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The most faltering and tragic questions of the 21st century is how to manage the fiscal system of a country regardless of their level of economic growth. Leaders, politicians, lawmakers and ordinary citizens are deeply baffled and greatly offended by the scale of the problem in their domestic economy, and in the recent global economy.
The economy was still in its sick bed in late 2009 when the Greek government spilled the truth about their official figures being misrepresented for years. The most pronounced effect of the horrific level of public debt has been had the outcome of the unpopular austerity measures.
The unprecedented action to curtail and mitigate the dangerously high proportion of debt failed to bring in the amount of hope that the measures were designed for. Attempts to subsidize or fend-off the crisis were made by the European Commission, the IMF and the European central bank by setting-up a tripartite committee to prepare appropriate programs and economic policies.
A loan agreement was reached between Greece and the other Euro zone members, with an agreement settling on a total of 110 billion €. Greece, being member of the Euro zone, it cannot unilaterally stimulate the economy by expanding monetary policy. According to Vicky Pryce, senior director of economics at FTI, “we will see a haircut on Greek bonds, a recapitalization program of banks and increase in the size of the bailout”
Ultimately, nations under the hammer of fiscal congestion and monetary impossibilities will have fewer possibilities of revitalize the sluggish economy in order to gradually subside the debt debacles. President Obama said when German Chancellor Angela Merkel Visited the US, that “European Debt Crisis must be brought under control predicting disastrous results if there is an uncontrolled spiral and default in Europe”
According to the German Finance minister, Wolfgang Schauble, creditors holding soon-to-mature Greek bonds would need new bonds on similar terms that are payable for several years. But this plan doesn’t release Greece from the shackles of their staggering debt — it only shifts the burden to future generations, providing a short-term relief.
In another plan which has been accepted by the European Central Bank, a ‘no bond exchange’ requires that private creditors can cash in on maturity and be encouraged to re-lend some of their money. This plan is only viable if private creditors believe that re-lending to the government won’t put them back to previous risk levels.
Even so, Greece is not out of the woods completely, since it will also require paying interest with principal for those bonds. Some economists have echoed the option of Greece leaving the Euro zone. Greece has some good reason to leave the Euro zone. If it can devalue its currency, Greek exports will rise and provide a cushion for economic activity and bring in cash.
But it might push the inability of other members of the Euro zone to rescue a financially unstable member country and may endanger the whole financial system of the region.
If Greece withdraws itself from the Euro zone, the confidence in Europe would be tarnished, inviting catastrophic consequences to other debt laden nations like Portugal, Italy, and Ireland. Nevertheless, debt restructuring and beyond could be a possibility now the ECB has granted permission for exposed countries to have unilateral monetary policy.