 100
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
Eurozone member states, along with the
the verge of collapse.
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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
Fall edition of the IBR magazine at the Wharton School.