As the consequence of the 2008 U.S. banking crisis, Europe was hit by one of the worst debt crisis. Starting from Greece in autumn 2009, the crisis spread to other European countries, especially Spain, Italy, Ireland and Portugal and forced European policy makers to take many actions to limit its consequences (BOG, 2014, p.42). While others European economies such as Spain, Portugal avoided the severe crisis by following advisory strategy like austerity, reducing public spending…, Greece situation did not improved. To help Greece improve its situation, the IMF and Eurozone governments sealed a deal for two bailouts in 2010 and 2012, totalling €240 billion. On July 5, 2015 the ...view middle of the document...
Especially, Greece government, in 2002, decided to use complex financial product offered by investment banks to conceal true debt levels by pushing part of its liabilities into the future. In particularly, Greece’s debt manager agreed a deal involving cross-currency swaps with Goldman Sachs (Rebecca, 2010, p.16). In which, government debt issued in dollars, yen or Swiss francs was swapped for euro debt and after a certain period, it was to be exchanged back into the original currencies at a later date. “In the Greece case, the US bankers offered special kind of swap with fictional exchange rates that allowed Greece to receive a higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks” (Beat Balzli, 2010). These transactions involving financial derivatives were technically not reported by the Greek government under EU accounting rules.
In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data, it stands at 5.3 percent. The convergence criteria might be applied not strictly enough to Greece, which may due to some special reasons - for instance, political failure of European leaders. Goldman Sachs also was investigated the role involving to build up of Greece’s debt of by the Federal Reserve (Rebecca, 2010).
Secondly, allowing the interest rate spreads on bonds issued by Greece to fall under 5% during the period 2002 -2007 let Greece quickly to be in crisis, which was totally different from what was expected is to boost trade and enhance the propensity to invest with low real interest rate.
Soure: ECB Statistical Data Warehouse (Retrieved: 16/08/2015)
Underestimating the risk on all sorts of assets by international investors and the rating agencies let Greece be able to borrow almost as easily as Germany. Besides, the economy, which relied mainly on consumption rather than on saving and investment, associated with public overspending and the budget deficits far exceeded the limits of the Stability and Growth Pact just made Greece to continue borrowing and accumulating debt.
Graph: Budget balance and Gross Debt situation in Greece
While Greece was no longer able to use monetary or exchange rate adjustment to deal with disadvantages at a national level, debt crisis was apparently and also warned by Bank of Greece.
In next paragraphs, financial regulations and the role of banks are discussed to clarify what actually government, Eurosystem or banks did during debt crisis.
2. Financial Regulation and the role of banks:
2.1 Financial Regulation:
Financial regulation focused mostly on banks. During the first phase of global crisis (2008 - 2009), Greek government and Bank of Greece (BoG) tried to support the banking system by strict new rules, effectiveness in operation and strengthening the liquidity.
The new banking law 3610/2007 and the Governor’s Acts as well as the Committee of...