Greek
Debt Crisis: The Scenario
The 1999
introduction of the euro as a common currency reduced trade costs among the
Eurozone countries, increasing overall trade volume. However, labour costs
increased more in peripheral countries such as Greece relative to core
countries such as Germany, making Greek exports less competitive. As a result,
Greece saw its current account (trade) deficit rise significantly.
As the Great Recession that began in the U.S. in 2007–2009
spread to Europe, the flow of funds from the European core countries to the
periphery began to dry up. Reports in 2009 of fiscal mismanagement and
deception increased borrowing costs; the combination meant Greece could no
longer borrow to finance its trade and budget deficits
A
country facing a “sudden stop” in private investment and a high debt load
typically allows its currency to depreciate (i.e., inflation) to encourage
investment and to pay back the debt in cheaper currency, but this is not an
option while Greece remains on the Euro. Instead,
to become more competitive, Greek wages fell nearly 20% from mid-2010 to 2014,
a form of deflation. This resulted in a significant reduction in income or GDP,
resulting in a severe recession and a significant rise in the debt to GDP
ratio. Unemployment has risen to nearly 25%, from below 10% in 2003.
Almost two-thirds of
Greece’s debt, about 200 billion euros, is owed to the eurozone bailout fund or
other eurozone countries. Greece does not have to make any payments on that
debt until 2023. The International Monetary Fund has proposed extending the grace
period until mid-century.
Origins
of the Crisis
Socialist
Government
In
October 1981, the Panhellenic Socialist Movement (PASOK), a party founded by
Andreas Papandreou in 1974, came into power on a populist platform. Over the
next three decades, PASOK alternated in power with the New Democracy Party that
was also founded in 1974. In a continuing bid to keep their voters happy, both
parties lavished liberal welfare policies on their electorates, creating a
bloated, inefficient, and protectionist economy.
For instance, salaries for workers in the public sector rose
automatically every year, instead of being based on factors like performance
and productivity. Pensions were also generous. A Greek man with 35 years of
public-sector service could retire at the ripe old age of 58, and a Greek woman
could retire with a pension as early as 50 under certain circumstances. Perhaps
the most infamous example of undue generosity was the prevalence of 13th and 14th-month
payments to Greek workers. Workers were entitled to an additional month's pay
in December to help with holiday expenses and also received one-half month's
pay at Easter and one-half when they took their vacation.
As a result of low
productivity, eroding competitiveness, and rampant tax evasion, the government
had to resort to a massive debt binge to keep the party going. Greece's
admission into the Eurozone in January 2001 and its adoption of the euro made
it much more easier for the government to borrow.
Since the government
had introduced welfare schemes that the taxation revenue could not cover up it
secretly borrowed every year from a host of private and foreign investors. The
finance ministry presented a budget with little deficit while secretly borrowing
on the side.
Whenever a new government would ascend to power they would be
presented with the legacy of the debt burden. The ruling party leaders would
have the option of drastically cutting back on a large portion of the welfare
measures undertaken without fiscal backing or it would have the option to keep
quiet about it and continue borrowing. Drastically cutting back on the welfare
would have been political suicide though it was the only sensible economic
option to follow. Throw open the nation’s messy public finances for all Greek
citizens to see and explain the need for drastic fiscal measures. Unfortunately
for Greece its leaders decided to take the easier path and continued borrowing
even as the gap between revenue and expenditure mounted, the interest burden
mounted and the public debt to GDP ratio expanded. When
the revelation finally came in 2008-2009, it was already too late.
Taxation
By 2011, Greece was losing around 30 billion Euros a year on tax evasion and evasion of
social security contribution. That accounts for close to 14.6% of the GDP. Present government revenues account
for 39.1% of the GDP or 81.9 billion Euros. This means that the government is losing
out on tax revenues equal to 36.6%
of the gross government revenue.
The Greeks were
enjoying a lifestyle that they did not deserve. Essentially it was a party that
lasted three decades and finally reality has dawned. Thus domestic protests in
Greece against austerity measures raise indignation across Europe where hard-working
and educated citizens bear the burden of bailing Greece out of its fiscal mess.
Misreported
Debt Statistics
It was revealed that Goldman Sachs and other banks had helped the
Greek government to hide its debts. Greece hired Goldman Sachs to enter the
Eurozone by hiding its statistics. Greece is the only member-state that cheated with its
statistics for years. According
to Der
Spiegel, credits given to
European governments were disguised as "swaps" and consequently did
not get registered as debt because Eurostat at the time ignored statistics
involving financial derivatives.
To keep within the monetary union guidelines, the government of Greece had also for
many years misreported the country's official economic statistics. At the
beginning of 2010, it was discovered that Greece had paid Goldman Sachs and
other banks hundreds of millions of dollars in fees since 2001, for arranging
transactions that hid the actual level of borrowing. Most notable is a cross currency swap, where billions worth of Greek debts and
loans were converted into yen and dollars at a fictitious exchange rate by
Goldman Sachs, thus hiding the true extent of Greek loans.
The
Troika Bailout
By the
spring of 2010 the excessive debt problem became unbearable and there was open
speculation that Greece would default. The country had done this on four
occasions previously since 1800.
Greece became the epicenter of Europe’s debt crisis
after Wall Street imploded in 2008. With global financial markets still
reeling, Greece announced in October 2009 that it had been understating its
deficit figures for years, raising alarms about the soundness of Greek
finances.
Suddenly, Greece was shut out from borrowing in the
financial markets. By the spring of 2010, it was veering toward bankruptcy,
which threatened to set off a new financial crisis.
To avert calamity, the so-called
troika — the International
Monetary Fund, the European Central Bank and the European Commission — issued the first of two
international bailouts for Greece in May 2010. The €110 billion bailout loan to rescue Greece from sovereign
default and
cover its financial needs throughout May 2010 until June 2013, conditional on
implementation of austerity measures, structural reforms, and privatization of
government assets. A year later, a worsened recession along with a delayed
implementation by the Greek government of the agreed conditions in the bailout
programme revealed the need for Greece to receive a second bailout worth €130 billion (including a bank recapitalization package worth €48bn), while
all private creditors holding Greek government bonds were required at the same
time to sign a deal accepting extended maturities, lower interest rates, and a
53.5% face value loss.
Why did the rescue fail?
To
justify the new lending, the lenders had to be assured that the deficits would
end and that the country would grow enough to be able to service its debt. In
May of 2010, the International Monetary Fund (IMF), led at the time by
Dominique Strauss Kahn, who had ambitions of running for the presidency of
France, conducted an analysis to see if such a scenario was realistic. The
report at the time concluded that if Greece undertook drastic reforms it could
close its deficits and begin growing so that over time the debt (including the
new lending that was being provided) would be manageable.
This
analysis was later shown to be deeply flawed by the IMF itself. The Greeks did
actually cut their deficits substantially, but many of the reforms that were
supposed to support growth did not occur and the economy contracted
substantially. So the debt, relative to the size of the economy, did not
improve.
Other information
Greece is, as a percentage of GDP, the second-biggest defense
spender[29] in NATO, the highest being the United
States, according to NATO statistics.
In April 2010, it
was estimated that up to 70% of Greek government bonds were held by foreign
investors, primarily banks.
Greece's debt-to-GDP
ratio was at 103% in 2000, well above the Eurozone's maximum permitted level of
60%.
Beneficiary
and the benefactor: In 1953, Greece forgave half
Germany's debt so that the fledgling republic could recover from the war
Germany had inflicted on those creditors, and thrive economically.
It is both ironic
and criminal that Germany is the primary obstacle against forgiving or reducing
Greece’s debt today, yet Greece, which was one of Germany’s creditors,
supported reducing Germany’s debt after WWII. Greece was one of the countries
that willingly took part in a deal to help create a stable and prosperous
western Europe, despite the war crimes that German occupiers had inflicted just
a few years before.
Back in 1971 Nick Kaldor, the noted
Cambridge economist, had warned that forging monetary union before a political union was possible
would lead not only to a failed monetary union but also to the deconstruction
of the European political project.
References
Greece’s Debt Crisis
Explained http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=1
The
Greek Debt Crisis <https://en.wikipedia.org/wiki/Greek_government-debt_crisis>
A Primer on the Greek Crisis: the things you need to know from the
start until now
http://faculty.chicagobooth.edu/anil.kashyap/research/papers/A-Primer-on-the-Greek-Crisis_june29.pdf
Origins
of the Greece Debt Crisis <http://www.investopedia.com/articles/personal-finance/061115/origins-greeces-debt-crisis.asp>
Origins
of the Greece Debt Crisis <http://www.mananvyas.com/the-origin-of-the-greek-sovereign-debt-crisis/>
Germany failed to learn from its own history — and
now Greece is paying the price <http://www.businessinsider.com/germany-failed-to-learn-from-its-own-history--and-now-greece-is-paying-the-price-2015-7?IR=T>
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