U.S and Greece’s Relations

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Introduction

Global financial crisis remains a major point of concern in recent years. The world has witnessed varying periods of this nature, with the crisis of early 1930s having led to major global effects. Although the effects of these crises have always been felt by almost every nation of the world due to the existence of intertwined issues, the United States and Greece have considerably captured the world’s attention in 2007 and 2011 respectively.

With the current crisis being directly felt by Greece and other European nations, it is believed that the manner in which a country responds to this crisis determines its overall impact. As such, strategies like bailouts and austerity plans having commonly been adopted by the U.S and Greece in trying to mitigate serious effects that could occur (Puri, Rocholl & Steffen, 2011).

Nevertheless, looming danger of the situation in Greece has forced the European Union to intervene in order to safeguard the impact of the crisis on the Euro zone and the entire world.

In general the United States and Greece have had to face the financial crisis in varying ways as dictated by different factors to stabilize their economies and prevent its reoccurrence in future. This paper compares and contrasts these two countries’ political responses to recent economic volatility; how they been similar and how have they differed in re-setting national policy in this area.

Additionally, the role of democracy has been incorporated coupled with the influence of globalization, political actors and fundamental constitutions.

U.S Financial Crisis

The financial crisis of the late 2000s, also referred to as Global Recession, is still considered as the worst economic crisis to be experienced since the Great Depression that left several economies on their knees.

It resulted into a number of mitigation strategies which included but not limited to bailouts that were facilitated by the national bank, collapse of uncountable financial institutions and huge downturns in markets across the globe (Foster & Magdoff, 2009).

Additionally, the housing sector was seriously hit, leading to loss of employment by thousands of Americans who earned their living from the housing industry, foreclosures and cases of evictions as many people were unable to pay back their mortgages. Furthermore, unbelievable businesses collapsed in the United States with the drop in consumer wealth having amounted to several U.S trillion dollars (Puri, Rocholl & Steffen, 2011).

Coupled together, these effects caused a decline in core economic activities which translated in what the world did not expect, the 2008 economic recession (Puri, Rocholl & Steffen, 2011). The impact of this recession was felt in every country as governments struggled to keep their economies stable through creation of barriers that prevented direct impact of the crisis.

In understanding the crisis, many economic analysts have unanimously agreed that the crisis was caused by a chain of factors which joined forces in pulling down economies throughout the world (Foster & Magdoff, 2009). Although some of the causes were controllable, 2008 appeared to be too late for the United States to reverse the effects of the depression which were beckoning.

The 2007-2008 financial crisis in the United States was caused by problems that emanated from poor valuation and liquidity within the American banking system. Of great significance was the collapse of the housing sector that reached its peak in the year 2007 (Sánchez, 2011). This led to the fall in the values of securities which were principally tied to the real estate pricing of the U.S. with its effect damaging global financial institutions.

There were numerous unanswered questions relating to bank solvency, a major drop in the availability of credit and ruined investor confidence both of which affected stock markets globally. The ultimatum of these events was loss of value of securities in 2008 to mid 2009 (Foster & Magdoff, 2009).

Although many experts and analysts have enumerated countless causes of the crisis with varying magnitude of weight, the United States Senate admitted that the crisis did not qualify to be categorized as a natural disaster since it had close links with high risks, conflicts of interest and failure of some financial regulators to seal meltdown loopholes that were evident (Foster & Magdoff, 2009).

It is still argued that investors and credit valuation agencies underestimated mortgage risk with the government failing to tune its regulators to address market needs of markets in the 21^st century. How then did the government respond to this crisis?

Although the efforts may have been implemented, the government was quick to act and prevent the effects of the crisis from reaching levels currently being witnessed in Greece and the entire Euro zone (Sánchez, 2011).

Government response to the Crisis

Bailout

According to survey, the U.S government acted swiftly to prevent extreme effects of the crisis which had been prophesized. Even though the efforts served a successful short term task, the main issue has been the implementation of long term strategies to avoid a repeat of the same (Sánchez, 2011).

The first step was the Federal reverse, which was based on the assumption that financial institutions would raise their lending percentage to households and businesses. However, this did not work as banks were unwilling to increase interest rates on loans due to lack of proof for the credit worthiness of borrowers.

Additionally, their lost capital demanded them to lower lending to maintain their balance with capital ratios (Foster & Magdoff, 2009).

Because of this unaccepted response from the banks, the government had to look for other possible ways of stabilizing its economy. Unlike before, the Federal government expanded the eligible collateral for the lending of its loans that was initially open for treasury bonds. The implication of this was higher risks on securities that included mortgage-oriented securities.

An additional step was the extension of loans to American institutions, a move that had not been witnessed in the entire history. Since investment banks were not being controlled by the Federal government, many believed that the government did not have the obligation to lend to these banks during crisis moment (Foster & Magdoff, 2009).

However, this was not the case as the government rescued banks which were on the verge of collapsing. For instance, it lent to the Bear Stearns and JPMorgan Chase, which later acquired Bear Stearns.

This move was considered viable by the government since the bankruptcy of Bear Stearns was to affect the entire American economy. In analyzing the impact of the government’s decision to go against its traditions, many have used it as the basis to justify the instability of the U.S economy (Sánchez, 2011).

In the same manner, the government took unprecedented action of bailout of AIG when the bankruptcy of Lehman Brothers claimed to shake the economy. Notably, AIG had been battling with credit default swaps in the American market (Foster & Magdoff, 2009).

As the leading insurance company in the world, its status was a major concern for the Federal government as it feared that the company would fail to pay back its insurance policies. Such a failure was to have a direct impact on banks and to the staggering economy. Therefore, the bailout was mainly as a way of salvaging the financial system from the crisis (Sánchez, 2011).

It can be argued that the government’s option to bailout financial institutions remains successful as per now. It managed to rescue the system which was headed for total collapse. Besides this, both commercial and investment banks have not agreed to increase their lending as demanded by the Federal government (Foster & Magdoff, 2009).

Additionally, Fed’s policies are seen to be unable to deal with major problems like high household debt, high foreclosure rates and falling housing prices.

Legislation

Before September 2008, the U.S Congress ratified legislation that was aimed at dealing with mortgage crisis, which had significantly contributed to the financial crisis (Sánchez, 2011).

For instance, the Economic Stimulus Act of 2008 provided incentives for business investments, tax rebates to those households who were considered to earn low income and the expansion of the mortgage eligibility plan. At a cost of $152bn, the law was to reverse unpleasant trend in the housing industry and stabilize the economy (Foster & Magdoff, 2009).

On the other hand, the Housing and Economic Recovery Act of 2008 put together several efforts to mitigate the housing crisis in the American market. A good example is the HOPE for Homeowners program, which authorized $300bn regarding subprime mortgages with some conditions demanding lenders to write down loan balances to a value of 90%.

However, low uptake for the proposal was realized, causing the Federal Housing Association not to insure any contrary to the program’s recommendations. In addition, this act provided a 10% refundable tax for those buyers acquiring mortgage for the first time (Foster & Magdoff, 2009). Moreover, it added capital into the Fannie and Freddie, which authorized the purchase of debt obligations by the treasury.

U.S treasury

The U.S Treasury Department took a low profile in responding to the financial crisis which had engulfed the country’s economy. It was mainly involved in supporting financial agencies which were faced with the crisis (Sánchez, 2011).

In October 2007, the treasury went ahead to establish the HOPE NOW association of lenders, mortgage advisors and investors with a sole aim of supporting and informing homeowners, regarding trends and possible actions deemed necessary depending on existing financial situation.

Its success was measured in August 2008, when HOPE NOW reported to have prevented a total of 2.5m foreclosures in the country (Foster & Magdoff, 2009).

It is also believed that the rescue program for the Bear Stearns was pushed by the treasury after it got concerned with the performance of the bank and its early signs of running bankrupt (Sánchez, 2011). Successively, the treasury further proposed the expansion of the Fed’s Regulatory to allow it offer support to financial institutions faced with such crisis.

Nevertheless, the department pushed to have all financial institutions increase capital ratios to cover losses that had been made on CDO and mortgage markets (Foster & Magdoff, 2009). Its mandate was also expanded, allowing it to purchase equity in any of the companies involved.

Greece Economic Crisis

The debt crisis in the Euro zone has been experienced since early 2010. Several governments from the region have accumulated debts which are believed to be unsustainable. As a result, Portugal, Greece and Ireland have responded by borrowing loans from the International Monetary Fund and Euro countries which seem t o be stable (Zahariadis, 2010).

As a result, the crisis has threatened stretching to cover the entire zone with Greece remaining at the center of the crisis. It has the highest debt among the Euro countries and a budget deficit that exceeds the rest of the members. As a result, it was the first to feel the market pressure before it considered borrowing from other Euro members and the IMF.

With the crisis having reached its peak, the IMF together with European Central Bank and the government of Greece have erected measures to deal with the crisis before its effects are felt by the rest of the world. In attempt to save the country’s economy from sinking, Greek bond holders accepted to bear losses that would occur (Adam, 2011).

Greece’s Crisis Build-up

Like with the United States, the financial crisis facing Greece was caused by intertwined factors whose impact was highly underestimated by regulatory agencies and the government. Greece welcomed the 21^st century with excess capital that was principally triggered by high confidence among investors and flush capital markets within the region (Dody, 2010).

Some of these factors were augmenting by its adoption of the Euro since the currency was common among European Union member states. Additionally, capital inflows were not properly used to improve the competitive status of the economy.

In fact, the rules which were designed by the European Union to deal with increased accumulation of public debt among its members did not yield much for Greece’s economy (Zahariadis, 2010).

The 2008-2009 global crisis was also blamed for the worsening of the situation in Greece as it contributed to high borrowing costs for the economy to survive.

By the year 2010, Greece defaulted to pay back public debt, breeding the current economic crisis that not only threatens the nation’s economy but also the entire zone and spread to outside economies because of interconnectivity and globalization of financial matters (Adam, 2011).

Responses to the crisis

In attempting to restore the confidence of investors and boost the economic survival of Greece, the government of Papandreou was involved in a series of austerity measures. However, these efforts did not yield much in helping the country to redeem its public debt.

As a result, Papandreou announced that his government was going to draw $60bn from IMF and Euro zone members to pay its debt without breaking the agreement. In exchange for this proposed financial assistance, IMF and EU leaders demanded further details and measures to cater for the budget deficit (Dody, 2010).

Fiscal Austerity

Papandreou efforts to deal with the government’s deficit challenge began in October 2009 when three packages were unveiled. These packages were to cut down the deficit which was estimated at 13.6% of the country’s GDP in the year 2009 to a projected 3% in 2012.

From this proposal, the measures were to cover an estimated $21.6bn of GDP with similar measures running to 2013 during which 2% of the GDP was to be met (Adam, 2011).

Although Papandreou’s suggestions were accepted by the EU members, some expressed their concern that high reduction on expenditure and increased taxes was likely to result into massive unemployment in the country and worsen the recession impact.

This was attributed to the fact that the two major issues, which were facing Greece were at odds with each other (Adam, 2011). Additionally, there was concern over the time span that the government was going to rely on public support to counteract the impact of recession.

Having been positively received Papandreou’s austerity measures sought to find revenues that would meet the government’s budget deficit. The government aimed to launch a crackdown on tax evasion by a considerable number of citizens having been targeted.

Furthermore, collection of social security shares was also to be improved in mitigating the effects of the crisis and meeting the target upon which the measures were ratified (Adam, 2011). Tax increase mainly targeted certain commodities like liquor, luxury products, tobacco and fuel. Additionally, there was a 1% increase on personal incomes, giving a value of $133,000.

Other tax reforms were also announced on real estate, personal and corporate taxes. On the other hand, expenditure reduction widely targeted the civil service (Dody, 2010). Some of the measures included freezing of the hiring exercise, reduction of allowances, reduction of pensions and a 30% cut regarding supplementary pay within the public sector.

Structural reforms

Reforms proposed by Papandreou’s could be considered as a difference between the U.S and Greece’s governments towards dealing with their respective financial crises. Papandreou adopted these reforms as part of promoting long-term strategies in dealing with the crisis and shielding the economy from future meltdowns.

The reforms proposed were to affect several sectors of the economy including health and pension plans and the overall public administration of the country (Adam, 2011). Moreover, the government adopted a plan to boost the competitive status of its economy by augmenting job opportunities and economic improvement, expansion of the private sector and massive support in research, innovation and technology.

Importantly, a major challenge for the government was maintaining political and public support for the proposed austerity measures.

With 65% of Greeks supporting the measures and thousands of workers demonstrating against the move, this denoted the role of politics in dealing with the Greece economic crisis. Although New Democracy (ND) supported the measures, it was opposed to PASOK’s idea of involving IMF assistance (Adam, 2011).

Role of democracy and Globalization

The eruption of the 2007-2008 economic crisis left many concerned with its impact on global democracy. There were warnings of possible halt in democratization, indicating the interplay between economic crisis and democracy. With the crisis having passed, several democracies have shown resilience, more than it was publicly expected (Bryan, 2010).

Nevertheless, democracies did not prevent emergence of political consequences in response to the global crisis. At the lapse of the recession, several incumbent leaders were elected back to their positions in more than 35% of elections done globally. Although it may be hardly seen, economic crises lead to discontentment with incumbents.

However, democracy can also suffer reversals in the hands of an economic crisis. In 2009, there was high tension in Honduras that led to a coup against the president. This resulted from tension between the executive arm of government and other parties. It can therefore be seen that democracy plays a core role during economic crises (Bryan, 2010).

Conclusion

The above comparison between the U.S and Greece’s approach towards financial crisis reveals the role of any government in ensuring the stability of its economy. This role can hinder or promote economic growth and restore dwindling confidence of customers. Although the two governments responded towards the crises, the impact of their actions varied in many ways.

While the U.S may have succeeded in combating the crisis through bailout, new legislation and treasury involvement, Greece’s efforts did not yield much. Its concentration on fiscal austerity and structural reforms worsened the situation.

Greece concentrated on borrowing from EU members and IMF together with leaning on public support in meeting its budget deficit (Adam, 2011). It can therefore be seen that bailout and austerity were the main differences as both governments engaged change of legislation to allow the efficient operation of crisis mitigation measures.

References

Adam, C. (2011). Greece’s Debt crisis: The price of cheap loans. Policy, 27(3), 10-14.

Bryan, G. (2010). Markets in a Democracy. Political Studies Review, 8(1), 55-66.

Dody, T. (2010). Greece’s Math Problem. Time, 175(9), 1-4.

Foster, J., & Magdoff, F. (2009). The great financial crisis: causes and consequences. Michigan: Monthly Review Press.

Puri, M., Rocholl, J. & Steffen, S. (2011). Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects. Journal of Financial Economics, 100, 556–578.

Sánchez, M. (2011). Financial crises: prevention, correction, and monetary policy. Cato Journal, 31(3), 521-534.

Zahariadis, N. (2010). Greece’s Debt Crisis: A National Tragedy of European Proportions. Mediterranean Quarterly, 21(4), 38-54.

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