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The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

My assignment question is:

What have been the main roles performed by the International Monetary Fund (IMF) and the European Central Bank (ECB) in resolving the financial crisis currently being experienced by Greece?The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

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Requirements SUB-SECTIONS needed to include in your report:

Executive summary
– Introduction and Background information
– The Impact on financial crisis in the European Union

• The case of Greece
– Did the Global Financial Crisis play a role?
– The build-up of Greece’s Debt Crisis

• Concerns IMF and ECB on Greece’s debt crisis

• Crisis responses – roles performed by IMF and ECB
– Financial Assistance from ECB and IMF
– Austerity measures, Pros and Cons
– Fiscal Consolidation and Economic Reforms in Greece
– ECB intervention
– Evaluating the policy responses  The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

• Conclusion

• References

NB// Please input diagrams/graphs in between where appropriate (include a graph/table/image for ‘The case of Greece’ section and ‘Crisis responses’ section) (NB// This is a major requirement). Wording needed is: 2000 words.

The Eurozone has been experiencing a major debt problem since early 2008. Governments within the Eurozone had accumulated significantly unsustainable levels of debts and three – namely, Portugal, Ireland, and Greece – turned to the International Monetary Fund (IMF) and the European Central Bank (ECB) for financing in order to avoid loan defaults (Gibson, HallandTavlas, 2012, p. 498). The crisis also threatened the third and the fourth largest Eurozone economies, namely Italy and Spain, in the order provided. Greece has been the focal point of the debt crisis facing the Eurozone. Within the Eurozone, Greece has the largest public debt and big budget deficits. Consequently, Greece was the first EU country to experience intense pressure from the market and the first EU country to turn to the IMF and the ECB for loans (Karanikolos, et al. 2013, p. 1324). As a result, the IMF, the ECB, the Greek government and EU officials undertook significant crisis response strategies.
Initially, some of the EU members viewed the 2008/ 2009 financial meltdown as purely an American phenomenon. This perception changed as the crisis knocked the doors of EU members. As the situation worsened, international trade sharply declined, eroding the prospects for EU exports offering a secure value for local industries that were cutting output. Additionally, public outcries, sparked by the increasing unemployment rates and concerns over the rising economic and fiscal turmoil were increasing the political interests for EU leaders and governments. Vandorosand Stargardt (2013, p. 2) noted that several EU governments had to expend public expenditure in order to rescue collapsing banks, in addition to using fiscal and monetary tools to protect banks, depositors, to stimulate economic growth as well as unfreeze credit markets. However, the differential ramifications of the financial crisis were dividing the Eurozone wealthy governments from the poorer governments. The EU membership raised concern over the ramification of the economic recession and the fiscal crisis on the Eastern Europe economy and the possibility of political instability in the region. Governments in Eastern Europe such as Latvia collapsed due to public protests focused on how their government handled the economy during the economic crisis. The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper
2.0 The Case of Greece
The newly constituted Greek government revised budget deficits from 3.7 percent to 12.5 percent of Gross Domestic Product (GDP) in October 2009 (Abboushi, 2011, p. 1). The striking deterioration of the Greek debt situation in 2009 marked the onset of the European Monetary Union sovereign debt problem. The Greek debt crisis expanded further in the following months despite the EU reactions and domestic reform measures. The fiscal markets responded heavily afraid of Greek loan default. Several EU governments – Ireland, Italy, Spain and Portugal – also got in problem as their financial deficits grew and the costs of refinancing sovereign debts increased dramatically. In 2010, the IMF and the EU jointly announced fiscal aid for Greece. The rising interest rate load of several EU economies coupled with the fear of a breakdown of EU banks that had not recovered fully from the 2008/ 2009 economic crises and financial markets problems prompted a collective response of the IMF and the EU (Lane, 2012, p. 51). The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

Source: Reinhart and Rogoff, “From Financial Crisis to Debt,” March 2010
A report by the IMF and the ECB cited numerous factors that caused the financial problems in the US as the same factors that spread to Europe. In essence, an expansion of the investment and fiscal opportunities, low interest rates that emerged from aggressive expansion of credit, growing difficulty in the securitization of mortgage, and relaxing in underwriting standards coupled with growing connections among national fiscal centers to inspire a wider credit expansion and economic growth contribute to the financial crisis in 2008/2009. This rapid growth rates pushed up the value of real estate, commodities and equities. Over time, the mixture of rising cost of housing and higher commodity prices pinched the budgets of consumers and they reacted by reducing spending. One impact of this reduced spending was a break on economic activities and in the long run, a contraction in the cost of housing (Karagiannis and Kondeas, 2012, p. 55). This raised concerns in the market and spread to other fiscal markets, including the interbank money market and structured securities. The problems spread rapidly throughout the fiscal sector to include fiscal guarantors as the markets increasing turned dysfunctional due to the concerns of undervalued assets. The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper
The Greek government has had a history of challenges with its public financing since 1832 – after attaining internal self-rule from the Ottoman Turks. Economists point to a multiple of deeply entrenched Greek economy features and the general Greek society that have failed to stimulate economic growth and instead, created the environments underlying the present crisis (Gibson, Hall and Tavlas, 2014, p. 407). Key among these factors includes pervasive control of the economy by the state, a huge and inefficient public administration, widespread clientelism and endemic tax evasion. Capital influx in 2000s fuelled by low interest rates and the global economic recession of 2008/ 2009 further aggravated these problems, consequently straining public fiscal systems to an unsustainable level.
According to Pagoulatos and Triantopoulos(2009, p. 42), in the 1990s, the government of Greece controlled approximately 75 percent of all corporate assets and tightly controlled other aspects of the economy. By 2008, the government minimized its stake to about 50 percent. Nonetheless, the private segment continued to suffer from complex and weighty regulations as well as from the absence of a systematic and coherent strategy to rule- making. In the years before the fiscal crisis, a substantial percentage of growing government spending was allocated to increasing public sector benefits and wages. Further, analysts often cited the Greek leader’s traditional perception towards the provision of public benefits and jobs as a factor that contributed to inconsistencies between GDP and public wage. Similarly, clientelism could be another critical component behind a complex tax code and pervasive tax evasion. Before the crisis, the Greek officials stated that they only taxed one- third of public employees who had declared their wealth. Most economic pundits view deeply entrenched political clientelism and tax evasion in the Greek social setup as emblematic of a wider distrust of government institutions. In 2010, Transparency International rated Greece as the leading corrupt nation in the European Union behind Romania and Bulgaria (Kouretas and Vlamis, 2010, p. 391). The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper
3.0 Concerns IMF and ECB on Greece’s debt crisis
In 2oo1 when Greece joined the EU, confidence in the economy of its economy grew and this was followed by a big economic boom. However, everything changed after the 2008/ 2009 economic recession. Almost every country in the EU one entered a recession, but Greece suffered the most because it was among of the most indebted and poorest countries in the Eurozone. If Greece was not a member of the EU it would have printed more drachma, its local currency, in order to boost its economy (Mink and De Haan, 2013, p. 102). This strategy would have lowered drachma’s value in the global market, making exports from Greece more competitive. In addition, it would lower local interest rates, stimulate domestic investment as well as make it easier for debtors to service their loans. Unfortunately, Greece shared its fiscal policy with other EU members. The ECB dominated by Germany, had given the EU a fiscal policy that is so that tight that it pushed Greece into a recession. The IMF and the ECB responded to this crisis by providing Greece with financial assistance in exchange for spending cuts and tax increases. But this offered little leverage and by 2010, the Greek situation was almost getting out of hand and the ECB and the IMF stepped in to avert a possible panic in the fiscal market. The rising interest rate load in Greece and the financial markets problems prompted a collective response of the IMF and the ECB. The IMF and the ECB feared that if Greece defaults it will have spiral effects on the global economy since it will cause panic across financial institutions leading to increased interest rates and a total collapse in the banking segment.The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper
4.0 Crisis Responses
The ECB, the IMF and the European leaders argued that a disorderly, unregulated Greek default would be risky and should be averted by all means. The fear was that a Greek default would activate a major bond sell – off by other EU members with high debt degrees and that EU banks operating in Greece and other EU states would not be able to survive this storm (Mink and De Haan, 2013, p. 111). Fear of fiscal turmoil and contagion drove a major policy reaction by the IMF, the ECB and the Greek government in order to avert a Greek default in 2010. The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

 

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Source: National Australia Bank, Macrobond
4.1 Financial Assistance from the ECB and IMF
In mid-2010, the ECB and the IMF announced a $ 158 billion financial assistance to Greece. Of the $ 158 billion, the ECB pledged to contributed $ 115 billion and the IMF contributed $ 43 billion for a three year period based on market interest rates (Karagiannis and Kondeas, 2012, p. 71). The loan was to be disbursed on condition that the Greek government undertook economic reforms. With the objective of preventing the spread of the Greek crisis beyond its borders, the EU leadership also established a new EU mechanism for offering fiscal help to Eurozone members facing intense market pressures.
4.2 Austerity Measures
In return for financial assistance, the IMF and the ECB expected Greece to implement severe austerity interventions in order to avoid bankruptcy and bring down its debt deficit. The austerity measure aimed at achieving new budget cuts over 3 years – with the objective of cutting public deficit of Greece to less than 3 percent of the GDP by 2014 (Lane, 2012, p. 65). This meant that Greek government had to carry out pension and nominal wage cuts and raise excise and VAT taxes. Other austerity plans included removing bonus payment for employees in the public sector, scrapping holiday bonuses for higher earners, capping increases in public sector pensions and salaries for a minimum of 3 years. Although the austerity plan aimed at rescuing Greece from its eminent debt default, these measures meant that the people of Greece had to come from the closet and face hard economic realities. This meant that public opinion could quickly alter against the leadership of the day.
4.3 Fiscal Consolidation and Economic Reforms in Greece
As the Greek situation worsened in 2011, another round of structural reforms and austerity plans were approved by the Greek parliament in June 2011. The structural reforms were critical in order for Greek to get the next loan disbursement from the IMF and EU financial help package and also, in order to secure an additional financial aid package. The cornerstone of these reforms was a fiscal consolidation plan worth $ 40 billion that would ran to 2015, including further additional budget cuts and implementation of tighter economic reforms. These reforms aimed at bringing the Greek deficit by 2015 down to 0.9 percent of the GDP. The proposal aimed at cutting excess staff in the public sector, streamline social transfers as well as improve the fiscal performance of enterprises owned by the state (Gibson, Hall and Tavlas, 2014, p. 412). The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper
4.4 ECB Interventions
The ECB offered a second loan to Greece amounting to $ 157 billion in 2011 (Vandorosand Stargardt, 2013, p. 5). The second fiscal aid plan aimed at providing the Greek government with a loan on more favorable interest terms. In addition, the ECB intervention aimed at extending the maturity on existing EU financial assistance to Greece. Instead of only offering loans, the ECB provided precautionary credit to Greece.
4.5 Evaluating the Policy Responses
The policy reaction the debt crisis facing Greece was not taken lightly and they were agreed upon after lengthy periods of negotiations among the Eurozone leaders, the Greek government, the IMF and the ECB. The policy reaction aimed at preventing Greece from defaulting its debt, restoring Greece’s debt sustainability as well as hampers the spread of the Greek- like crisis to other EU members and the worldwide economy. Up to date, the policy responses have only succeed in preventing Greece from defaulting its loans, but the other remaining objectives have realized limited success, if any.
5.0 Conclusion
The hallmark of the Eurozone economic recession was Greece. Greece suffered the most because it was among of the most indebted and poorest countries in the Eurozone. The government of Greece revised its debt to 12.5 percent, thereby sending shocks among its creditors of possible default. The IMF and the ECB stepped in in order to preventing Greece from defaulting its debt, restoring Greece’s debt sustainability as well as hampers the spread of the Greek- like crisis to other EU members and the worldwide economy.The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

Bibliography
Abboushi, S. 2011. Analysis and outlook of the Greek Financial Crisis.Journal of Global Business Management, 7(1), 1-8.
Gibson, H. D., Hall, S. G., and Tavlas, G. S. 2014. Fundamentally wrong: market pricing of sovereigns and the Greek financial crisis. Journal of Macroeconomics, 39, 405-419.
Gibson, H. D., Hall, S. G., andTavlas, G. S. 2012. The Greek financial crisis: growing imbalances and sovereign spreads. Journal of International Money and Finance, 31(3), 498-516.
Karagiannis, N., and Kondeas, A. G. 2012. The Greek financial crisis and a developmental path to recovery: Lessons and options. real-world economics review,60, 54-73.
Karanikolos, M., Mladovsky, P., Cylus, J., Thomson, S., Basu, S., Stuckler, D., …and McKee, M. 2013. Financial crisis, austerity, and health in Europe.The Lancet, 381(9874), 1323-1331.
Kouretas, G. P., and Vlamis, P. 2010. The Greek crisis: causes and implications. Panoeconomicus, 57(4), 391-404.
Lane, P. R. 2012. The European sovereign debt crisis.The Journal of Economic Perspectives, 26(3), 49-67.
Mink, M., and De Haan, J. 2013.Contagion during the Greek sovereign debt crisis.Journal of International Money and Finance, 34, 102-113.
Pagoulatos, G., and Triantopoulos, C. 2009. The return of the Greek patient: Greece and the 2008 global financial crisis. South European Society and Politics, 14(1), 35-54.
Vandoros, S., and Stargardt, T. 2013. Reforms in the Greek pharmaceutical market during the financial crisis.Health policy, 109(1), 1-6. The International Monetary Fund (IMF) and the European Central Bank (ECB) Essay Paper

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