The European Union and the International Monetary Fund have agreed to bailout Greece, which is reeling under debt, with a €110 billion package. The move is expected to help the Euro stabilize. Global stocks rose as investors became more confident of a financial rescue of the country.
Stringent spending cuts by the Greek government are expected with Prime Minister George Papandreou admitting in a live telecast that citizens would have to make “big sacrifices”. These sacrifices include a pay and pension cut for those employed in the public sector and significant tax increases. The country has a population of 11 million of which about 1 million work in the public sector.
The reasons why Greece finds itself in this predicament are many. Large, unchecked spending by the government, lending at cheap rates and unsuccessful implementation of financial reforms hit the country hard during the recession. It went on to reveal deficits and debts that exceeded Eurozone’s set limits. The country’s deficit stands at 12.7 percent and national debt is about €300 billion. The situation prompted S&P to lower Greece’s debt ratings to junk status last week.
Greece’s rescue deal was give the green signal by sixteen European countries that have Euro as their currency and the loans will be given over a period of three years to minimize the risks of Greece defaulting. The monetary package contributed by these nations would be dependent on their individual Gross Domestic Product and population. Euro nations will meet on May 7 to close the process.
Greece’s aim is to reduce deficit by more than €10 billion. Some measures it has implemented in order to achieve this include a hike in taxes on alcohol, tobacco and fuel; cut in pensions of public sector employees; and an increase in the retirement age by two years. Greek citizens are opposed to their government’s stringent measures and unions across the country have called for a strike protesting the proposed austerity measures.
It is feared that Greece’s debt problems could spread to other financially weak countries, including Portugal and Spain. This could cause the Euro’s value to diminish relative to other global currencies and adversely affect the financial credibility of eurozone nations.
Economists argue that there is a lesson for the US in how this situation is unfolding. The deficit and debt levels are worrying here too, and the massive spending during the recession could come back to haunt the economy in the next few years.