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How the Greece crisis spread to EU & will another bailout be needed?


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Many European countries have been living beyond their means, leading to what is called the sovereign debt crisis-when governments are so heavily indebted that the whole country could go bankrupt. 

Since Greece is a member of European Union, its potential bankruptcy would have caused severe losses (in terms of foregone revenues/loans) to several European countries-especially the big ones, Germany and France. 

On Oct 27, private sector European banks agreed to write off 50% of Greece debt held by them. Europe's main rescue fund, the European Financial Stability Facility (EFSF), has been expanded to 1 trillion, from 440 billion before. 

The writeoff of 100 billion will be implemented through exchange of longer term bonds, which will give Greece time to mend its economy. Since the writeoff is "voluntary" , it will not trigger insurance payments linked to credit default swaps on Greek debt, which is projected to drop to 120% of GDP by 2020. 

The biggest losers are the banks that have to write off Greece's debt. But they would have lost more if Greece had defaulted. Europe's consumers will have to face austerity as some governments control spending. 

Source: Economic Times


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