Greece Economic Crisis Summary - Is It Their Own Fault?

Posted in Finance Articles, Total Reads: 1656 , Published on December 08, 2015

Greece’s staggering sovereign debt has now exceeded €315 billion. The International Monetary Fund (IMF) and Greek officials continue insisting that any package must provide for easing this burden. On 13th July 2015, Eurozone leaders have provisionally agreed on a third bailout programme to save Greece from bankruptcy. The Greek economy is clearly tired of austerity, and an eventual recovery seems more difficult than ever. But is this all Greece’s fault? To understand the roots of this rekindled crisis, let us revisit the first Greek rescue of 2010, the consequences of which reverberate even today.

During negotiations over Greek’s bailout package in 2010, the IMF had pushed for debt haircuts i.e. for reducing the amount private bank sector holders of Greek debt could expect to be paid back. This would have paved the way for an orderly process out of the debt crisis, thus preventing the full burden of banking sector debts to be pushed onto Greek taxpayers.

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However, the proposal was fiercely opposed by the then ECB president Jean-Claude Trichet who feared it could spark a financial conflagration akin to the 2008 bankruptcy of Lehman Brothers across all of Europe; and so there was no restructuring agreed for Greece. It had to pay off its immediate debts to the private financial sector, basically investment banks and the subsequent replacement debt was laid onto Greek taxpayers.

The fear of a contagion had thus trumped measures that would have been right for Greece. Less than two years later a restructuring did inevitably arrive in March 2012. Bondholders had to take a hit on their holdings ranging between 60-75%. But more importantly, Trichet's fear of contagion failed to materialize! In fact, by this time, the harsh reform measures of government spending cuts imposed on Greece by the Troika (the European Commission, the European Central Bank and the IMF) had done significant damage to the economy impairing its ability to repay debt in future.

Greece did not fail on its own. It was made to fail.

The delay in dealing decisively with Greece’s debt has prolonged the Euro crisis to this day. Despite two bailouts and adjustment programmes, Greece’s economy has shrunk by more than 20% since the start of 2010, unemployment is above 25% with youth unemployment over 50%, and its public debt to GDP ratio has grown from 133% in 2010 to a mind-numbing 175% today. The sight of Greeks lining up for soup at soup kitchens today is reminiscent of the soup kitchens of the Great Depression of 1929.

And they call this a bailout! Whose bailout was this essentially, we must ask.

It was the banks that got bailed out, not Greece. Of the €240 billion received by Greece since the May 2010 bailout, 92 % went to Greek and European financial institutions, shows data from Jubilee Debt Campaign. This implies the bailout proved a boon to Greece’s private lenders, more particularly German and French banks - they received timely and full payment on billions of euros worth of Greek bonds in 2010, 2011 and early 2012. Their gains were subsidized by Greek taxpayers who had to bear the burden and the risk of the official loans extended to Greece. Thus, instead of reforming, Greece got deformed!

Economists agree widely that Greece’s debt should have been restructured way sooner. Some contend that 2010 would have been the ideal time for this. Fast forward to today, it seems difficult to objectively predict whether a Grexit will eventually occur, and, in case it does, whether this will lead to the end of the economic and monetary union that is Eurozone. But what for sure stands on shaky ground today is the claim of European Union being an ethical and progressive project of civilization based on liberal market principles and standards of democratic governance.

This article has been authored by Ravi Vatsa from XLRI Jamshedpur

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