The Greece debt crisis is once again the spotlight for much news coverage in recent times. It was only a year ago that they had dominated the air waves with a bailout package and now here they are again. So what is the big story? With all the downgrades being given by the rating agencies what is really happening with the Greece crisis?

Causes and Effects of the Crisis

One of the questions on the lips of many persons is what are some of the problems that have caused Greece’s dilemma? The simple answer is that there is the perception that the country’s debt payments exceed the Government’s current ability to repay. As a result, the government could no longer borrow on the international capital market. If the Government was unable to access alternative funding, they would have faced the possibility of not being able to refinance their maturing debt and thus going into default. However, thanks to the European Union and the IMF who have pledged financial assistance to the Greek Government in the form of money that will be used to make the upcoming debt payments, the likelihood of a short term default has been reduced significantly. This is particularly reassuring for short term bond holders. However, in exchange for these funds, the Greek Government had to make significant cuts in expenditure on public services and implement specific economic and monetary policy programs mandated by their lenders.

Part of the problem, was that the Greek Government initially presented financial information that partially concealed their true severity of their poor fiscal position. This further decreased market confidence, as investors became very wary of accepting any subsequent statistical information released from Greece. Bond prices plummeted as investors demanded a very high rate of return to hold Greek debt.

Even investors who do not own Greece bonds must acknowledge the crippling effects of a default. If the Greek Government did not repay its debts, American and European banks (including the European Central Bank who is purported to hold billions of Euros in Greek debt) that hold Greek debt would suffer extensive losses, threatening their survival. In turn, depositors in European financial institutions would be faced with the risk of losing their deposits; business persons would be unable to access financing, and most importantly, market confidence in the entire European financial system and economy could collapse. Many analysts, have compared Greece, Ireland, Portugal and Spain to the “too big to fail” financial institutions in the United States.

Recent Developments

On Thursday July 21st 2011, the Euro zone leaders and the International Monetary Fund (IMF) agreed to circumvent any further crisis by offering Greece a second bailout to the tune of approximatley 109 billion euros. The Banks and other private investors have volunteered to make their own contribution to the package in the amount of some 37 billion euros by rolling over their maturing bond holdings; swapping their existing bonds for new ones with lower interest rates and longer maturities; or selling the bonds back to Greece at a discount. Essentially, they have agreed to different terms of repayment, which give the Greek Government a bit more flexibility. The arrangement should be very familiar to us here in Jamaica as it closely mirrors the objectives of the Jamaica Debt Exchange.

The bailout package and its terms and conditions were also extended to Ireland and Portgugal to help deal with their economic problems.

A special Committee will be created to work with the Greek authorities to focus mainly on growth, job creation and training. The relevant personnel in the Member States will provide all resources needed in order to assist Greece with its economic reforms. The recent announcement of the bailout plan has already been widely accepted by the market as stock markets start to rally and the cost of borrowing begins to fall (after hitting record highs in the past couple of weeks).

We all continue to stay tuned to the news as the bailout plans continue to be unveiled.

Dian Blackwood is a personal financial planner with Sterling Asset Management Ltd. Sterling provides medium to long term financial advice and instruments in U.S. and other world market currencies to the corporate, individual and institutional investor.

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