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What’s behind Greece’s debt crisis?

With violent protests erupting across Greece in response to new taxes and spending cuts, the value of the euro at a one-year low and growing fears about how Greece’s debt crisis will affect the rest of the European Union, Need to Know takes a step back and asks: how did we get here? I spoke with Paul Murphy, editor of the popular Financial Times blog Alphaville to get some perspective.

Q&AlisonAlison Stewart: Were there signs that the crisis would happen before it actually did ?

Paul Murphy: With Greece, yes, you could certainly say that. Property prices had soared, Greek companies had spread out across Europe spending money, acquiring other businesses. Actual productivity rates for Greece itself had remained a long way behind other European eurozone members, notably Germany. Yes, I think there were plenty of signs.

Stewart: Greece’s debt has been down to junk. Can you explain what that means and why that’s important?

Murphy: It’s important because investors who are owning or investing in Greek bonds, they expected a certain quality associated with those investments. They use credit ratings by the major credit-rating agencies, namely Standard & Poor’s and Moody’s, to effectively advise them on the safety of specific government bonds. Standard & Poor’s has now decided that there is a real risk of Greece as a country defaulting on its bonds and therefore it has downgraded the paper to, as you say, junk status. I should quickly add that Moody’s, which is the other large credit rating agency, for the moment is holding an investment grade rating on the bonds, although it has warned that it might move, might downgrade the bonds in the future.

Stewart: It has been suggested that tax evasion has played a role in Greece’s huge debt. Do you know anything about that?

Murphy: Well, whether it’s evasion or avoidance, I’m not so sure. But it is certainly the case that Greece has been associated with rather lax tax government controls in the past. Historically Greece has thrown up a large number of very wealthy people, individuals, individual families often associated with Greek shipping, and a number of those families have migrated to either other parts of Europe or to offshore tax jurisdictions where they literally have to pay less money. Some people would argue that this avoidance culture that was first associated with the ultra rich in Greece, has trickled down through society.

Stewart: Is it true that 15 other economies have agreed to help out Greece?

Photo: AP Photo/Nikolas Giakoumidis

Murphy: Well, yes it is. It’s basically the rest of the eurozone. Each country’s specific bill is measured by the size of its economy within the eurozone. That means that Germany, France and Italy pay a larger proportion of the bill with smaller eurozone members like, say, Ireland paying a smaller amount.

Stewart: Does that create difficulty for any of those smaller countries that might have their own economic woes?

Murphy: Well, that certainly is an issue. Just recently, while we had such chaos in the financial markets in Europe, you had a situation where countries like Portugal were effectively having to pay a higher price to raise money in the financial markets than the price at which they were being asked to lend to Greece as part of its bailout. Obviously, a situation like that is unsustainable.

Stewart: What’s the cautionary tale here?

Murphy: The cautionary tale is, I guess, about how the costs associated with bailouts get passed on down the line. What you’ve seen in Europe, what you’re seeing right now, is effectively a mimicking of what we saw with banks on Wall Street. We had a situation where it was deemed that there are certain countries that are simply too big to fail without endangering the overall system — in this case, the currency experiment that we know as the euro. The danger here, however, is that policymakers in Europe have actually decided that, rather than countries being too big to fail, there’s a real danger that further down the line some countries will be simply too big to save. If we had a general panic against a country like Spain or Italy, it is doubtful whether its neighbors are actually even strong enough to deal with those problems.

Related story: Where is the euro headed?

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