GREEK ECONOMIC CRISIS

The Greek depression started in late 2009. It was the first of five sovereign debt crises in the
eurozone later referred to collectively as the European debt crisis. In Greece, triggers included
the turmoil of the Great Recession, structural weaknesses in the Greek economy, and a sudden
crisis in confidence among lenders. In late 2009, fears developed about Greece's ability to meet
its debt obligations, due to revelations that previous data on government debt levels and
deficits had been misreported by the Greek government. This led to a crisis of confidence,
indicated by a widening of bond yield spreads and the cost of risk insurance on credit default
swaps compared to the other Eurozone countries Germany in particular. In 2012, Greece's
government had the largest sovereign debt default in history. On June 30, 2015, Greece became
the first developed country to fail to make an IMF loan repayment. At that time, Greece's
government had debts of 323bn.

Formation of Euro
The euro (sign: ; code: EUR) is the official currency of the eurozone, which consists of 19 of the
28 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia, and Spain. The currency is also officially used by the institutions of
the European Union and four other European countries, as well as unilaterally by two others,
and is consequently used daily by some 337 million Europeans as of 2015.Outside of Europe, a
number of overseas territories of EU members also use the euro as their currency. The euro is
the second largest reserve currency as well as the second most traded currency in the world
after the United States dollar.

The name euro was officially adopted on 16 December 1995. The euro was introduced to world
financial markets as an accounting currency on 1 January 1999, replacing the former European
Currency Unit (ECU). Physical euro coins and banknotes entered into circulation on 1 January
2002, making it the day-to-day operating currency of its original members. While the euro
dropped subsequently to US$0.8252 within two years (26 October 2000), it has traded above
the U.S. dollar since the end of 2002, peaking at US$1.6038 on 18 July 2008.

Since late 2009, the euro has been immersed in the European sovereign-debt crisis which has
led to the creation of the European Financial Stability Facility as well as other reforms aimed at
stabilizing the currency. In July 2012, the euro fell below US$1.21 for the first time in two years,
following concerns raised over Greek debt and Spain's troubled banking sector. As of June 2015,
the eurodollar exchange rate stands at US$1.10.

EUROZONE CRISIS
Following the U.S. financial crisis in 2008, fears of a sovereign debt crisis developed in 2009
among fiscally conservative investors concerning some European states, with the situation
becoming particularly tense in early 2010.This included eurozone members Greece, Ireland and
Portugal and also some EU countries outside the area. Iceland, the country which experienced
the largest crisis in 2008 when its entire international banking system collapsed, has emerged
less affected by the sovereign-debt crisis as the government was unable to bail the banks out. In
the EU, especially in countries where sovereign debts have increased sharply due to bank
bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk
insurance on credit default swaps between these countries and other EU members, most
importantly Germany. To be included in the eurozone, the countries had to fulfill certain
convergence criteria, but the meaningfulness of such criteria was diminished by the fact it was
not enforced with the same degree of strictness from country to country.

CAUSES
In January 2010, the Greek Ministry of Finance published the Stability and Growth Program
2010. The report listed these five main causes for eruption of the current government-debt
crisis:

GDP growth rates

After 2008, GDP growth rates were lower than the Greek national statistical agency had
anticipated. In the report, the Greek Ministry of Finance reported the need to improve
competitiveness by reducing salaries and bureaucracy, and the need to redirect much of its
current governmental spending from non-growth sectors such as military into growth-
stimulating sectors.

Government deficit

Huge fiscal imbalances developed during the five years from 2004 to 2009. The output
increased in nominal terms by 40%, while central government primary expenditures increased
by 87% against an increase of only 31% in tax revenues. In the report the Greek Ministry of
Finance stated their aim to restore the fiscal balance of the public budget. They intended to
implement permanent real expenditure cuts (meaning expenditures would only be allowed to
grow 3.8% from 2009 to 2013, which was below the expected inflation at 6.9%). Overall
revenues were expected to grow 31.5% from 2009 to 2013, secured not only by new, higher
taxes but also by a major reform of the ineffective tax collection system.

Government debt-level

Mainly deteriorated in 2009 due to the higher than expected government deficit and high debt-
service costs. An urgent fiscal consolidation plan was needed to ensure that the deficit would
decline to a level compatible with a declining debt-to-GDP ratio. The Greek government
assessed that it was not enough to implement structural economic reforms, as the debt would
still increase to an unsustainable level before the positive results of such reforms could be
achieved. On this basis the government's report emphasized that in addition to implementing
the needed structural economic reforms, there was an urgent need in the coming four-year
period to implement packages of both permanent and temporary austerity measures.
Implementation of this entire package of structural reforms and austerity measures, in
combination with an expected return of positive economic growth in 2011, would then result in
the baseline deficit being forecast to decrease from 30.6 billion in 2009 to only 5.7 billion in
2013, while the debt-level relative to GDP would stabilize at 120% in 20102011 and begin
declining again in 2012 and 2013.

Budget compliance
Budget compliance was acknowledged to be in strong need of improvement, and for 2009 it
was even found to be a lot worse than normal, due to economic control being more lax in a year
with political elections. In order to improve the level of budget compliance for upcoming years,
the Greek government wanted to implement a new reform to strengthen the monitoring system
in 2010, making it possible to keep better track on the future developments of revenues and
expenses, both at the governmental and local level.

Statistical credibility

Problems with unreliable data had existed ever since Greece applied for membership of the
Euro in 1999.In the five years from 2005 to 2009, Eurostat each year noted a reservation about
the fiscal statistics for Greece, and too often previously reported figures got revised to a
somewhat worse figure, after a couple of years. The flawed statistics made it impossible to
predict accurate numbers for GDP growth, budget deficit and the public debt. By the end of the
year, all turned out to be worse than originally anticipated. Problems with statistical credibility
were also evident in several other countries, but in the case of Greece, the magnitude of the
2009 revisions and its connection to the crisis added pressure to the need for immediate
improvement.

THE SOVERIEGN DEBT CRISIS

After all, its normal for governments to run a deficit by using debt to finance undertakings such
as wars, civil projects and public services. The answer is-palpable fear that excessive
government debt will not be repaid. As any banker knows, the rewards of borrowing are felt
immediately and the pain is postponed to the futureoften pushed back further by adding
more debt. Consequently, undisciplined government borrowing can rise to unsustainable levels,
leading to crisis, austerity and even default. This possibility can occur in any nation, even the
United States.

When considering how deep in the hole a nation is, economists tend to look at the debt-to-GDP
(gross domestic product) ratio instead of just the nations budget deficit and the entire national
debt, which is the sum of the current and all past deficits/surpluses. The debt-to-GDP ratio
measures a countrys ability to pay off the entire debt with one years income, regardless of the
nations wealth or total debt outstanding. Many nations, including the U.S., have gross debt-to-
GDP ratios well above 90 percent. A high debt-to-GDP ratio does not automatically mean a
nation is a default risk, however. Many countries have defaulted with little debt, and other
countries have been doing fine with very high levels of debt.

Ability Vs Willingness To Pay

The critical point for lenders and investors comes when they are no longer confident of getting
their money back. Its not the ability to repay the debt but the willingness to repay the debt. For
example, Japans current debt-to-GDP ratio is well above 200 percent, but few holders of
Japanese debt see that nation as a default risk. However, Brazil and Mexico defaulted in the
early 1980s with lower debt-to-GDP ratios of only about 50 percent.

In normal times, most nations roll over their debt when its due. Nations often choose to get
short-term debt because of lower interest rates rather than longer-term debt, at the expense of
rolling over debt more frequently. Every time you roll it over, youre giving investors the
opportunity to say, Can you meet your debt obligations? If youre borrowing every six months
or every 12 months, youve got to answer that question a lot more often. The minute a lender
fears you may not be able to settle up this debt, they may either refuse to roll over the debt or
raise the interest rates that you have to pay.

This perceived willingnessor growing lack thereofto repay government debt is a major
factor in Europes current sovereign debt crisis.
GOVERNMENT BUDGET BALANCE AND DEBT

Year Deficit as a % of GDP Debt as a % of GDP

2008 9.8 112.9

2009 15.7 129.7

2010 10.9 148.3

2011 10.2 171.3

2012 8.7 156.9

2013 12.3 175.0

2014 3.5 177.1

ANNUAL GDP GROWTH RATE

YEAR RATE

2008 0.4

2009 4.4

2010 5.4

2011 8.9

2012 6.6

2013 3.9

2014 0.8

DEBT CRISIS COUNTERMEASURES

Tax evasion and tax collection improvements

The OECD estimated in August 2009, the size of the Greek black market to be around 65bn
(equal to 25% of GDP), resulting each year in 20bn of unpaid taxes.This is a European record in
relative terms, and in comparison almost twice as big as the German black market (estimated to
15% of GDP). Another study found that seven out of 10 self-employed Greeks significantly
under-report their earnings, with only 200 Greeks declaring incomes of over 500,000.
Undeclared income from self-employed Greeks (particularly doctors and lawyers) amounted to
28 billion in 2009, more than 10 percent of the country's gross domestic product that year. The
state lost 11.2 billion euros in tax revenues as a result. Above all, ship owners benefit from
dozens of tax exemptions. A rapid increase in government revenues through implementing a
more effective tax collecting system has been recommended but several successive Greek
governments had failed to improve the situation. Implementing proper reforms is estimated to
be a slow process, requiring at least two legislative periods before they start to work.
In 2010 the government has implemented a tax reform. In November 2011, the new Greek
finance minister Evangelos Venizelos called upon all persons who owe the state more than
150,000 to pay their outstanding taxes by 24 November or find their names on a black list
published on the Internet. The government later revealed the list, which also includes a number
of prominent Greeks, including pop stars and sportsmen. In January 2012, Athens was
considering the establishment of a 100-strong unit to go after wealthy tax evaders. The year
2012 also saw the introduction of a duty of non-cash payments for amounts over 1,500 Euros.
Meanwhile, the Greek police have established a special unit, which deals exclusively with tax
offenses. Germany has offered experts from its financial management and tax investigation
office to help build a more efficient tax administration. However, months later it was not clear
whether Greek officials would accept the offer. By the beginning of 2011, out of 5,000 cases
suspected of tax evasion gleaned from Greek bank records, only 334 have been conclusively
settled.

Anti corruption measures

Transparency International, an independent corruption monitoring NGO, found that 13% of

Greeks paid fakelaki (bribery in the form of envelopes with cash donations) in 2009, which was
estimated to account for 787 million in yearly payments. At the same time it was estimated
that roughly 1 billion was paid by companies in bribes to public institutions for avoiding
bureaucratic rules or to get other benefits. When calculating all sorts of corruption in Greece,
the total amount is estimated to be roughly 3.5 billion per year (equal to 1.75% of the Greek
GDP). Compared with corruption levels measured by Transparency International for 160 other
countries, Greece ranked at 49th in 2004, was down at 57th in 2008, and slumped to 71st in
2009. The government elected in October 2009 had on its agenda to increase the fight against
fakelaki and other forms of corruption.

Improving the Economy- Business Climate

According to the latest Doing Business Report, Greece is among the 10 economies of the world
that showed the largest improvement of business climate in 2011/12. It ranks 78 in the Ease of
Doing Business Index in 2012, a big step forward compared to the previous year when it ranked
100, a bigger leap in improving its regulatory environment than in any of the previous six years.
The authors of the report note that the reasons for Greece's good performance were the
implementation of regulatory reforms in the following three areas:

1) It reduced the time required to obtain a construction permit by introducing strict time limits
for processing permit applications at the municipality.

2) It strengthened investor protections by requiring greater immediate and annual disclosure of

material related-party transactions
3) It enhanced its insolvency process by abolishing the conciliation procedure and introducing a
new rehabilitation proceeding.

Austerity Packages & Reforms

When the first three austerity packages had been negotiated and agreed upon from February to
May 2010, they featured a total fiscal tightening of 41 billion of which 28bn was related to
201011 and the remaining 13bn scheduled for 201214. Because of a worse than expected
recession, this was however followed by a need for the government also to pass a fourth
austerity package in June 2011 and a Fifth austerity package in 2012. The two extra packages
increased the total amount of fiscal tightening for 20102014 to 65 billion (equal to 31.9% of
the 2012 Greek GDP), with the first 36bn in 201011 followed by 13bn in 2012 and 16bn in
201314.

In regards of the Fifth austerity package it only introduce a new tightening of 13.5bn for 2013
14, but in addition there is also a fiscal tightening of 2.5bn being implemented during the years
as leftover from the earlier packages, resulting in 16bn of tightening for 201314. Creditors
attributed the increased need for fiscal tightening to the Greek government's
inability/unwillingness to implement the needed economic structural reforms, while the
government viewed the recession as the result of the austerity measures

First austerity package(February 2010)

o Expected to save 0.8 billions

Second austerity package (March 2010)

o Included 30% cuts in Christmas, Easter and leave of absence bonuses, a further
12% cut in public bonuses, a 7% cut in the salaries of public and private
employees, a rise of VAT from 4.5% to 5%, from 9% to 10% and from 19% to 21%,
a rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported
cars of up to 10%30%.

Third austerity package (May 2010)

o Actions included sale of 4000 government-owned companies, limits on "13th and

14th month" salaries, a new rise of VAT from 5% to 5.5%, from 10% to 11% and
from 21% to 23% and other cuts to public employee benefits, pension Reform
and tax increases.

Fourth austerity package (June 2011)

 o It includes rise in taxes for those with a yearly income of over 8,000, an extra tax
for those with a yearly income of over 12,000.

Fifth austerity package (October 2011)

o The bill included among other, major cuts of the wages of civil servants through
to the definition of a single payroll and cuts for the pensions over 1000 euros.

Sixth austerity package (February 2012)

o 22% cut in minimum wage that goes to 586 from 750 per month.

Seventh austerity package and reforms (October-November 2012)

o Total abolition of 13th and 14th month salaries.

Eighth austerity package (April-July 2013)

o It included layoff of another 15,000 public employees among them were school
guards and municipal policemen.

Ninth austerity package (May 2014)

o The bill provided freeze of wages and pensions over a period of the next four
years, until 2018. Also it provided for cuts in public sector's expenses such as cuts
for the expenses of the Ministry of Health among others.

Tenth austerity package (July 2015)

o It includes transfer of many products in the high rate VAT (23%) and rise of
corporation tax from 26% to 29% for small companies among others.

Eleventh austerity package (August 2015)

o The new bill included provisions for the rise of various taxes and changes in the
retirement system.
CONSEQUENCES OF GREEK CRISIS

ECONOMIC EFFECTS

Greek GDP suffered its worst decline in 2011 when it clocked growth of 6.9% a year where the
seasonal adjusted industrial output ended 28.4% lower than in 2005,during that year, 111,000
Greek companies went bankrupt (27% higher than in 2010).As a result, the seasonally adjusted
unemployment rate also grew from 7.5% in September 2008 to a then record high of 23.1% in
May 2012, while the youth unemployment rate during the same time rose from 22.0% to
54.9%.On 17 October 2011, Minister of Finance Evangelos Venizelos announced that the
government would establish a new fund, aimed at helping those who were hit the hardest from
the government's austerity measures.The money for this agency would come from a crackdown
on tax evasion.

Greek GDP fell from 242 billion in 2008 to 179 billion in 2014, a 26% decline overall.
Greece was in recession for over five years, emerging in 2014 by some measures.
GDP per capita fell from a peak of 22,500 in 2007 to 17,000 in 2014, a 24% decline.

The public debt to GDP ratio in 2014 was 177% GDP or 317 billion. This ratio was the
third highest in the world after Japan and Zimbabwe. The public debt peaked at 356
billion in 2011; it was reduced by a bailout program to 305 billion in 2012 and has risen
slightly since then.
 The annual budget deficit (expenses over revenues) was 3.4% GDP in 2014, much
improved versus the 15% GDP of 2009. Greece has achieved a primary budget surplus,
meaning it had more revenue than expenses excluding interest payments in 2013 and
2014.

Revenues for 2014 were 86 billion (about 48% GDP), while expenditures were 89.5
billion (about 50% GDP).

Interest rates on Greek long-term debt rose from around 6% in 2014 to 10% in 2015.
Based on a debt of 317 billion, the 6% rate represents annual interest payments of
roughly 20 billion, nearly 23% of government revenues. For scale, U.S. interest is
roughly 8% of revenues. Interest rates on German bonds were under 1% in 2015.

The unemployment rate has risen considerably, from below 10% (20052009) to around
25% (20142015).

An estimated 44% of Greeks lived below the poverty line in 2014.

Greece defaulted on a $1.7 billion IMF payment on June 29, 2015. Greece had requested a two-
year bailout from its lenders for roughly $30 billion, its third in six years, but did not receive it.

SOCIAL EFFECTS
The social effects of austerity measures on the Greek population have been severe.

In February 2012, it was reported that 20,000 Greeks had been made homeless during
the preceding year
 20 per cent of shops in the historic city centre of Athens were empty.

By 2015, unemployment in Greece had reached 26% and it was reported by the
Organisation for Economic Co-operation and Development that nearly twenty-percent of
Greeks lacked sufficient funds to meet daily food expenses.

As the economy has contracted and the welfare state has declined, traditionally strong
Greek families have come under increasing strain, often unable to bear the burden of
increasing numbers of unemployed and often homeless relatives.

Many unemployed Greeks cycle between friends and family members until they run out
of options and end up in homeless shelters.

The Greek national government has not been able to commit the necessary resources to
combat the homelessness problem, due in part to austerity measures.

A program was launched to provide a stipend to assist homeless to return to their

homes, but many enrollees never received their grants.

Various attempts have been made by local governments and non-governmental

agencies to alleviate the problem. The non-profit street newspaper Shedia (Raft is sold
by street vendors in Athens who are allowed to keep half the 3.50 cover price for each
issue sold.

The municipality of Athens has started its own shelters, the first of which was called the
Hotel Ionis.

In 2015, the Venetis bakery chain in Athens was giving away ten thousand loaves of
bread a day, one-third of its total production. In some of the poorest neighborhoods,
according to the chain's general manager, there were disturbances among the large
numbers of hungry people queuing up to receive bread.

SOLUTIONS TO THE CRISIS

GREXIT
Nobel prize-winning economist Paul Krugman suggests that the Greek economy can recover
from the severe recession by exiting the Eurozone (often called "Grexit" in the media) and
launching a new national currency, the drachma. The devaluation of the currency may help
Greece boost its exports and pay down its debts with cheaper currency. In fact, Iceland made a
dramatic recovery after it filed for bankruptcy in 2008, taking advantage of the devaluation of
Icelandic krona. In 2013, it enjoyed an economic growth rate of about 3.3 percent. Canada was
also able to improve its budget position in the 1990s by devaluing its currency.

However, the consequences of "Grexit" could be global and severe, including:

Membership in the Eurozone would no longer be perceived as irrevocable. Other

countries might be tempted to exit or demand additional debt relief. These countries
might also see the interest rates rise on their bonds, making debt service more difficult.

Further depreciation of the euro relative to the dollar, which would cheapen Eurozone
exports while making imports more expensive for Eurozone members. This could reduce
the exports of non-euro countries.

Geopolitical shifts, such as closer relations between Greece and Russia, as the crisis
sours relations with Europe.

Significant financial losses for Eurozone countries and the IMF, which are owed the
majority of Greece's roughly $300 billion national debt.

Adverse impact on the IMF and the credibility of its austerity strategy, which has
contributed to the Greek depression.

Inability of Greece to access global capital markets and the collapse of its banking system
for an indeterminate period of time.
DIGITAL CURRENCY CARDS
The bank multiplier effect means the amount of bank deposits far exceeds the amount of
paper euros. Greece and its people face a shortage of paper euros when withdrawing funds
from their bank accounts. Reducing the requirement of paper euros in the withdrawal
process, into a digital form, allows withdrawals and spending.

NEGOTIATE ANOTHER BAILOUT

Greece could also agree to additional bailout funds and debt relief in exchange for further
public pension cuts, privatizing certain government owned businesses, selling government-
owned assets, raising tax rates, and more aggressively collecting taxes. However, the present
austerity strategy has contributed to a Greek Depression, making it even harder to pay back
its debts, so it is unclear how further austerity measures would help if not accompanied by
very significant reduction in the debt balance owed.In 2011 the Greek government agreed
to creditors proposals that Greece could raise up to 50 billion through the sale or
development of state-owned assets, but the Greek government was not successful, receipts
were much lower than expected, and the policy was strongly opposed by SYRIZA. In 2014,
only 530m was raised. Some key assets were sold to insiders.

CONCLUSION
Uncertainty came roaring back in late spring because of election results in Greece, France
and elsewhere in the EMU, and anxiety increased over possible Spanish and/or Italian
defaults, the possible Greek exit from the eurozone, and the ultimate fate of the euro and
the EU. And regardless of the resolution of the crisis, Greece and other nations will still have
to solve their fiscal problems.

Calling Europes turmoil a modern Greek tragedy is not a mere play on words. Rather, its a
tragedy because borrowing is seductive. Although the ability to borrow to finance current
spending can be very beneficial, its very tempting to borrow for the short-term gains and
kick the pain down the road. As a result, governmentslike householdscan borrow too
much. And suddenly you wake up one day realizing that your debt burden is unsustainable,
which leads to a crisis, periods of austerity, and pain and suffering.

Thats the tragedy of sovereign debt!