The Financial Crisis Of Greece And Portugal - 1624 Words

The music stopped on October 2009, a year after Lehman Brothers collapsed at the height of the financial crisis. Investors all over the world were shocked and creditors were equally horrified. Greece, the founder of true democracy, the originator of the olympics and the birthplace of geometry - was now $430 billion in debt. Never before had a country such as Greece imploded with such velocity and magnitude - that its government bond contracts were now considered toxic. It was an exact replay of the financial crisis, except that the insolvent borrower was now the state. The Maastricht Treaty, signed in 1992, promised to make this group of nations strong. A formal agreement to establish the European Union, it pledged to bring together the†¦show more content†¦Secondly, capital mobility and financial transactions should be flexible, open and easily completed. Thirdly, a system which automatically balances risk and transfers capital to less economically developed regions must be in place. Fourthly, member nations should preferably have similar fluctuations in their business cycles, allowing the central bank to control monetary policy without the need for diverging monetary plans. In his original paper, Mundell called this the â€Å"synchronising of shocks†. To Greece, the potential idea of entering the Eurozone was one that was too tempting. A key benefit would be the reduction of inflation rates in the short term. â€Å"By joining a monetary union with a credible anchor country or set of countries, a client country eliminates the inflation bias arising from time inconsistency in monetary policy† (Alesina Barro, 2002). The inflation rate falls to that of the lowest member nation - representative of the credibility and reputation of the German banks and the entire OCA. Hence, a country such as Greece, which lacked the regulation and financial supervision, jumped at the opportunity of sharing the same credible status Germany worked hard to maintain. To understand why Greece defaulted, we need to uncover the economic and political reasoning behind its recent history. The first decision to host the Olympic Games in Athens in 2004 burned a â‚ ¬8.4 billion hole in public finances. Facilities and buildings became obsolete and vacated