1 The Greece Debt Crisis

The Greece Debt Crisis

-By, Saujanya Roy Indian Maritime University, Kolkata

A financial crisis is characterized as a situation in which the prices of all the significant assets experience a huge decline in their financial value. Many crises have occurred throughout history. One of the most notable is the Greece Debt Crisis which the Greeks have been experiencing as an aftermath of the 2007-09 financial crisis. Greece seems to have suffered the longest duration of stagnation in recent history due to the crisis.

Greece, like many other European countries, had experienced the 19thcentury debt crisis. However, Greece had emerged as one of the fastest GDP growth rates in the world during the twentieth century. Greece joined the European Economic Community (now the European Union) in 1981, with an impressive debt-to-GDP ratio of just 19.8% on average.

(www.britanica .com)

In October of 1981, the Panhellenic Socialist Movement (PASOK) came into power, ending a brutal seven-year long military Junta. Since then, the power has always shifted between the PASOK and the New Democracy Party (ND). In order to win over the voters, both the parties lavished several policies over the years which resulted in soaring inflation rates, slow growth rates and creating an inefficient, bloated economy.

One of the most infamous Policy was to annually increase the salary of all the workers in the public sector irrespective of their performance or their productivity. The workers also received an

additional pay (also known as 13th month or 14th month pay) in order to cover for their expenses while they were on vacations or during Easter.

These unplanned policies resulted in low production, slow growth and diminished competitiveness, which broke the government. During this financial crisis, on January 2001 Greece joined the European Monetary Union (EMU) giving them some glimpse of hope. With the introduction of Euro in 2001, trading cost between the Eurozone countries have greatly reduced and there was a significant increase in the overall trading volume. With Banks investing their money and usage of only Euros throughout the Europe, it significantly lowered the interest rates the Greek government needed to pay (around $172 Billion then). This allowed the Greek government to borrow at a much cheaper rate of interest than before 2001. The annual GDP growth between 2001 and 2008 was increased to an impressive 3.9% and were second fastest behind Ireland in the Eurozone.

(www.investopedia.com)

However, the membership soon became a very controversial one. Greece’s Debt-to-GDP ratio was found to be 103%, far above the permitted level of 60% set by the Eurozone. Furthermore, Greece’s fiscal defect was 3.7% of the GDP which is also above the allowed limit of Eurozone of by 0.7%.

This was soon revealed during the global financial crisis of 2007-09. Greece’s already meagre tax revenues were getting eroded due to the recession weeks and hence worsening the deficit. In 2009, Greek debt was downgraded after many statistical discrepancies were found including underreporting of public debt was also exposed. Greece was suddenly barred from borrowing in the capital market. In 2010, U.S financial rating agencies assigned a “junk” rating to Greek bonds. Greece faced liquidity crisis as capital got dried up. To avoid a crisis, the IMF, the European Commission Bank and the European Commission, collectively known as the troika, agreed to provide Greece with emergency funding and Greece was essentially bailed out. This bailout marked the beginning of what has now become one of the longest crises in modern history.

(www.npr.org)

The bailouts from the International Monetary fund and from other European creditors were contingent on Greece’s implementing fiscal reforms, specifically increased cuts and increased tax returns. These austerity measures triggered a series of recessionary cycle, with unemployment reaching an all-time high of 25.4%. Tax revenues fell, worsening Greece’s fiscal situation. The Austerity measures exacerbated the humanitarian crisis, increase in homelessness, suicide cases reached an all- time high, and a significant decline in public health and lifestyle

(www.britanica.com)

The measures implemented in the midst of the worst financial crisis in the world since the Great Depression of 1930, proved to be a major contributor to Greece’s economic implosion. In the wake of the financial crisis, the debt-to-GDP ratio skyrocketed as Greece’s economy shrank reaching an astonishing figure of 180%. The final nail in the coffin came in 2009, when the new government took over the office and announced that the fiscal deficit was 12.7% which is double than the previously disclosed figure, further accelerating their debt crisis.

Instead of assisting Greece’s economy in regaining its stability, bailouts only ensured that Greece’s creditors get repaid while the government struggled to put together the meagre tax revenues. While Greece was facing structural problems, such as tax evasions, membership in the Eurozone allowed the country to hide from these issues for a time, but it eventually generated huge economic problems and an unresolved debt crisis.

Several methods have been suggested by economist around the globe, but the government failed to acknowledge most of these methods. Raising the tax revenues is one of the most important solution. The Greek government’s current income is about 42% of the GDP. This is a low to middle figure for the Eurozone where the IMF expects Belgium, France Finland will all exceed 50% by this year. Raising the tax rates and improving tax collections will help the government’s revenue to catch- up with its previous expenditures and gradually balance the budget. The government has been facing enormous pressure from IMF and EU to cut spending. Currently the budget deficit is around 7% of the GDP, and is expected to remain around 5% in the long run. However, cut spending could stymie the Greek economy’s recovery by reducing government employment and salaries and spending in other sectors.

(www.npr.org)

Greece’s return to economic stability is getting hampered by the Euro currency. The government can use inflation to reduce the value of its debts with their own currency. Further, the Greek government cannot issue euros anymore, only the European Central Bank is able to do so. Returning to Drachma would restore Greek authority over their monetary policy. The government would initially struggle to come up with enough drachmas to cover their debt, but gradually the country would be well prepared for their future growths.

(www.britanica.com)

The Greek debt crisis had stemmed from previous governments’ fiscal mismanagement, indicating that, like individuals, nations cannot afford to live beyond their means. As a result, Greeks may have to endure years, if not decades of harsh austerity measures.

REFERENCES

1. www.britanica.com 2. www.toptal.com 3. www.investopedia.com 4. www.npr.org