The Origins of Greece's Debt Crisis

The Greek debt crisis originated from heavy government spending and problems escalated over the years due to slowdown in global economic growth. When Greece became the 10th member of the European Union (EU) on Jan. 1, 1981, the country's economy and finances were in good shape, and by 1999 the country had a respectable a debt-to-GDP ratio of less than 60% and a budget deficit below 3% of GDP. In 2001, Greece joined the Eurozone and adopted the common euro currency.

But the situation deteriorated dramatically over the next two decades fast due to fiscal profligacy, which is defined as wasteful and excessive expenditure, caused deficits and debt levels to explode.

Key Takeaways

  • The Greek debt crisis is due to the government's fiscal policies that included too much spending.
  • Greece's financial situation was sound when it entered the EU in the early 1980s, but deteriorated substantially over the next thirty years.
  • While the economy boomed from 2001-2008, higher spending and mounting debt loads accompanied the growth.
  • By the time of the 2007-2008 financial crisis, the jig was up and Greece's debt loads became too big to handle—austerity measures were put in place shortly thereafter.

The Road to Debt

In Oct. 1981, the Panhellenic Socialist Movement (PASOK), a party founded by Andreas Papandreou in 1974, came into power on a populist platform. Over the next three decades, PASOK alternated in power with the New Democracy Party that was also founded in 1974. In a continuing bid to keep Greek voters happy, both parties lavished liberal welfare policies on their electorates, creating a bloated, inefficient, and protectionist economy.

But that growth came at a steep price in the form of rising deficits and a burgeoning debt load. This was exacerbated by the fact that these measures for Greece had already exceeded the limits mandated by the EU's Stability and Growth Pact when it was admitted into the Eurozone. For example, Greece's debt-to-GDP ratio was at 103% in 2000, well above the Eurozone's maximum permitted level of 60%. Greece's fiscal deficit as a proportion of GDP was 3.7% in 2000, also above the Eurozone's limit of 3%.

Unsustainable Ambitions

The jig was up shortly after the financial crisis of 2007-08, as investors and creditors focused on the colossal sovereign debt loads of the U.S. and Europe. With default a real possibility, investors began demanding much higher yields for sovereign debt issued by Portugal, Ireland, Italy, Greece, and Spain (the so-called "PIIGS") as compensation for this added risk.

Up until then, the sovereign debt risk for those countries had been camouflaged by their wealthy neighbors in the north, such as Germany. By Jan. 2012, however, the yield spread between 10-year Greek and German sovereign bonds has widened by a whopping 3,300 basis points, according to research by the Federal Reserve Bank of St. Louis. As Greece's economy contracted in the aftermath of the crisis, the debt-to-GDP ratio skyrocketed, peaking at 180% in 2011.

The final nail in the coffin came in 2009, when a new Greek government led by Papandreou's son George came into power and revealed that the fiscal deficit was 12.7%, more than twice the previously disclosed figure, sending the debt crisis into a higher gear.

Are Greece's Debt Problems Over?

Greece's sovereign debt crisis began in the 2010s, and a decade later the country's economy has still not fully recovered, in part due to more recent disruptions caused by COVID19. While the last official round of financial bailout support was made to Greece in 2018, it has until the year 2060 to fully pay off those debts.

What Is Greece's Debt-to-GDP Ratio?

In 2020, Greece's debt-to-GDP ratio hit a record level of 206.3%. In 2021 it fell slightly to 197.3%, which is the third-highest such ratio among sovereign debt ratings issued by Fitch Ratings.

Is Greece a Developed Country?

Yes, according to the World Bank's standards, Greece's economy is considered to be one of a developed country. Greece has a high standard of living according to the World Bank's Human Development Index (HDI): it ranked 32 out of all countries. Greece also has a GDP-per-capita of around USD $23,000 as of 2021.

The Bottom Line

The Greek debt crisis had its origins in the fiscal profligacy of previous governments, proving that, like individuals, nations cannot afford to live way beyond their means. As a result, Greeks may have to live with stiff austerity measures for nearly a decade.

Article Sources
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  1. Council on Foreign Relations. "Greece's Debt Crisis: Timeline."

  2. Coufoudakis, Van. "Ideology and Pragmatism in Greek Foreign Policy." Current History, Vol. 81, No. 479. 1982, Pages 426-431.

  3. BBC News. "Greece admits fudging euro entry."

  4. Federal Reserve Bank of St. Louis. "Sovereign Debt: A Modern Greek Tragedy."

  5. BBC News. "Greece's budget deficit worsens."

  6. Fitch Ratings. "ECB Decision Supports Greek Government Debt Sustainability."

  7. World Bank. "Greece - Human Development Reports."

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