Before you start
What you'll be able to answer
- Why could Greece no longer borrow on the markets in 2010, and why could it not fix this alone?
- What did Greece get in May 2010, and what did it have to do in return?
- Why did the euro area build rescue funds in 2010, and how much could they really lend?
Where this sits
The Eurozone Crisis — 2009 to 2015 · this module is lit
- 21 Oct 2009Greece revises its 2009 deficit figure sharply upward
- May 2010Euro area governments and the IMF agree Greece's first rescue loan, EU governments agree to create rescue funds, and the ECB starts buying government bonds
- 28 Nov 2010Ireland agrees a rescue programme
- May 2011Portugal agrees a rescue programme
- Dec 2011 and Feb 2012The ECB makes two rounds of three-year loans to banks
- Mar to Apr 2012Private holders of Greek bonds take a cut of more than half in face value
- 20 Jul 2012Euro area ministers approve a loan to recapitalise Spain's banks
- 26 Jul and 6 Sep 2012The ECB's president promises "whatever it takes"; the ECB announces Outright Monetary Transactions
- Mar to Apr 2013Cyprus takes rescue loans, while uninsured depositors, shareholders and bondholders meet the capital needs of Cyprus Popular Bank and the Bank of Cyprus
- Jun to Jul 2015Greece shuts its banks after a bank run, voters reject the lenders' terms, and euro area leaders agree a third programme
Greece's request for help in April 2010
On 23 April 2010 Greece's prime minister, George Papandreou, announced on the island of Kastelorizo that Greece was asking the other euro area governments and the International Monetary Fund (IMF), which lends to countries in trouble, for loans. In October 2009 Greece had revised its 2009 deficit figure sharply upward; the deficit is the gap between what the government spends and what it collects. Since then, the interest rate it paid to borrow for ten years had risen from about 4.6 to 7.8 per cent.
A country in trouble can sometimes let its currency fall, which makes its goods cheaper abroad and helps it sell more. Why was that not open to Greece in 2010?
Greece had replaced the drachma with the euro. A country that shares a currency cannot let it fall on its own, so the adjustment had to come in other ways.
Greece's position in spring 2010
Greece shared the euro, so it could not make its exports cheaper by letting a currency of its own fall. It still had to borrow to cover its deficit and to repay old debts as they fell due. A government borrows by selling bonds, which are promises to repay with interest. Lenders who doubt they will be repaid ask for a higher interest rate, and Greece's lenders now did.
The euro had been built with no fund to lend to a member that could not borrow. Any help had to be put together from scratch by governments that first had to agree among themselves and then win the approval of their own parliaments.
The first loans to Greece
In May 2010 euro area governments and the IMF agreed to lend Greece 110 billion euros over three years. Euro area finance ministers agreed their share, 80 billion euros, on 2 May, and the IMF its 30 billion on 9 May. The euro area's share was not one loan. It was a bundle of separate loans from each government, known as the Greek Loan Facility, pooled and run by the European Commission, the EU's executive. All the other euro area countries took part, except Slovakia, which later decided to stay out.
The money came in instalments. Each one depended on Greece doing what it had agreed: a further round of budget cuts and tax rises, on top of those it had already begun, and changes to how its state and its economy worked.
The IMF's choice over Greece's debt
The IMF lends beyond its normal limits only if, among other tests, its analysis shows that the country's debt will very probably be repaid in the medium term. IMF staff could not say that of Greece, and its senior officials were split on what to do. The European Commission, the European Central Bank (ECB), the central bank for the euro area, and some euro area governments opposed any restructuring, a deal that cuts what a borrower owes its lenders. Greece had accepted that as a condition of European help. Some IMF staff worried that lending without a restructuring would let private lenders sell out first, so that any later cut would fall harder on the private lenders who were left. With the 2008 collapse of the US bank Lehman Brothers still fresh in mind, many feared that a Greek default, a failure to repay, could spread to other countries.
Your decision
You run the IMF in early May 2010. What do you do about Greece?
A smaller debt is more likely to be repaid, so the IMF's money is safer and Greece needs smaller budget cuts.
Where it was triedOne group of senior IMF officials doubted the debt could be repaid and thought a well-run restructuring could keep the spread to other countries manageable.
What it costsSome euro area governments, the Commission and the ECB opposed it, and Greece had accepted their position. The IMF would have had to break with its European partners.
Official loans give Greece time to cut its deficit and reform, and avoid a default that could spread to other countries.
Where it was triedAnother group of senior IMF officials thought that, with strong action, Greece could manage without a restructuring.
What it costsThe IMF would be lending without being able to say its money would very probably come back, which is what its rule was written to prevent.
The IMF's rule exists to stop it lending where repayment is doubtful; keeping to it protects the money its members provide.
Where it was triedThe IMF had rarely lent to rich countries in recent decades, and its share of a Greek loan would be far beyond its usual limits.
What it costsGreece would lose the IMF's share of the money and its expertise, both of which the IMF had been invited in late March 2010 to provide.
The board added an exception, later called the systemic exemption: the IMF could lend even when it could not say a debt would very probably be repaid, if there was a high risk of the crisis spreading across the world's financial system. Board members had no advance notice of the change, the IMF's own evaluators later found.
What followedIn the evaluators' view, the decision left the doubts about Greece's debt unresolved, made the budget cuts Greece needed larger, and let private lenders reduce their holdings before Greece's private bonds were cut in 2012. The IMF used the exemption again for Ireland and Portugal, and its board removed it in January 2016.
The IMF's rule and the troika
The chart shows Greece's government debt as a share of its yearly output, its GDP. On 9 May 2010 the IMF's board approved its part of the loan, and in the same decision added an exception to its rule: it could lend beyond its usual limits, even when it could not say the debt would very probably be repaid, if there was a high risk of the crisis spreading across the world's financial system.
Three institutions then designed, ran and monitored the programme: the European Commission, the ECB and the IMF, known as the troika. The Commission and the IMF drew up and oversaw the reforms, while the ECB concentrated on the stability of the banks. Government leaders kept overall charge, but the troika became the public face of the rescues, and a target of fierce criticism in the countries that received them.
Source: Eurostat, government consolidated gross debt (gov_10dd_edpt1), Greece. CC BY 4.0.