Financial Crisis in Greece and Ireland and What Is The Difference?

 Introduction

The financial crisis in Europe is also known as the European debt crisis or the European sovereign debt crisis. Many financial institutions, investors, or even the governments could not repay their debts. Many of the financial institutions collapse, and the governments in several European countries are running under tons of debts. The bond yield rose rapidly during that period and the fear was quickly spread. As the fear spreading, the bondholders tend to expect much more yield for the risk trade-off. After all, safety is very important while we consider our investment. 

The debt crisis began in 2008 and then spread to many European countries such as Portugal, Italy, Ireland, Greece, and Spain in 2009, and destroyed the confidence in European businesses, economies, and the credibility of the governments. Several Eurozone countries' bonds have been downgraded by rating agencies and became far more difficult to issue new bonds.

To restore the confidence, the International Monetary Fund (IMF) and the governments of European countries tried hard to prevent the collapse of the euro and financial contagion. And it was eventually controlled by making financial guarantees. However, the bonds are also built on guarantees, but they all default during the period. How can we know when does it will finally collapse again?

What Factors Led to The Present Financial Crisis in Greece and Ireland?

Greece 

Before the Global Financial Crisis of 2007-2008, the debt-to-GDP of Greece was pretty healthy and did not exceed 104%. As the financial crisis of 2008 hit the world's economy, many of the major industries of Greece like tourism suffered serious damage since tourism accounts for 18% of Greece’s GDP, and accounting for one-fifth of the workforce.(For a Sustainable Tourism Industry) That may explain why Greece has more international airports than most countries. 

As Greece's policymakers try to keep the economy functioning by government spending, the national debts increased accordingly. Since 2008, the debt to GDP of Greece was significantly soared. However, being a member of the Eurozone, Greece did not have autonomous monetary policy flexibility. But if Greece were to leave the euro, the economic and political consequences would be devastating. That means Greece has fewer tools to solve its own problems if they want to stay in the Eurozone. Moreover, Greece was hard to borrow money during this period since the markets have increased borrowing rates. Therefore, It was very difficult for Greece to finance its debt in early 2010 until the IMF's bailout. 

But the IMF's bailout was not for free, those loans are tied with several requirements and terms. Greece has to narrow the cost-competitiveness gap like wage reductions and head back to the original issue, the government spending. 

Ireland

Unlike Greece, the Irish sovereign debt crisis was not from government over-spending. It is caused by financing a property bubble. 

As we know that the Global Financial Crisis of 2007-2008 hit many countries around the world, of course, Ireland was not excluded. After the crisis, the unemployment rate in Ireland rose to 14% by 2010. Irish bank related industry had lost about billions of euros because of defaulted loans. These loans were borrowed mostly by property developers and homeowners to boom the property bubble and then burst around 2007. 

And no surprises, while the Irish government tries to save the economy and fix this issue, the national budget sank from surplus to deficit in 2010, the highest in the history of the eurozone. Moreover, a lot of depositors and bondholders cashed in during 2010 because with Ireland's credit rating falling rapidly, the guarantee was not credible enough. As we all learned how bankers making money by deposits, that kind of tremendous cash by depositors will be a devastating event.

Furthermore, yields on Irish Government debt rising rapidly was an inevitable path to go, because of the lack of confidence. Therefore, call out for help was a helpless choice. The Government went to seek assistance from the EU and IMF. Similar to Greece, money does not grow on trees, there are bailout agreements have to sign and compromise.

Summarise The Differences between The Greek and Irish

As the Global Financial Crisis of 2007-2008 hits, Greece's policymakers try to keep the economy functioning by government spending, and it is too much. 

Unlike Greece, the Irish sovereign debt crisis was not from government over-spending. It is caused by financing a property bubble. 

Finally, we are all humans, we always make mistakes. But why do we fall? So, we can learn to pick ourselves up. That's what we should do.

Reference

European debt crisis. (2020, October 02). Retrieved October 03, 2020, from https://en.wikipedia.org/wiki/European_debt_crisis

For a Sustainable Tourism Industry. (n.d.). Retrieved October 03, 2020, from https://www.mfa.gr/usa/en/about-greece/tourism/for-sustainable-tourism-industry.html