Background on Greece’s Debt Crisis “You cannot spend more than (what) you earn…you should not borrow more than (what) you can afford.” This, according to an editorial published by the Greek newspaper Kathimerini, may be the lesson Greeks are now learning the hard way.1 Unrestrained spending of successive Greek governments over a long period may have driven the country’s budget and current account deficits.2 Greece borrowed heavily from international capital markets to finance public sector jobs, pensions and other social benefits.3 As deficits and the country’s debt burden grew, the governments just kept on borrowing. 4 When Greece joined the eurozone in 2001, it gained monetary stability and was able to borrow at lower interest rates –
8 “Is Greece Heading for Default?,” Oxford Economics, January 29, 2010. 9 “Q&A: Greece's financial crisis explained,”http://edition.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html 10 Congressional Research Service. “CRS Report, Greece’s Debt Crisis: Overview, Policy Responses, and Implications,” April 27, 2010.

previously released by the Greek government in October 2009. This further increased investor nervousness and revived questions about Greece’s ability to repay its debts.11 Greece’s debt is estimated at 300 billion euros with part of it maturing in mid-May 2010. Despite austerity measures and sales of additional Greek bonds, fears of a possible default continued to spread along with speculations on other courses of action the Greeks may take. Greece: Current Economic State Between 2000 and 2007, the Greek economy grew as GDP increased by about 4.0% per year. However, the growth dropped to 2% in 2008 and contracted by 2% in 2009, bringing the country into recession. This decline may be attributed to the global financial crisis and Greece’s failure to address the fiscal problems. Unemployment rose to 9.5% in 2009 from 7.7% of the previous year. On the other hand, inflation went down by nearly 3 percentage points. Price levels show an uptrend since 2003, almost reaching the EU average in 2009. With Greece taking a step towards comprehensive structural reforms to address its current debt crisis and restore competitiveness, the Organisation for Economic