Must-know: What caused the Greek, Irish, and Spanish debt issues?

What caused the debt issues in Greece, Ireland, and Spain?

In this section, you’ll see real world examples of the fundamental factors discussed earlier. You’ll learn how these factors can affect debt repayment schedules. The financial crisis of 2008 affected the more vulnerable European (EZU) economies.

Debt levels in the Portugal, Ireland, Italy (EWI), Greece, and Spain (or PIIGS) nations reached unsustainable levels. Borrowing in the Eurozone had received a boost during 2002–2008, due to easy lending practices for high-risk borrowers and government over-spending.

Tourism revenues—a key revenue component for all these countries—declined substantially because foreign tourists stayed away during the aftermath of the Great Recession. Key industries were also affected—notably cyclical industries like shipping.

Crisis in Greece

In Greece, the central government debt-to-gross domestic product (or GDP) ratio increased to 136% in 2009—an extremely high level. Greece was battling a slump in two of its most important industries—tourism and shipping. These industries are cyclical. They were hit hard by the Great Recession. Major Greek shipping companies include Navios Maritime Holdings (NM) and Diana Shipping (DSX).

The budget deficit in Greece was being underreported. To remain in the Eurozone, countries are given specific budget deficit targets.

Greece received two bailouts from the International Monetary Fund (or IMF) and the European Union (or EU). The first bailout was in 2010 and the second was in 2012.

Greece was also forced to adopt severe fiscal austerity measures according to the bailout conditions. These moves weren’t popular with the electorate and led to mass protests.

Debit crises in Ireland and Spain 

Contrary to the other PIIGS nations, Ireland’s debt crisis wasn’t fueled by government overspending or fiscal mismanagement. Banks in Ireland basically needed to be recapitalized because they had funded a real estate bubble.

The international financial crisis of 2008 also put a dampener on its exports. Exports are Ireland’s main revenue earner.

Ireland’s central government debt-to-GDP ratio increased from ~29% in 2007 to 87% in 2010. Ireland’s sovereign debt was downgraded to junk status by Moody’s in 2011. The country’s rating has been revised since then. It’s currently rated Baa1.

Spain (EWP) also experienced a similar situation. The boom years of 2002–2008 fueled a real estate bubble. The bubble burst during with the Great Recession and global financial crisis of 2008.

Bank recapitalizations and the drop in exports and tourism revenues increased the central government’s debt-to-GDP ratio from ~30% in 2007 to ~68% in 2012.

In the next part of the series, you’ll read about the sovereign debt crises in Portugal and Argentina.