Greece's Debt Crisis: Overview, Policy Responses, and Implications [April 27, 2010]

Over the past decade, Greece borrowed heavily in international capital markets to fund government budget and current account deficits. The reliance on financing from international capital markets left Greece highly vulnerable to shifts in investor confidence. Investors became jittery in October 2009, when the newly elected Greek government revised the estimate of the government budget deficit for 2009 from 6.7% of gross domestic product (GDP) to 12.7% of GDP. In April 2010, Eurostat, the European Union (EU)'s statistical agency, estimated Greece's deficit to be even higher, at 13.6% of GDP. Investors have become increasingly nervous about Greece's ability to repay its maturing debt obligations, estimated at €54 billion ($72.1 billion) for 2010. On April 23, 2010, the Greek government requested financial assistance from other European countries and the International Monetary Fund (IMF) to help cover its maturing debt obligations. This report analyses the Greek debt crisis and implications for the United States. The debt crisis has both domestic and international causes. Domestically, analysts point to high government spending, weak revenue collection, and structural rigidities in Greece's economy. Internationally, observers argue that Greece's access to capital at low interest rates after adopting the euro and weak enforcement of EU rules concerning debt and deficit ceilings facilitated Greece's ability to accumulate high levels of external debt. During the crisis, the Greek government has sold bonds in order to raise needed funds. Greece's government has also unveiled, amidst domestic protests, austerity measures aimed at reducing the government deficit below 3% of GDP by 2012. It also appears likely that Greece will receive financial assistance from countries that use the euro as their national currency (the Eurozone) and the IMF in order to avoid defaulting on its debt. A common method for addressing budget and current account deficits, currency devaluation, is not possible for Greece as long as it uses the euro as its national currency. If the austerity measures and financial assistance from outside parties prove insufficient, Greece could be forced to default on, or restructure, its debt. Greece's crisis has numerous broader policy implications. There is concern that Greece's crisis could spill over to other European countries in difficult economic positions, including Portugal, Ireland, Italy, and Spain. Greece's crisis has raised questions about imbalances within the Eurozone, which has a common monetary policy but diverse national fiscal policies. It has also come to light that complex financial instruments may have played a …