Abstract
The financial crisis that broke out in late 2008 was an episode in the long-term trend that possibly negatively restructures key indicators of the economy. Its intensity ranks it as the biggest economic crisis since the maturation of the Greek economy. The 2008 crisis exposed the weaknesses of the Greek economy, particularly affecting some of its figures and indicators, such as debt and the labour market. This chapter includes a brief history of financial crises, their overall impact at global level, the changing phases of the crisis from 2007 to date, the temporal evolution of the crisis, the internal and external conditions that shaped it, the inclusion of the Greek economy in the European support mechanisms and, finally, the course of global economies and key global imbalances.
Greece entered the European Stability Mechanism (ESM) in May 2010. Therefore, this chapter contains information relevant up to that date. Chapter 12 includesupdates until December 2010, when the partial amendment of the Lisbon Treaty was decided, focusing on the restructuring of the rescue mechanisms for excessively indebted European economies.
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- 1.
A longer-term perspective (covering the last two centuries) of the evolution of the global financial crisis is mainly found in Chap. 11.
- 2.
IMF, World Economic Outlook, April 2009.
- 3.
In the USA, the transformation of investments in property from a means of ensuring one’s housing into an investment vehicle began in the previous decade with the relief of the real estate buying and selling and tax levies from interest rates in the housing loans by President Clinton as an answer to the Republican program for tax coefficient reduction. This fiscal background has particularly favoured the housing boom during the current decade.
- 4.
American bank and investment giants were involved in the “subprimes” issue mainly due to the financial reform introduced by President Clinton in cooperation with the Republican Party in 1999 that overthrew the 1933 rules, according to which investment activities were prohibited for commercial banks.
- 5.
The adverse selection is due to the existence of asymmetric information in a given market. In the case of inter-bank loans, borrowers may not evaluate the quality (risk) of the bank’s assets before being granted the loans. Because they are not able to determine the difference between “good” banks (those with the highest-quality portfolios) and “bad” banks (those with the most risky assets), lenders charge a higher than normal interest rate that corresponds to the average risk of the inter-bank market. The additional loan costs of banks with the highest-quality portfolios (which, in the case of perfect information, would have a lower lending cost) comprise the average selection cost. This situation leads to the dominance of high interest rates and segmentation in capital markets. The importance of asymmetrical information was first introduced in Akerlof’s study (1970), while its part in the banking system operation is discussed in Mishkin’s (1997) book, “The economics of money, banking and financial markets.”
- 6.
Moral hazard concerns the existence of asymmetrical information on undesirable actions that could take place after a transaction is completed. In the case of providing state support to banking institutions, there is a risk that the administrators of the financial institutions will not act in accordance with the public sector’s interests, i.e., by participating in extremely risky investments to achieve higher profits, considering that the public sector would cover possible losses.
- 7.
The amount of the initial Paulson plan (named after the Secretary of the Treasury of the USA at the time; its official name was Troubled Asset Relief Program, or TARP) for supporting the US financial system in the autumn of 2008 exceeded $700 bn. It was followed by a similarly sized second round of support by the Obama administration in the beginning of 2009. More recent estimates (July 2009) set the support cost for American banks to the inconceivable amount of $23.7 tr, against $3 tr already spent by July 2009 (see deposition of N. Barofski before the Committee on Oversight and Government Reform. U.S. House of Representatives, Kathimerini, 26/7/2009). However, such a development (although possibly exaggerated) would reverse everything we currently know on the subject.
- 8.
For instance, the buyouts of Wachovia by Wells Fargo and of the investment banks Merrill Lynch and Bear Sterns by Bank of America and J.P. Morgan, respectively.
- 9.
The same word is deliberately used twice.
- 10.
Termed thus here because it appeared during the last months of 2008, even though its maximum impact in the domestic economy was felt mainly in 2009.
- 11.
According to Law 3427/2005.
- 12.
See OECD, Economic Surveys: Greece (2007).
- 13.
Service for Special Audits (ΥPΕΕ) of the Ministry of Economy. It is the evolution of SDOE (Body against Financial Crime).
- 14.
Bank of Greece.
- 15.
Bulletin of Conjunctural Indicators of the Bank of Greece, December 2008, p. 128.
- 16.
This percentage varies between 5% in Turkey and 27% in Bulgaria and Albania (OECD, Economic Surveys: Greece, July 2009, page 41.) More precisely, the National Bank of Greece, in February 2009 (Vima 2/22/2009), granted 30% of its financing towards these countries, Alpha bank 13%, Eurobank 26% and Piraeus bank 17.4%.
- 17.
The company, Nakheel, Dubai World’s subsidiary that constructed the famous artificial islands in the form of palm tree leaves, also failed to repay an Islamic bond amounting to $3.5 bn by December 14. Limitless, another construction subsidiary, could not pay another bond amounting to $1.2 bn that was to reach its term in spring.
- 18.
This position was completely reversed by an ECB decision (03/05/2010) that suspended “indefinitely” the minimum credit rating required for eligibility for security requirements of the Eurosystem for the cases of marketable securities guaranteed by the Greek government. This means that there was no risk of further downgrading of Greek bonds by international rating agencies and that the increase in performance of Greek bonds over German benchmark bonds was expected to be slowed.
- 19.
Eurobank EFG Economic Research (2010) The Dynamic of Greek public debt and why bankruptcy is not the option, February, V: 9.
- 20.
Financial Times: Short view Greek CDS, 02/15/2010, and the digital edition of Reuters news agency.
- 21.
Among the managers with the higher profits for 2009 are: D. Tepper (with total profits estimated around $4 bn), G. Sorros (with profits around $3.3 bn), J. Simons (with profits of $2.5 bn), J. Paulson (who maintained high positions against the euro and Greek debt, with profits of around $2.3 bn), S. Cohen (estimates place his profits at $1.4 bn) and C. Icahn (with profits of around $1.3 bn).
- 22.
The companies Standard & Poor’s, Moody’s and Fitch.
- 23.
According to the law, the guarantees and bonds provided entail commissions for the government, while, for preference shares, a 10% yield is foreseen for the government. According to the new provisions, the yields of preference shares are predicted to rise from 10% to a higher percentages that has not yet been defined so that the cost will act as an inhibitor and they will not rest on the support package.
- 24.
The lack of an efficient response to the crisis from Germany, and essentially the entire EU, reflects an EU institutional weakness that constitutes one of the two basic factors determining the features of the international financial crisis of the 2010s. The second factor is the peculiar institutional structure of the Chinese economy that has resulted in a constantly growing economy with a depreciated currency (Yuan).
- 25.
However, it should be noted that, “at the end of the day”, the reduction of the euro’s price against the dollar is a particularly welcome result, especially for the weakest economies.
- 26.
These are cross-currency swaps, by which the government debt issued in dollars and yen was exchanged in euros for a specific period of time, to return to the initial currencies at a specific date.
- 27.
Based on journalistic and scientific references.
- 28.
Hedge fund that had a dominant role in the Greek bond crisis of March 2010, specifically with the use of credit default swaps subject to Greek bonds.
- 29.
The decisions were made in the period from 22/04/2010 to 7–9/8/2010 and began 2 days before the spring summit of the IMF, on April 24, 2010, with the participation of ministers and central bankers of the G-7.
- 30.
It is estimated that when Greece entered the ESM, the liquidity of the Greek banking system provided by the ECB reached €90 bn from approximately €40 bn that it was during the period of the financial crisis.
- 31.
Kathimerini, March 2010.
- 32.
As already noted, the yuan’s reevaluation is one of the basic demonstrations of institutional particularity of the Chinese economy, which is also one of the two most important destabilisation factors of the global economy. The other destabilisation factor, as previously mentioned, is the weak institutional organisation within the EU.
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Petrakis, P. (2012). The 2008–2010 Crisis and the European Stability Mechanism. In: The Greek Economy and the Crisis. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-21175-1_10
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