The Eurozone Crisis, 2009 to 2015

Before you start

Where this sits

Greece's new government found a far bigger deficit

In October 2009 Greece had a new government. Within weeks it told the European Union's statistics office that the deficit, the gap between what the government spends and what it collects, would be far bigger than reported in the spring. Greece was one of the countries that share the euro, together known as the euro area, so its problem soon became theirs.

The revised figures made lending to Greece look risky

On 21 October 2009 Greece revised its planned deficit for 2009 from 3.7 to 12.5 per cent of GDP. Greek deficit and debt figures had been revised again and again since 2004, a European Commission report (COM(2010) 1) found in January 2010.

A government with a large deficit has to borrow to cover it, and it borrows by selling bonds, promises to repay with interest. Lenders who doubt they will be repaid ask for a higher interest rate. Greece's borrowing costs rose, and by early 2010 Greece risked being unable to repay its debts.

In May 2010 Greece got a rescue loan, and the euro area had no fund ready

In May 2010 euro area governments and the International Monetary Fund (IMF), which lends to countries in trouble, agreed to lend Greece 110 billion euros over three years. The money was paid out in stages, and only as Greece cut its deficit and changed its economy.

The euro had been built with no fund to lend to a member that could not borrow. In the same month EU governments agreed to create temporary rescue funds. The European Central Bank (ECB), the central bank for the euro area, began buying government bonds. It said the purchases were meant to repair markets that had stopped working, so that its interest rates reached borrowers across the euro area.

Four more countries needed rescues, for different reasons

Lenders' doubts spread to other countries whose banks or governments looked weak. In September 2008 Ireland's government guaranteed its banks' debts, so the banks' heavy losses fell on the state. Ireland agreed a rescue programme in November 2010, borrowing from the IMF, the EU's and the euro area's new rescue funds, and three other EU countries.

Portugal, after years of deficits and slow growth, followed in May 2011, borrowing from the same two funds and the IMF. Spain had had a property bubble, and in July 2012 euro area finance ministers agreed a loan to rescue its banks, on condition that the weak ones were restructured; the IMF advised but lent nothing. In 2013 Cyprus borrowed from the euro area and the IMF, and the losses of its two largest banks fell on their owners, their lenders, and savers with more in the bank than the insured limit.

Borrowing costs soared, then fell

The chart shows what Greece's government had to pay to borrow for ten years. In early 2012 Greece agreed a second rescue programme, and as part of it private holders of Greek government bonds swapped them for new bonds with less than half the face value, the amount a bond promises to repay at the end. Greece did not repay its private lenders in full.

On 26 July 2012 the ECB's president, Mario Draghi, said it was ready to do "whatever it takes to preserve the euro". In September the ECB offered to buy, with no limit set in advance, short-term bonds of any country that agreed a programme, and its conditions, with the euro area's rescue fund, saying it wanted its policy to work the same way across the euro area. Borrowing costs across the hardest-hit countries fell in the months after, and many credit the offer for it.

The hardest-hit countries went through deep recessions

Governments under the programmes cut spending and raised taxes. By 2013 Greece's output was more than a quarter below its 2008 level, and more than one in four people who wanted work in Greece and in Spain had none.

Whether the budget cuts made the slump deeper is argued. A fiscal multiplier measures how much a country's output changes when its government cuts spending or raises taxes. In October 2012 the IMF's own staff concluded that "actual fiscal multipliers were larger than forecasters assumed": the cuts reduced output by more than expected. The IMF's evaluators added that in Greece the political crisis also hurt confidence, so that probably almost any forecast of the cuts' effect would have proved too small.

Ireland and Portugal left their programmes, and Greece needed a third rescue

Ireland completed its programme in December 2013 and Portugal in May 2014, and both could borrow from the markets again. In January 2015 Greeks elected a government opposed to the budget cuts, and talks with its lenders stalled. After a bank run, with savers rushing to take their money out, Greece shut its banks at the end of June. On 5 July voters rejected the lenders' terms, and on 12 July euro area leaders agreed a third rescue for Greece.

Why the crisis happened is still argued, and the last module of this series takes it up: some stress government borrowing, some private debt built on cheap credit, some a currency shared without a shared budget, and some how the crisis was handled. The next module goes back to the start: Greece's first rescue in 2010, and the rescue funds agreed the same month for the countries that might follow.

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