How will the Magnitude of the Debt Crisis in Greece Affect the World?

With the US superpower economy needing to revive from the current recession, the growing debt scenario in Greece is exactly the last thing on their wish list. Recalling back on the Great Depression in 1929, according to Ben Bernanke, the chairman of the Federal Reserve, he states that the Great Depression is largely caused by the tight monetary policies adopted by the Fed at that time. Coming back to the current situation, the Greek government's monetary policies are being threatened as it's present debt situation will definitely have an impact on the European and US economy.

The EU is doing everything in its will power to restrict the Greek debt within its continental boundaries so that the other countries using the Euro as the currency will not be affected. With its current scenario, it is a high possibility that the Greek government will be forced to default on its debt causing an increase in interest rates. The magnitude of the whole circumstances in Greece have caused a lot of uncertainty within the US treasury leading to a flight-away of investors from its stock market. However, investors may also not take the current Greek situation as a deciding factor on whether to hold on to the US markets as Greece represents only 2% of the European economy.

Obama has recently filed in his plan to double exports in the next five years as a step to reducing the recession in the US which is causing a high level of unemployment. But this could suffer a setback if the Greeks do not recover from its current complications. The Euro, all in all, will most probably face a drop in its value compared to the dollar which will come to as another predicament to Obama as exports will be more expensive. Moreoever, with the interest rates soaring, the Europeans will now have difficulty purchasing US products.

In conclusion, in the short run, the current Greek economy will is just affecting the US market in general at the moment but the consequences in the long run will see colossal effects on global economy.

How did the Greek Economy get into such a mess?

As we all may know, the Greek economy is heading for a "car crash" that will never be recovered. What are the reasons behind all these that is leading to a downfall of the Greek economy? Looking at the evidence itself, it is not surprising how the Greek government has doomed itself to a never ending debt crisis.

Defaulting debts has long been Greece's practices over the many years. Joining the euro was supposed to be a stepping stone to eliminate the debt crisis but evidence shows that this has undoubtedly created insurmountable problems for both the EU and Greece itself. It comes to no surprise as why initially the EU refused to allow Greece's participation into the EU.

Moving on to more current events, we all know that the Greek government relies on borrowed money to fund its country. With it, comes failure to pay of its debts. The current recession does not help either as there is now lower tax revenues and higher welfare payments. Recession occurs when there is a slowing down of economic activity, in general it means that the economy has excess supply over its demand. Greece has one of the most generous pension system in the world and ironically, it also has one of the fastest aging populations in Europe.

As the sovereign debt continues to increase, there has been a higher demand for interest rates and with it, furthers complications as to how the Greek economy will grow itself out of trouble. The climax to all these problems is when the international rating agencies cuts off Greece's credit rating, fearing further sovereign default. With no other options left, Greece had to turn to the IMF for up to120bn euros of replacement lending. However, there is a catch to it,  there must be a severe cut of public spending to reassure investors that it is credit worthy. The biggest kill joy for Greece in all of these is that the country is part of the EU and this means that it is not able to stimulate growth by devaluing its currency, nor it can cut interest rates any further as interest rates are set by the European Central Bank.

In conclusion, all these complications faced by the Greek economy as a result of relying on loans have created an unstable country that may face bankruptcy if not careful. However, one might not need to be too harsh on them as most developed countries rely on loans to fund their countries as well.