by George Kalantzakis

Shortly after coming into office in October 2009, the center-left PASOK (Pan Hellenic Socialist Movement) government of George Papandreou discovered major discrepancies between the actual state of Greece’s finances, and claims by prior administrations. Within two months, Greece became enmeshed in the growing financial crisis that has erupted in other European nations and threatened the stability of the Eurozone, the economic and monetary union of the seventeen European Union (EU) member states that have adopted the euro as their national currency.

Since joining the EU in 1981, Greece had become increasingly reliant on low interest loans and subsidies from the EU, using them to effectively finance its budget deficit for years. [1]  At the same time, Greece’s revenue continued to fall while its public spending increased, [2] causing Greece’s national debt to grow, as further loans were required to finance government spending.

To make matters worse, successive Greek governments from the left and the right used political pressure to hinder the collection of accurate financial data, masking the size of its problem, in order to stay within European monetary union guidelines. [3]  Shortly after taking office in October 2009, the newly-elected Papandreou government revised the previous government’s estimated size of Greece’s deficit, up from 6% to 12.7%.

By the end of 2009, the International Monetary Fund (IMF) estimated Greece’s sovereign debt to be €216 billion, or the equivalent of 115% of Greece’s Gross Domestic Product or GDP, which measures the size of a nation’s economy. Thus, for every dollar that Greece’s economy generated, Greece owed $1.15 — making it less likely Greece could pay its debts.

Interest rates on 2 year Greek government bonds

The rise of interest rates on 2 year Greek government bonds since 2009 reflects the markets' assesment of growing risk

The impact of the newly-revised figures on the Greek economy grew quickly when Fitch Ratings, an international credit ratings agency, downgraded Greek debt to BBB with a negative outlook from an A rating (out of a maximum AAA rating). [4]   This made it more costly for Greece to borrow money by issuing government bonds to investors, and marked the beginning of Greece’s sovereign debt crisis.

In January 2010, the European Commission denounced the Greek government for having falsified data on its public finances in previous years. [5]  In a drastic attempt to calm international fears about the state of the Greek economy, Greek Finance Minister George Papaconstantinou announced an ambitious three-year plan to curb Greece’s budget deficit. [6]  As the financial crisis has grown worse, the Greek government has passed increasingly severe austerity measures (efforts to cut spending), in attempts to reduce Greece’s debt, in return for emergency loans from the EU and the IMF.

By April of 2010, EU officials estimated that the Greek government’s annual deficit had risen to 13.6% of GDP. In May 2010, the IMF stated that, even with Greece’s austerity measures, Greece’s overall debt-to-GDP ratio could reach 150% by 2013.

Sovereign credit default swaps

Measuring the risk of government default on sovereign debt: Sovereign credit default swaps by country, 2010-2011 (Greece in blue)

The Wall Street Journal has reported that, while the cost of the Greek rescue to the IMF is still being debated, it is estimated to be over $150 billion. [7]  This infusion of funds is designed to allow Greece to meet its financial obligations in the near term, while giving the Greek government time to get its financial house in order, by curbing spending and raising revenue through privatizations and additional tax income.

Meanwhile, Greece’s economy has entered its third year of recession, bringing into doubt its ability to meet its targets for reducing its budget, or meet the deadlines for interest payments coming due on its debt, which have the effect of making its budget deficit worse. If the Greek government can no longer make payments on its debt obligations, Greece may be forced to default on its debt, with grave implications for its economy, for the euro, and for a shaky global economic recovery.

The IMF has stated that Greece’s two main problems are high debt and a lack of competitiveness. [8] It is hoped that, in combination with financial assistance that reduces Greece’s crushing debt burden, the implementation of strict austerity programs, the privatization of state owned enterprises, and the reform of antiquated laws that hinder private sector growth, Greece will emerge from its financial crisis fiscally sound and better equipped to effectively overcome future economic challenges.


[1] “Can Greeks Become Germans?” By Thomas Friedman, The New York Times

[2] “Frequently Asked Questions: Greece,” International Monetary Fund

[3]  “How Greece got into a financial mess” By Stephen Beard Marketplace, Monday, April 12, 2010

[4] “Interactive Timeline: Greek Debt Crisis” By Emily Cadman and Rob Minto, The Financial Times

[5] “EU report slams Greece over false statistics,” By Andrew Willis, EU Observer January 13, 2010

[6] “Greek Tragedy: Athens’ Financial Woes” By Dody Tsiantar, TIME Magazine February 15, 2010,9171,1959059,00.html

[7] “Size of Greek Bailout Package Is Still Under Debate By Ian Talley and Riva Froymovich, The Wall Street Journal, July 27, 2011,

[8] “Frequently Asked Questions: Greece


by George Kalantzakis

George Kalantzakis

George Kalantzakis

George Kalantzakis is a graduate of the Johns Hopkins University School of Advanced International Studies (SAIS) where he received an MA in International Economics and International Relations. George completed his first year of SAIS at the Johns Hopkins University campus in Bologna, Italy and finished up the masters program in Washington, D.C. Currently, George is pursuing an MBA through the Johns Hopkins University Carey Business School in Washington, D.C. Before graduate school George completed his undergraduate studies at Texas A&M University and went on to work in the energy and financial services industries for approximately four years. George has an interest in economics, international business, transatlantic relations, and politics.