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Borrowing Cost as a Crucial Factor for Sustainable Fiscal Consolidation & for Exiting the Current Crisis

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  • Sotirios Theodoropoulos

Abstract

The Greek fiscal crisis which is evidenced in a sharp deterioration of public finances resulting in the highest public deficit and debt in the E.U. makes even more urgent the necessity to make accurate assessments of the problem so as to apply the appropriate policy measures. After repeated downgrades by all rating agencies in a period of a few months, along with the loss of access to financial markets in spring of 2010, the unaffordable cost of borrowing due to record high spreads, reached such levels that the necessary fiscal adjustment is now nearly impossible. The international support mechanism created by the IMF, European Commission & ECB in order to avoid sovereign default, and preserve Greece’s position as a member of the Euro-zone, was an urgent and necessary step. Besides the policy measures stated in the memorandum of understanding, which are an attempt to correct years of structural imbalances in Greek public finances, borrowing cost become a crucial factor for achieving the above targets. In this paper we try to present and explore the evolution of borrowing cost from Greece’s entry to the Euro-zone until the end of 2009 and its severe deterioration afterwards. As will be shown, at the close of 2009, borrowing cost became one of the most crucial component in restoring fiscal consolidation and discipline. The spill-over effects of the borrowing cost on the private sector- crowding out effects- following the loss of access to international financial markets by domestic banks, will be investigated. Also, necessary preconditions for sustainable markets and E.U. enforced fiscal discipline by appropriate policy measures to restore market’s confidence and reduce borrowing cost, will be discussed.

Suggested Citation

  • Sotirios Theodoropoulos, 2012. "Borrowing Cost as a Crucial Factor for Sustainable Fiscal Consolidation & for Exiting the Current Crisis," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 141-154.
  • Handle: RePEc:ers:journl:v:xv:y:2012:i:1:p:141-154
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    References listed on IDEAS

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    1. Gang Gong & Alfred Greiner & Willi Semmler, 2001. "Growth Effects of Fiscal Policy and Debt Sustainability in the EU," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 28(1), pages 3-19, March.
    2. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
    3. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers 2008 - 2015 388, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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    More about this item

    Keywords

    Banks Fiscal Consolidation. Public Debt; Yield Differentiation; Borrowing Cost;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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