Greece’s Debt Crisis: Overview, Policy Responses, and Implications

Rebecca M. Nelson, Coordinator
Analyst in International Trade and Finance

Paul Belkin
Analyst in European Affairs

Derek E. Mix
Analyst in European Affairs

Over the past decade, Greece borrowed heavily in international capital markets to fund government budget and current account deficits. The reliance on financing from international capital markets left Greece highly vulnerable to shifts in investor confidence. Investors became jittery in October 2009, when the newly-elected Greek government revised the estimate of the government budget deficit for 2009 from 6.7% of GDP to 12.7% of GDP. There are now questions about whether Greece will be able to repay its maturing debt obligations and interest payments, totaling €54 billion ($73 billion), in 2010. This report analyses the Greek financial situation and identifies its implications for the United States. 

The debt crisis has both domestic and international causes. Domestically, analysts point to high government spending, weak revenue collection, and structural rigidities in Greece's economy. Internationally, observers argue that Greece's access to capital at low interest rates after adopting the euro and weak enforcement of European Union (EU) rules concerning debt ceilings facilitated Greece's ability to accumulate high levels of external debt. 

During the crisis, the Greek government has sold bonds on international capital markets in order to raise needed funds, although investors have demanded high interest rates to compensate for the perceived risk of these investments. Greece's government has also unveiled, amidst domestic protests, austerity measures aimed at reducing the government deficit below 3% of GDP by 2012. At the end of March 2010, the Eurozone member states, led by Germany and France, announced after much debate that they would provide financial support to Greece if necessary and if accompanied by financial support from the International Monetary Fund (IMF). A common method for addressing budget and current account deficits, currency devaluation, is not possible for Greece as long as it uses the euro as its national currency. If the austerity measures and/or financial assistance from outside parties prove insufficient, Greece could be forced to default on its debt. 

Greece's crisis has numerous broader implications. There is concern that Greece's crisis could spillover to other European countries with difficult economic situations, including Portugal, Ireland, Italy, and Spain. Additionally, Greece's crisis has raised questions about possible problems with the Eurozone, which has a unified monetary policy and diverse fiscal policies. It has also come to light that complex financial instruments may have played a role in helping Greece accumulate and conceal its debt. This has played into current debates about financial regulatory reform in the United States and the EU. 

Greece's crisis could have at least five implications for the United States. First, falling investor confidence in the Eurozone could further weaken the euro, which would likely widen the U.S. trade deficit. Second, financial instability in the EU could impact the U.S. economy given the strong trade and investment ties between the United States and the EU. Third, $14.1 billion of Greece's debt is held by U.S. creditors, and a Greek default would likely have ramifications for these creditors. Fourth, some point to similarities between the financial situation in Greece and the United States, implying that Greece's current crisis foreshadows what the United States could face in the future. Others argue that the analogy is weak, because the United States, unlike Greece, has a floating exchange rate and the dollar is a reserve currency. Fifth, the debate about imbalances within the Eurozone is similar to the debates about U.S.-China imbalances, and reiterates how, in a globalized economy, the economic policies of one country impact other countries' economies.


Date of Report: April 7, 2010
Number of Pages: 18
Order Number: R41167
Price: $29.95

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