There is an old saying that goes, “a stitch in time saves nine” but with the Greek banking crisis, it may be a case of “too little too late”? Well let’s find that out. At the end of the year 2009 and early 2010, Greek banks underwent a massive financial crisis, due to increasing speculation that the Greek government might default on its sovereign debt. Banks are required to invest a portion of their capital base in government debt facilities, such as bonds, as collateral. In April 2010, Greek debt was downgraded by Standard & Poor’s (a ratings agency), to the first levels of “junk status”, rendering them virtually worthless at that point. This later led to a recession, due to reduced investor appetite and flight of invested capital in the Greek zone.
At this point, most Greek banks experienced an acute shortage in money supply, since they were virtually locked out of the global finance industry, as means to access credit since they were no longer deemed as worthwhile borrowers. This left them to rely on customer deposits, which were declining as a result of the crisis, and the European Central Bank (ECB) as the lender of last resort. This has led to what is referred to, in the finance industry, as a credit crunch.
But after awhile, the ECB started putting pressure on Greek banks to reduce their dependence on central bank funding. European Union officials have suggested that Greek banks should look for alternative source of finance, such a sale of new shares or asset holdings, and banking giants in the Greek zone, such as the National Bank of Greece, have so far being successful at doing. The Greece Banking crisis is a classic example of what could happen when government sovereign debt is left unchecked, and it boils over to the point of destabilizing a countries economy, or an economic region as a whole.
Tips and comments:
The Greece debacle has so far been dispelled, albeit through a lot of intervention from the ECB, and the global finance industry as a whole. But, in order to prevent such predicaments from occurring in the future, better controls must be put in place to monitor and control sovereign debt. Some economists have proposed that routine audits should be performed by external agents, to check on the borrowing practices utilized by governments, to keep them in line with ECB guidelines.
