Multiple choice

According to the author, what of the following cannot be attributed as the chief reason for this sovereign debt crisis originating in Greece?

  1. Reliance of Greek government bonds on foreign investors and its failure to redeem the bonds contributed to this crisis in the main.
  2. It originated in Greece because its economy was one of the fastest growing economies of the world.
  3. Greece had incurred huge losses in tourism and shipping and was unable to honour its external debt commitments.
  4. It originated in Greece because this sovereign debt crisis was actually rooted in the Greek debt crisis.

Directions: Answer the given question based on the following passage:

The global economy has witnessed two macro economic crises in the last three years shattering the entire gamut of economic growth parameters across the world. Crisis number one is the banking crisis after the fall of Lehman Brothers in 2008 and crisis number two is the on-going sovereign debt crisis of the European Union. The commonality between the two is that they originated in two major economic super power zones: the first one in USA and the second one in EU and thereafter percolated to other parts of the world impacting the growth forces of the world economy. However, the two are different in nature in as much as the US crisis originated from financial sector fall out popularly known as the sub-prime crisis and the EU sovereign debt crisis originated from fiscal fallout. Much has already been written about the financial sector crisis of US. The Sovereign debt crisis of EU is still like hot potato and therefore more pertinent for a detailed discussion.
The crux of the EU sovereign debt crisis was rooted in the Greek debt crisis. The Greek economy was one of the fastest growing economies in the euro zone from 2000 to 2007; during that period it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government to run large structural deficits. Successive governments for years had been customarily running large deficits to Finance public sector jobs, pensions, and other social benefits. Since 1993 the ratio of debt to GDP had remained above 100%. After the introduction of euro in January 2001, Greece was initially able to borrow due to the lower interest rates government bonds commanded. Many member countries including Greece borrowed from the rest of the world, especially from the member nations, huge sums by issuing sovereign securities deliberately keeping yields low. But it failed to repay the coupon and the principal when the securities became due for redemption. To obfuscate the simmering problem from public gaze, it further borrowed issuing fresh securities.
The Greek government bond market relied on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds were held externally. The late-2000s financial crisis that began in 2007 made a severe impact on Greece. Two of the country’s largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009. Estimated tax evasion costs the Greek government over \$20 billion per year.
As the majority of outstanding debt of Greece is held by other member nations, default of Greece resulted in loss to the member countries. Greece’s debt crisis led to instability in euro, the common currency of EU. There are fears of public debt crises spreading to other EU nations. After the fiscal crisis of Greece, Italy, Ireland, Portugal and Spain also suffered the similar crisis, though to a lesser extent. To stem the rot, European leaders announced a \$1 trillion bailout package in collaboration with IMF. EU Finance ministers pledged to tighten penalties on countries with runaway fiscal deficits. One of the problems facing the euro countries is the disagreement between Greece and the trio of rescuers, EU, IMF and ECB, over the conditions of bail out. The bail-out package will be available subject to the condition that the beneficiary country will have to go for fiscal austerity in terms of reducing fiscal deficit. This could lead to the imposition of additional taxation and curbing corruption and tax evasion. The measures will lead to tje cooling down of industrial growth and increasing of unemployment. Hence, the public at large in Greece are up in arms against the conditions of the second bail-out package. (Excerpted from PNB Monthly Review of Jan 12)

  1. 1 and 2 only

  2. 1 and 3 only

  3. 2, 3 and 4 only

  4. 3 and 4 only

  5. None of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

(1) There are various factors that led to this crisis originating in Greece. That it was rooted in the Greek debt crisis is a fact, but certainly not the chief reason. (2) It was one of the fastest growing economies was also a fact, but that was not the chief reason why it originated in Greece. It partially answers the question. (3) This was the result of the crisis. This can be called the consequence of what happened to the economy of Greece because of the policies they pursued, not the chief reason for the crisis itself. (4) Almost 70% of government bonds were subscribed to by the foreign investors. With the government failing to redeem them, the crisis deepened and that became sovereign debt crisis. As this happened in Greece, the crisis originated there.

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