The term 'Grexit' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Grexit is the clever abbreviation for the idea of a Greek exit from the Eurozone. The feared event of Greece returning to its old currency until 2001 the Drachma never occurred thanks to a variety of bailouts in exchange for austerity measures. This did not stop it from threatening to collapse several European banks which held Greek debt and infecting the sovereign bonds of other similarly afflicted countries like Spain and Portugal.
The global financial crisis pushed over Greece’s precarious financial position. In 2009 in only the first quarter, the country’s GDP plunged by 4.7%. At the same time its deficit skyrocketed to more than 12% of the national GDP. Credit downgrades were not long in following. All three of the major agencies Moody’s, Standard and Poor’s, and Fitch began downgrading Greek debt until S&P finally cut it to junk level in 2010. The resulting yields on 10 year Greek bonds rose to over 44% at their worst point in March of 2012.
The socialist government began a series of cuts to attempt to stabilize its shrinking finances. In the initial austerity measures the socialist party passed in 2009 they cut the spending and government jobs wages by 10% and raised the age for retirement. During the next three years, they passed other austerity packages that severely cut back pay for government jobs, laid off public workers, increased taxes, cut minimum wages, cut pensions, slashed defense and health spending, and loosened the procedures for laying off employees.
Not all of these measures were evenly implemented. Interest groups with powerful allies were able to stall the ones that impacted them while those impacting the poor and middle classes moved forward. Unemployment soared from slightly more than 10% to around 28% by September of 2013. More than 40% of Greek children live in poverty. Nearly 50% of ages 15 to 24 year old Greeks are unemployed.
In order to qualify for international help from the IMF and EU, Greece was told to cut its expenditures still further. They were forced to begin a series of humiliating austerity measures and to enact painful structural reforms in order to receive the bailout money that was needed to stave off financial collapse.
Prime Minister Papandreou asked for a bailout from the IMF and EU in April of 2010. These groups responded to the calls for help by approving a €110 billion over three years ($147 billion when offered) bailout. This represented the largest bailout of a sovereign nation in history. In order to receive it, Greece had to go through yet another series of agonizing austerity measures.
Greece needed still more help and in February of 2012 received approval for a second package of bailout money. The EU nations, the European Central Bank, and the IMF known collectively as the Troika increased their money to Greece by another $172 billion bringing them to a total of €246 billion worth $319 billion in those days. Greece was required to lower its debt down from the 160% GDP at the time to 120% by 2020. Greek bond holding banks took a 53.5% haircut on their bonds’ face value. This amounted to as much as 75% loss of the real value of the debt.
Regular Greeks felt betrayed by their own leadership and the leaders of fellow Eurozone countries such as Chancellor Angela Merkel of Germany. Their economy continued to slide in and out of recessions. Greece finally reached the point of a referendum on the policies and austerity that had brought the country to this low point.
More than 60% of Greeks who voted rejected austerity in the results. This led to fears that Greece would drop out of the Euro if the demands of Syriza party leader and Prime Minister Alexis Tsipras for a better bailout package were not met. This departure from the Eurozone never materialized, as Greece continued to receive periodic monetary help and support from the Troika every quarter. Greeks never saw most of this $320 billion in bailout money, as it instead generally passed through the country on its way to repay holders of Greek debt.