Business School
MSc International Business & MBA (Graduate)
Module: Global Economics and Finance
Name: Phillip Shannon
Tutor’s Name: Robert Mikecz
Assessment Type/No: 2
First Submission 1
Submission Date: 11th January 2018
Word Count: 2200.
P.shannon Students must sign here to show that they have read and adhered to the University
plagiarism regulations as stated in the student handbook.
, This essay will look at the Eurozone Sovereign debt crisis in Greece and how the events
impacted the relationship between the financial markets; where buyers and sellers trade
assets; equities, bonds, currencies and derivatives (Market Business News, 2019), and the real
economy. The real economy is producing goods and services (Financial Times, 2019).
Firstly, the failure of the Lehman Brothers bank in 2008, set off a stop to the interbank
market, as fears amongst financial institutions spread about each other’s strengths. The banks
over-leveraged and became burdened with harmful assets, due to issues with regulation and
sights on gains. During the period of stock market strength, the safeguard for deposits was
deemed unnecessary in terms of resource allocation (Carmassi, Gros and Micossi, 2009:
p.988). This led to trouble. Bank deposits are insured by the governments for a fee, banks
need to have capital to support after losses (Acharya and Richardson, 2009: p.197). The
European Central Bank had to intervene, lowering interest rates and lending to banks, to
prevent panic. The monetary union’s inadequacies were bought to light as a result of the
governments failing to respond (Pisani- Ferry, 2014: p.7).
However, Greece showed pre-conditions for a debt crisis in 2009, when the European Union
ordered a reduction in its budget deficit. Due to corruption and spending by previous
government George Papandreou’s socialists party won a snap election (BBC, 2012). After
government spending and borrowing amplified, tax revenues diminished because of
inefficient tax collection processes. Wages and prices increased but productivity lagged
behind and this damaged Greece’s competitiveness (European Stability Mechanism, 2018).
These conditions including interest rate flexibility (Neoclassical Growth Theory) (Solow-
Swan Model) of real GDP increasing if technology keeps advancing thus secures higher
productivity and profit rates. The advancement could be beneficial if, for example,
technology aided tax collection. (Niehans, 1987: p.311).
Secondly, structural problems were also factors as the economy contracted, as unemployment
rose to alarming levels (European Stability Mechanism, 2019). Government deficit of GDP
was -10.18% pre-crisis 2008 (OECD, 2019D), GDP declined from 341 million US dollars to
337 (OECD, 2019E). Annual growth rate of real GDP declined steeply from -0.34% to -
4.30% (OECD, 2019B). Government debt to ratio as percentage of GDP pre-crisis 2008
117.4% and increased to 135% in 2009 (OECD, 2019A).
