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The Greek Debt Crisis

 General characteristics of Greece’s economy
 40% - Public Sector
 21% - Manufacturing Sector
 Types--processed foods, shoes, textiles, metals, chemicals, electrical
equipment, cement, glass, transport equipment, petroleum
products, construction, and electrical power.
 15% - Tourism (as Greece attracts more than 16 million tourists each year)
 7% - Maritime Sector
 5% - Agriculture
 Agricultural output has steadily decreased in importance over the
last decade from 15% to 5%
 Other important sectors include food processing, tobacco, textiles,
chemicals (including refineries), pharmaceuticals, cement, glass,
telecommunication and transport equipment.
o Workforce
 20% - Agriculture
 With agricultural products such as wheat, corn, barley, sugar beets,
olives, tomatoes, tobacco, potatoes, beef, dairy products and wine
 59% - Service Sector
 21% - Industry
 Food and tobacco processing, textiles, chemicals, metal products,
mining and petroleum and construction.
o Greece is one of the poorest countries of the European Union with the second-to-
lowest average income, after Portugal.
 Today, the economy of Greece is improving, with appropriate steps taken by the
government, the EU and the Greek population as a whole to beat the recession and turn the
economy around. However, the financial situation wasn’t always like that.
 History of Greece’s economy
o Greece has a long history of fiscal trouble.
o Spent half of the past 2 centuries in default – Carmen Reinhart and Kenneth Rogoff
in “This time is different”
o Greek crisis was triggered, but not originated “by the recent global financial crisis

 Exogenous causes
 Greece got admitted into the Eurozone prematurely.
o Food irradiation is the process of exposing food to ionizing radiation to destroy
microorganisms, bacteria, viruses, or insects that might be present in the food.
Imagine if a machine error caused half of an apple to not get irradiated. That apple
then gets thrown into the basket along with the other fully irradiated apples. When
that half goes bad, the others would too due to close contact with bacteria and
o Got admitted into the Eurozone and allowed to adopt the euro without it meeting
the criterion, namely the Maastricht convergence criteria
 ratio of gross government deficit to gross domestic product (GDP) must not
exceed 60%. However, at time of admission, the government deficit was
126.355% the GDP! More than twice the accepted value
 Still got admitted anyway.
 Credit-rating agencies that unhelpfully downgraded Greek government bonds (rate them as
 Speculators
o Bet against Greek government bonds
o Helped to drive up borrowing costs
o Bought credit-default swaps (CDSS), a form of insurance against default, in order to
drive up Greece’s borrowing costs and then profit from the ensuing panic
 The Eurozone
o A regime of a single interest rate and a common exchange rate  deprives countries
of key economic weapons such as devaluation. E.g. Greece couldn’t devaluate their
currencies after the 1999 crisis. This made the struggle out of depression harder.
o Did not work as well as hoped in promoting convergence among EU members’
o When originally conceived, the euro was meant to join together economies that
were relatively at the same level of development. This would make possible a "one
size fits all" interest-rate policy. But subsequent reality has shown this to be overly
o Lack of a central euro-zone authority for helping out cash-strapped countries
o Gave Greece no monetary and exchange rate policies to manoeuver [a hard
currency peg]
o EU countries reluctant to cede any control of their public finances, making it hard for
countries which run slack fiscal policies to get punished.
o Lack of solidarity funds at the EU level. The EU is a monetary union, not an economic
one with a Federal Budget. EU has a common monetary policy, but economic policy
is still in the hands of national policy makers. Whenever a crisis occurs at the EU
periphery, there is no adjustment mechanism in place to deal with such a crisis at a
supranational level.
 Endogenous causes
 Government did not change even after entering the EU and the Eurozone [insides are rotten]
o Since the launch of Europe’s single currency, there have been theoretical worries
about profligacy. The main fear was that free-spending countries such as Italy might
borrow excessively and pass either higher interest costs or the bill for a bail-out on
to other, more frugal countries such as Germany. Well, this fear was well supported
and came true with the PIIGS.
o Borrowed too much as it rode a global economic boom (from 1997 to 2007)
o Some money was spent on expansionary fiscal and monetary policies in order to
increase aggregate demand. Indeed, that may be true, but a large amount of money
was also “wasted”.
o 72% of Greeks agree that the most direct cause for the crisis is caused by the
“wastage” of government funds
o Corruption survived [underlying structural difficulty] [established and legitimated
 Bribery rife
 The Greek population mostly perceives the Greek government as corrupt17
 78% of Greeks believe that the government is corrupt
 Only 19% noted reduced corruption
o Government’s unrestrained spending *fiscal recklessness/budgetary profligacy/fiscal
 In bids to boost government popularity
 Giveaways
 Huge salaries and pensions
 Slack fiscal policies
 Cheap lending
 The government sought to boost growth rather than prioritizing fiscal
prudence - hiding the overshoot in the budget until late 2009.
 In the current management of public funds, 77% of Greeks believe that
public money is squandered17
o Failure to implement financial reforms until it was too late
o Evidence-based policy making was never established as the prevailing policy-
planning paradigm15
o Bureaucratic, complex and sometimes inefficient institutional framework
 Complicated legislation and regulatory framework, too many laws and
overlapping control-mechanisms kept on increasing the administrative costs
and undermining any attempt to reduce bureaucracy and empower
o Modernization got delegitimized15
 Population’s tax evasion is endemic
o The 3 main sources of government revenue are tax revenues, fees and charges, and
other receipts. Out of all these, the most important and significant source of
revenue is taxes. However, many Greeks fail to pay their taxes.
o Greeks are very fond of a saying when you ask why rules are not followed " this is
Greece" , implying that not following laws or rules is the Greek way of life
o Greece’s main fiscal problem
o Greece’s tax revenue as a share of GDP *tax take+ was 31.3% in 2008. Among euro
zone countries, only Ireland’s figure was lower.
o Taxation is the main source by which governments finance their expenditure
o Past policies attempting to deal with tax evasion failed badly
o It is important that everyone pay their fair share in taxes, particularly those high-
income earners who have managed to evade taxes in the past. We cannot expect
wage earners, pensioners and the poor to shoulder most of the burden of
 What is the government’s fault is also the population’s fault as Greece is a democracy
o Civil society has never developed enough means to operate as a counter-balance
mechanism to distorted administrative practices15
 Greece sucks
 It thus becomes clear that the key factor behind the crisis Greece is experiencing today is the
public sector’s uncontrollable propensity to spend, especially in electoral times, and the lack
of effective collection of revenues.

Greece’s Economic Growth

 Standard & Poor’s, a rating agency, estimates that Greece’s GDP will not regain its 2008 level
until 2017.
 Put GDP and GDP growth rate graphs here

 As with other European countries, the financial crisis and resulting slowdown of the real
economy have taken their toll on Greece’s rate of growth
 2008 – Economic growth slowed to 2.0%
 2009 - Economy went into recession and contracted by 2.0%
o A result of the world financial crisis and its impact on access to credit, world trade,
and domestic consumption--the engine of growth in Greece.

Financial Repercussions
 Global panic
o Global financial markets went into a major panic, on fears that the Greek debt crisis
could spread to other countries.
 Contagion, spread to neighboring EU countries, especially the other PIIGS
 PIIGS (P=Portugal, I=Italy, I=Ireland, G=Greece, S=Spain)
 the market reaction to Greece’s debt dilemma has caused some
degree of collateral damage to these other economies, especially
given the fear that a worsening Greek situation could lead to major
fiscal crises among the other PIIGS.
 Although the Greek economy accounts for only about 3% of the
euro-area GDP, Italy and Spain, 2 of the PIIGS are the 3rd and 4th
largest economies in the euro area respectively.
 Although Greece accounts for only 1.4% of foreign claims in
European banks, economies such as Portugal, Ireland, Italy and
Spain, which have had similar fiscal problems as a whole, accounted
for 15.4% in September 2009.
 But although the PIIGS share many of Greece’s particular
vulnerabilities, no other country shares them all to the same degree
(Portugal comes closest)
 Jittery investors have forced Brazil to scale back bond sales as interest rates
soared and caused currencies in Asia like the Korean won to weaken.
 “It’s not just a European problem, it’s the U.S., Japan and the U.K. right now,”
said Ian Kelson, a bond fund manager in London with T. Rowe Price. “It’s
across the board.”
 “Up until last week there was this confidence that nothing could upset the
apple cart as long as the economy and jobs growth was positive,” said
William H. Gross, managing director of Pimco, the bond manager. “Now,
fear is back in play.”
o Shares in the largest European banks fell substantially, taking major stock market
indices down with them.2
 British FTSE 100 index dropped 2.6%
 German DAX index 3.3%
 French CAC-40 index 4.1%.
 Japanese markets fell by up to 4% in morning trading, and closing down by
 The major US indices closed down by up to 3.5%
 Dow Jones index even fell by 9% at one point, its biggest within-day fall since
the stock market crash in October 1987
 Falls of up to 40% in “blue chip” stocks like 3M and Procter & Gamble.
 April 27, 2010 – The Greek debt rating was decreased to BB+ (a “junk” status) by Standard
and Poor’s. The stock markets worldwide and the Euro responded by declining further.
 Budget Deficit
o The Greek fiscal crisis is the outcome of a combination of high debts and fiscal
o The debt that accumulated now reflects that the country owes far more than it is
o 2009 - Greece, already burdened by a heavy debt load, ran a budget deficit of
around 13.6% of its GDP - far over the euro-zone's 3% limit
o 2009 - Greece’s debt stood at 115.1% of GDP and public spending stood at 51.3% of
o 2010 - Greece had a public debt that was 144.0% of its GDP, making it the country
with the 5th highest public debt to GDP ratio.
 Current Account Deficit
o 2008 – The current-account deficit widened to 14.6% of GDP.
o 2010 - Intended to cut budget deficit to 8.7% of GDP (Failed)
 Bad for business
o A survey published on March 22 2010 said that 1/3 of small business owners in
Athens and the surrounding region fear that they may have to close down in the
next 3 years.
Social Repercussions [far reaching implications]
 Riots
o The government’s program is ambitious. Far-reaching changes have happened
quickly and under difficult circumstances. It is understandable that there is
discontent and opposition.
o The unemployment rate among the younger generations started to rise, and a
countrywide feeling of frustration started to spread in the younger Greek
generations. Greek youths also gained a perception of general inefficiency and
corruption in Greek state institutions. The severity and immediacy of the situation
became apparent when widespread rioting occurred on the streets of Greece in
2008, after a 15-year old student, Alexandros Grigoropoulos was killed in Exarcheia,
Athens by two policemen. Hundreds of youth rioters damaged public utilities and
property. Riots then spread to other Greek cities such as Thessaloniki.
o February 16, 2010 - Finance Ministry workers, state accountants, tax collectors and
even capital market regulators embarked on their own walkout today, incensed by
the Government’s plan to slash dozens of fringe benefits accumulated by civil
servants over many decades, including a bonus for carrying files from one floor to
another. Many fear that the “fourteenth salary” — an annual bonus split between
the Easter and summer holidays, enjoyed also by pensioners — might soon be a
thing of the past.
o February 24, 2010 – Nationwide general strike
o 6 May 2010 – the same day that voters in Britain went to the polls, riot police
battled demonstrators outside the Greek parliament in Athens, protesting against a
massive cuts package announced by George Papandreou’s Socialist party
 Confidence in the political system, major political parties and political personnel is getting
rapidly deconstructed:17
o Public trust that the crisis could be managed was fading fast as an increasing sense
of widespread corruption and public sector inefficiency spread.
o 52% never trust governments in Greece
o 40% trust them only partially and occasionally
o 72% ask for a change in government personnel
o This is a different crisis altogether – a crisis of confidence
o This crisis and the unpopular austerity measures that come with it might be utilized
for political gain. What started as an economic issue might soon turn political
 Unemployment rate
 Income levels
 GINI Index

Measures that have been taken

 Now, they have to decide how to deal with the debt, how quickly to cut their deficits and
public spending and risk undermining growth, and how to distribute the pain of doing so as
equitably as possible
 The nation faces "sacrifices" in a "choice between collapse and salvation".
 Austerity Measures [the Irish solution]
o "We are ready to do whatever is necessary," Mr. Papandreou told reporters.
o An over- indebted country has to accept that once the money runs out, it must cut
spending. If necessary, living standards must fall. Once that hit has been taken, you
can start growing again
o Mr. Papandreou said he was committed to austerity measures [fiscal consolidation].
o Greece has adopted a plan to reduce its budget deficit by €30 billion over the next
three years through various reforms and policies. The £30 billion mark was set by
the EU and the IMF as a prerequisite for the £110 billion bailout.
 The abovementioned measures include:
 On the spending side: [government expenditure]
o Decrease public sector salaries
 Slash civil servants’ salaries *wages+ (from the Prime
Minister’s on down)
 Slash civil servants’ supplemental income by 10% on
 Slash benefits and pensions
o Raise retirement age from an average of 58 to 65, similar to
other EU countries
o Stop hiring [frozen]
o Social services and the defense budget are both being
curtailed across-the-board
o The 13th and 14th annual salary installments will be
abolished for civil servants earning a gross salary in excess of
3000 every month.25
 Does not only reduce government expenditure, but
also reduces income inequality
o These measures also boost cost competitiveness.
o On the expenditure side the expected evolution of total
resources as a share of GDP follows a downward trend from
an estimated 52% of GDP in 2009 to 47.7% in 2013.
 On the income side: [government revenue]
o Increase taxes
 Increase in the excise tax on fuel, tobacco and
 excise duties on tobacco and alcohol have
increased by 20% and 10% respectively by a
law passed in January 2010
 Additional tax of eight euro cents per liter
for gasoline and three eurocents per liter for
 Expected to get 1.3 billion euro more from
these taxes
 On sales tax *VAT+ (like Singapore’s GST)
 Value added tax
 By 2% from 19% to 21%
 Expected to get 2.4 billion euro more from
increased VAT.
 Increases in other taxes such as on luxury goods,
electricity and even musical and theatrical plays
o Major changes concerning the tax-legislation and the
subsequent status-quo, such as an increase in the penalties
associated to tax evasion and fraud, mainly aiming at
confronting tax evasion and reducing relevant privileges.
o On the revenue side total revenues as a share of GDP follow
an upward trend from 39.3% of GDP in 2009 to 45.7% in
o Indeed, many people will be badly affected by these measures, and may get
infuriated. Indeed, this is what happened, causing the 2010 riots. Greek authorities
must communicate to citizens the dilemma the country faces in clear, unambiguous
terms, spelling out the full implications of both possible choices. They must also
convince citizens that it is in the country’s best interest for Greece to implement the
reforms necessary to remain in the Eurozone. Authorities should also convey to
citizens the message that the country needs to make a rapid decision: if markets do
not observe substantial progress within the next few months, they will infer that
Greece has chosen not to stay in the Eurozone and they will force her out.
o Ending the current EMU crisis and averting future ones ultimately depends on one
single factor: the willingness of societies in the EMU periphery to take the significant
short-run welfare cost that will accompany reforms.
o As expected, the measures were accepted with optimism outside of Greece and
great pessimism inside the country.
 Structural and institutional reforms
o The Greek government has already started to plan and proceed with major
structural and institutional reforms15
 New law acts
 Kallikratis
o Active decentralization of the state
 Reduced powers, so the effects of corruption on
certain personnel become less severe
 Diaygeia
o Increasing accountability
o Eliminating corruption
o Promotion and establishment of transparency and efficiency
o Enhancing productivity
 Rescue Packages [Fiscal Stimulus]
o What Greece needed was also the funds to service the gap between its revenue and
its obligations, a net deficit that gets smaller each week as it carries out the painful
cuts needed to bring its budget back to EU’s mandated standards. The funds were
given in the form or rescue packages
o “It’s up to Greece to consolidate its public finances, it’s up to the euro area to stand
determined” in case more is required of Athens." - Jean-Claude Juncker, the Prime
Minister of Luxembourg.
o Against the Maastricht Treaty of 1992 which forbids countries from assuming the
debts of others
 Legally speaking the EU can do little to help Greece. The Maastricht Treaty
was designed with a ‘no bailout’ clause to mitigate potential problems of
moral hazard, a particular concern of the larger economies such as Germany
which feared that they would ultimately have to come to the rescue of some
of the fiscally irresponsible members on the European periphery. However,
the EU still pulled through and gave monetary support.
o Rescue!
 May 10, 2010
 €750 billion rescue program [stabilization package] to support the PIIGS
 £110 billion rescue program for Greece - £80 billion from the EU and
£30 from the IMF16
 Only after Greece promised to take “drastic austerity measures”
 It took so long as Berlin was worried that a rescue would only
encourage further profligacy and wanted harsh penalties for Greece.
Angela Merkel, the German Chancellor was also mindful of
taxpayers’ resistance to bailing out Greece
o Did not agree on the rescue package early enough,
deepening the debt crisis.
 “lack of timely action underscored early European
reactions…while the euro area partners showed
little willingness in the beginning, to come forward
with help”
 20 billion worth of Greece’s debts are due in April and May. This 110
billion helped to pay for that and more.
 Fiscal adjustment and structural reform without financing is more
fragile and liable to fail without a war chest of liquidity to prevent a
run on public debt while the appropriate policies are implemented
and gradually gain credibility.
 But, although the package has bought Greece substantial relief and
time to stabilize their economy and to solve their debt issues, it does
not resolve its underlying structural difficulties
 These 2 entities have to put pressure on Greece to follow through with their
austerity programs
o Paul Krugman, recipient of the 2008 Nobel Prize in
Economics, called the IMF the “lender of last resort”.
o Supposed to practice tough love
 Give governments what they need instead of what
they want
 Force governments to pull themselves together in
the process of economic recovery.
 EU (particularly Germany)
o Got people to borrow and spend more
 The EU and Greece pushed interest rates down from 4.25% in August 2008
to 1.00% in May 2009. It has been at this minimum rate till now.
 Show Interest Rate graph

Other possible measures

 A smaller State is needed

o Not only stop hiring, cut wages and increase retirement ages but to fire people as
o Reduces government expenditure on civil servants
 The Greek population must also be prompted to show more honesty when declaring what
they earn.
o Over 95% of individual tax returns are below 30,000 euros
o Only a few thousand citizens admit to receiving more than 100,000 euros
 Sovereign Default
o “Declare bankrupt” – immediate clearance of debts.
o Deemed a breach of trust
o Other countries will think twice about lending money or support to you
o The cost of borrowing for other troubled EU countries will rise. (Bad)
o Let the banks that lent them the money take the consequences.
o BAD.
 Brussels could push to open services to greater cross-border competition
o Increased competition increases productivity and decreases prices
 Indeed, suggestions have been made for Greece to leave the Eurozone, or even the EU.
o Very unlikely
o The EU is more of a political entity than an economic entity. Many other factors and
policies in play. Main reason for its inception a long time ago was to prevent wars
amongst European countries.
o It is not known for sure that the benefits would outweigh the losses that would
come from forsaking the euro umbrella.
o Costs of establishing a new currency and exchange rate policy would be sizable.
o A dangerous and risky venture into unknown territory
o Would cause huge ruptures in the financial markets as investors would fear other
nations would follow, potentially leading to the break-up of the monetary union
o The EU has vowed to keep the Eurozone together, and dismissed talk of countries
leaving the euro.

 Greece plans to cut the budget deficit to 3% of GDP by 2012
 The Greek government has made good progress on its reform agenda. After six months of
intense reform efforts, there are signs that competiveness is improving, helped by a
slowdown in underlying inflation and wage growth. Budget measures implemented since the
start of the program have reduced the deficit by an estimated 6 percent of GDP in 2010
alone. On top of that, the pension reform approved in July implies large long-term fiscal
benefits and improved labor supply. But market sentiment toward Greece remains volatile.
The economy is still adjusting, and unemployment is rising. A key test will be the
implementation of additional structural reforms to boost growth and create new jobs.
 As of late 2010, significant progress has been made. Now for 2nd stage
o "The program has now reached a critical juncture. Many of the reforms that are
necessary to transform Greece into a dynamic and export-driven economy require
skillful design and political resolve to overcome entrenched interests. The challenge
now is to implement an ambitious schedule for these next-stage reforms." IMF
 What can be done in the near future
o Greece is the most east-western EU member other than Cyprus, and is much closer
to China and the budding economies of Asia than all the EU giants – France,
Germany and the UK. Greece has a chance to become the trade and financial hub
between Europe, Russia, China and the Middle East.
o €130-160 billion will be required for debt repayment.15
o Strong potential growth sectors
 Tourism
 Energy and Transport
o The key is for Greece to restore its competitiveness in Europe and beyond. If Greece
can implement the reforms in the program, growth will probably return in the latter
half of next year or early in 2012
o Fundamental structural reforms are needed. For example, opening up services,
trade, and the professions; streamlining state enterprises; and improving the climate
for business and investment. In short, unlocking the potential of Greek industry and
the Greek people. This is not easily done, but if Greece can maintain the momentum
of reform, investors will come to realize the country's commitment to change and
confidence will grow. I am optimistic Greece can do it.
o But, prevention is better than cure. The global financial economy needs stringent
supervision and oversight, both on a national and international level to prevent such
fiscal profligacy from occurring.
 At the end of the day, the citizens are the people who pay。 Any progress made will only be
gradual and certainly not easy: there will initially be significant short-run welfare losses
through higher unemployment and reduced output
 For the PIIGS, the crisis is a wakeup call for structural reform which, despite the inevitability
of hard times ahead, can serve as a catalyst for targeting a more sustainable growth model
in the long run.

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