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Demonstrators gather during a rally organized by supporters of the yes vote for the upcoming referendum in front of the Greek Parliament, Athens, June 30, 2015 (AP photo by Petros Karadjias).

Post-Mortem? Anatomy of the Greek Debt Crisis

Thursday, July 2, 2015

The Greek debt crisis entered uncharted waters this week, as Athens defaulted on an International Monetary Fund (IMF) loan after negotiations with its international creditors to extend its bailout program broke down. This report collects World Politic Review’s coverage of the crisis, from its origins in 2010 to the final days of the negotiations.

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From Crisis to Contagion

In October 2009, the newly elected government of then-Prime Minister George Papandreou revealed that Greece’s budget deficit was far greater than previously acknowledged. The announcement caused the heavily indebted country’s borrowing costs to skyrocket, setting off a chain reaction across the eurozone.

Greece’s Economy Threatens Euro’s Stability

In January 2010, Nicholas Nagle explained why Greece’s debt crisis had dangerous implications for other heavily indebted European Union countries—and for the union’s common currency, the euro.
As it became increasingly clear that Greece would be unable to meet its financial obligations on its own, a dangerous game of brinksmanship unfolded between Athens and its European Union partners. As Daniel McDowell noted in February 2010, Europe was “faced with a dilemma: bail out Athens and protect the euro, or leave Greece to the wolves and risk further decline in the euro's value and stature. Between these stark extremes . . . lie a range of options, each with its own set of costs, benefits and likely consequences.”
In May 2010, with a bailout deal secured, Greece had some breathing room, but at the cost of a punishing and immensely unpopular EU-imposed austerity program. As Nicholas Nagle wrote, “In order for the bailout to succeed, Prime Minister George Papandreou will have to face a number of challenges that will require all his political skills—and some luck.” At the time, it was hoped that “a successful management of the Greek crisis could set an example for the rest of Europe at a time when it is most needed.”
Within weeks, fears of financial contagion were borne out, and market concerns about Greece’s debt had spread to other heavily indebted European countries—the so-called PIIGS: Portugal, Ireland, Italy, Greece and Spain. Writing in May 2010, Daniel McDowell explained that the EU had eventually agreed to guarantee Greece’s solvability, “but not before suggesting to financial markets that they have neither the resolve nor the political will to address multiple casualties.”
The terms of Greece’s bailout required deep budgetary cuts along with deep structural reforms to the country’s economy. By July 2013, Dimitri A. Sotiropoulo wrote, the result of the austerity measures “was deep depression. Tens of thousands of small enterprises, the backbone of the Greek economy, went out of business, while over the same period Greece lost 20 percent of its GDP.” And while Greece had managed an impressive fiscal consolidation in terms of its budget deficit, its performance with regard to structural reforms was “disappointing.”

Aftershocks: The Political Fallout of Greece’s Economic Crisis
By November 2014, Greece’s finances had stabilized to the point that Athens considered exiting its bailout agreement in 2015. But the political impact of the crisis was far from over. The austerity measures taken to balance Greece’s budget, Dimitri A. Sotiropoulos wrote, had “provoked large-scale political protests, which shook Athens almost on a weekly basis in 2010-2012. Moreover, the Greek party system was drastically altered.” In particular, the rise of Syriza, a far-left coalition violently opposed to EU-imposed austerity, was just beginning to be felt.

From Recovery to Relapse

In January 2015, a technicality of Greece’s constitution forced snap elections at a time when Syriza was leading polls. With a platform of ending austerity and renegotiating the terms of Greece’s bailout with its international creditors, Syriza’s rise to power signaled the beginning of the second act of the Greek debt crisis.

Writing before the elections, Dimitri A. Sotiropoulos argued that while Greece’s economy had clearly suffered from the period of political instability preceding the polls, the European economy had done enough to firewall itself from contagion to be able to withstand a potential Syriza victory. “Thus, even if Syriza . . . wins Sunday’s elections, the repercussions will probably be minimal for the rest of Europe.”
That view was far from unanimous, however. In March 2015, contentious initial talks between the Syriza government and Greece’s creditors only resulted in a temporary and conditional four-month extension of its bailout. Milton Ezrati argued that the risk had now shifted “from the borrowing costs on sovereign debt to the danger of capital flight and bank runs. The mechanisms put in place after the 2008-2009 financial crisis were designed mainly in reaction to the first, which they have mitigated, but the second is still a potent threat in the event of a failure of a debt deal for Greece.”
The four-month extension agreed by Greece’s creditors—the so-called troika of the IMF, the European Commission and the European Central Bank—was conditioned on Athens submitting further reforms and budgetary cuts. It is these proposals that have been the focus of the increasingly bitter negotiations over the past four months, with the IMF in particular seeking tough measures from Athens. While Syriza did manage to win some concessions, Maria Savel wrote in March 2015, “the debt talks so far have signaled that the IMF’s hard line on reform and monitoring will likely push Athens’ radical left government to the center in order to reach a comprehensive deal.”
By last week, with the clock running down on a $1.8 billion loan repayment owed to the IMF by Tuesday, June 30, Greece faced default in the absence of a deal that would both extend its bailout agreement and unlock another payment from its European partners. Many still believed that the Syriza government’s brinkmanship was simply a negotiating tactic that would eventually lead to a compromise. Writing last week, Maria Savel noted, “The back-and-forth proposals this week show that both sides are capable of working toward a compromise. If that holds, negotiations are still likely to last until the 11th hour, but it appears for now that Greece and its creditors could reach a deal and stave off Greece’s leaving the eurozone.”