The Greek Debt Crisis- History, Causes & Way Forward
Posted in Finance Articles, Total Reads: 1145
, Published on 09 October 2015
The citadel of knowledge & philosophy of the ancient world, Greece, is now ironically crisis ridden with no obvious easy exits in sights. The past few years since the Euro zone debt crisis surfaced in 2008, it hasn't been easy for the European nations. However, slowly & steadily, the 19 nation economic & currency bloc, the Euro Zone, has crawled out of recession, evidenced by a 0.4% growth in the first quarter of 2015. Greece, though is still reeling under the immense burden of past happenings.
The Maastricht Treaty's Stability & Growth Pact (SGP) set the basic ground rules for nations to augur to, to enter the Euro Zone, and thus come under the ambit of Euro Currency. The criteria prescribed limits on inflation, fiscal deficit, public debt-to-GDP ratio & interest rates on 10-year Govt Bonds. Greece fudged their macroeconomic data to gain entry into the Euro Zone, as admitted by their Finance Minister in 2004. Greece's budget deficits were in the zone of 4-5%, while the limits were set south of 3% to be eligible for the entry. Interestingly, Greece wasn't the only accused party in this fiasco - the EC knew about this, but sheer economic blindness & the political motives of the World War ridden continent weighed heavily to douse the issue.
Four major drivers has led to the present condition. Firstly, post Euro Zone entry, Greece was awash with undreamt inflows of Euro. Growth propelled, financed by foreign debt - not by equity. Thus, there was a lack of industrial growth & exports, but money flowed in the guise of foreign debt. One instance of such money was the spending for the 2004 Athens Olympics, when Greece spent 9 times as much as the previous Sydney Olympics of 2000.
Secondly, low interest bearing debts in the world's second most important currency "Euro", gave the Greek Governments enough reason to increase subsidies, pay higher salaries & pensions, & create large scale public sector infrastructure & thereby employment. The government expenditure as a percentage of the GDP, grew from 18.5 in 2003 to 22.7 in 2009 - growth highly unsustainable for an economy of Greece's size. The misalignment between the fiscal policies controlled by the Greek Government & the monetary policies handled by the ECB proved disastrous - both Greece & the creditors should have realised that in the initial years.
Thirdly, post fudging macroeconomic data to gain entry to Euro Zone, Greece made no effort to set its economy straight. Not a single year since 2001 till 2007, did Greece meet the Fiscal deficit & public debt targets set by SGP. Year on year, the fiscal deficit widened & the public debt-to-GDP increased. And all this happened, while the foreign debt kept on flowing in - a bomb destined to explode.
Fourthly, for much of the past 2 decades, Greeks have evaded tax with ease. Rich dodgers stashed cash at the Swiss Banks, while others simply didn't pay. Statistics show that Greece's direct tax collection at a mere 8% of GDP - some 4% below the Euro Zone average. Data also shows that the Government as of June 2015, has collected less than half of the tax dues as of 2012.
All the above four reasons, each compounding the other, led to a situation where on the one hand pseudo-moralistic notion of "redemption through pain" forcing further austere measures on the Greek citizens is justified, while on the other hand further debt to keep Greece within the Euro looks to be too-much-of-a-charity with no plausible means of repayment.
By May 2010, Greece had its first bailout as the creditors & the rest of the world woke up to the impending danger. The Troika responded with a €110 billion loan to prevent sovereign debt, and in return Greece promised implementing austerity measures, structural reforms, better corporate governance & privatisation of select industries. But most of these didn't happen in any significant way. 2012 saw the second bailout of €130 billion, followed by few more rounds of bailouts.
By December 2014, Tsipras & the Syriza Party came to power, promising to end the Greek humiliation - total debt at €323 billion, unemployment at a high of 25% of the working population, GDP shrunk by 25% in the past 5 years & public debt-to-GDP at 170% of GDP.
With the expectations of anti-austerity measures running high, unsurprisingly, about 62% of the Greeks led by their charismatic leader Alexis Tsipras, voted "No" to a referendum, on 5th July 2015, thus rejecting further austerity terms to be imposed by the "Troika" of creditors (the International Monetary Fund, the European Commission & the European Central Bank). But alas, the conundrum isn't simplistic enough to be captured by a referendum or two - the Greek crisis is much beyond the existing pile of debts, it is more to do with the way the nation has been appallingly run over the past 2-3 decades.
The Way Ahead
Presently, post the largely insignificant referendum of July 5th, Greece has accepted another bailout of €86 billion, the precise terms & conditions of which are yet to be agreed upon by the Troika & the Greek & German Governments (ratified by their respective Parliaments).
When we talk of structural reforms, the question arises, what all can Greece do in the short term & in the long term. Structural-reform-linked (SRI) loans is one financially engineered product that might come to Greece's rescue. It has earlier been used in other countries' context -why not in this case. The further debts provided to Greece should be economically linked to the quantum of structural reforms (the units & measures could be debated & finalised) Greece could enforce. The salaries of the well-off citizens could be pruned to some manageable extent to prevent the reductions on the pensions & wages of poor workers in various industries.
Greece has some of the most arcane, most controlled rules & regulations in Europe. The industries are subjected to huge price controls, tariff & duties restrictions, and mostly domestic consumption driven market. Greece needs to push for competitive exports - pharmaceuticals, tourism based export goods, agricultural products, etc. At present, though sounds weird, due to immensely high transport costs, Greece imports vegetables from Belgium, while it is grown within its own borders. These problems stifles an economy & discourages entrepreneurial activities. Greece needs to realise the need of the hour & liberalise the economic sectors wherever necessary to institutionalise its growth trajectory - not driven by foreign debt model.
Thus, Greece is stuck between an immensely tough choice (of leaving the Euro & print its own currency Drachma) & a horrible choice (to continue with the bailouts) - acceptance of any is of grave consequence for the tax evading & aging Greek citizens. Greece urgently requires structural reforms enforceable from the highest echelons of the governmental machinery & strong ethical corporate governance to crawl out of the deep abyss - which is difficult & riddled with massive challenges - but certainly possible.
This article has been authored by Debarka Chakraborty from XLRI
Data & Fact Sources
1. Omkar Goswami, "Why Grentry augured Grexit", Business Standard, Kolkata, July 5, 2015
2. Claude Smadja, "Two deals, many lessons", Business Standard, Kolkata, July 23, 2015
3. Rose Troup Buchanan, "Greece debt crisis explained: A history of just how the country landed itself in such a mess", The Independent, July 04, 2015
4. "Greece’s Debt Crisis Explained", The New York Times, July 20, 2015
5. Adam Shell, "Greek Debt Crisis: Everything you need to know", July 2015
6. "Real reasons behind the Greek crisis: Inefficiency and a fudged budget deficit", Brisbane Times, July 6, 2015
7. Shawn Tully , "5 ways to transform Greece's economy now", Fortune Magazine, Feb 15, 2012
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