Question

Why did the sovereign debt problem of Greece a country that accounts for less than 2 percent of euro area GDP threaten the banking system throughout the euro area?

Answer 1

Greece is the one of the most indebted nation. The Greek national debt is worth 320 billion euros ,or 175 per cent of GDP. The two third of this debt is owned to other countries and central banks in the Euro area. On the whole European countries have lent Greece 52.9 billion euros bilaterally, 130.9 billion through the EFSF and IMF has lent 25 billion euros.

If problem in Greece increases , then it will default on all the above mentioned loans, which will be a situation of concern for all the European nations as they have lent a sizable chunk to Greece. Thus, sovereign debt problem of Greece a country that accounts for less than 2 per cent of euro area GDP threaten the banking system throughout the euro area.