INTRODUCTION
In
this Macro-Economic Research Paper four topics will be analyzed that
have to deal with the country of Greece. These topics include the
debt that Greece accumulated beginning with its acceptance of the
Euro. Upon accumulating this large sum of debt it affected its price
stability by lowering its exporting of goods and increasing its
importing of goods. The large debt affected employment in the
country of Greece and its growth opportunities.
Two
arguments will be presented. One will be against the practices that
led to the over-indebtedness of Greece. The other will be for the
solutions that have been presented to the government of Greece by IMF
to solve the problem.
THESIS
Greece
is an important aspect to the world economy and because of its small
size their borrowing spree and government debt burst at €360
billion which was borrowed from various European banks that
contributed to the European sovereign debt crisis.
The
adverse macro-Impacts of Greece's over-indebtedness upon its price
stability, employment, and growth function between the years 2007
through 2012 contributed to the European sovereign debt crisis.
During
2007 Greece had an annual growth rate of 4.2 percent. It was one of
the most rapid growing economies in Europe. Greece had only recently
adopted the Euro as its means of currency in 2002. However their
government gross debt was not far behind at 95.6 percent of its GDP
which was at $264.942 billion.
The
following is a list of lenders and the amount that was loaned to
Greece in billions:
BANK
|
COUNTRY
|
AMOUNT
|
CNP
Assurances
|
FRANCE
|
€2.0
|
Groupama
|
FRANCE
|
€2.0
|
Marfin
Investment Group
|
GREECE
|
€2.3
|
Socite
Generale
|
FRANCE
|
€2.9
|
Commerzbank
|
GERMANY
|
€2.9
|
Generali
|
ITALY
|
€3.0
|
Alpha
Bank
|
GREECE
|
€3.7
|
ATE
bank Deutsche Bank
|
GREECE
|
€4.6
|
BNP
Paribas
|
FRANCE
|
€5.0
|
Bank
of Greece
|
GREECE
|
€6.0
|
FMS
Wertmanagement
|
GERMANY
|
€6.3
|
Piraeus
Bank
|
GREECE
|
€8.0
|
Eurobank
EFG
|
GREECE
|
€9.0
|
European
National Central Banks
|
EUROPE
|
€13.1
|
National
Bank of Greece
|
GREECE
|
€18.6
|
IMF
|
EUROPE
|
€15.0
|
World
Government
|
EARTH
|
€25.0
|
Greek
Public Sector
|
GREECE
|
€30.0
|
European
Union
|
EUROPE
|
€38.0
|
Eurosystem
SMP
|
EUROPE
|
€45.0
|
Various
Institutions from around the world
|
EARTH
|
€110.9
|
In
2008 the gross domestic product for Greece descended to 2 percent.
The recession had begun for Greece in this year as the debt-to-GDP
ratio was at 99.2 percent. The average gross domestic product growth
had fallen to -3.45 percent by the end of the year. As well as
market share value that was traded publicly began to decline from the
previous year of $264.942 billion to $90.396 billion which is a
decrease of more than 100 percent. Due to this fact the unemployment
rates hit 7.7 percent and began to rise.
In
2009 the gross domestic product had gone to negative 2 percent. The
unemployment rate had gone up to 9.4 percent. The public debt-to-GDP
ratio had exceeded 100 percent and was now at 126.8 percent. The
market value of publicly traded shares had gone down to $54.717
billion. According to Fitch, which is a global rating agency, the
ratings on Greek debt had gone from an A rating to a BBB+ rating that
had a negative outlook on it.
To
add to the list of woes that led up to this collapse is a unstoppable
fact that is hardly spoken of which is corruption. The organization
Transparency International calculated that there were a grand total
of € 787 million in bribes in
2009. These bribes were divided via two sectors which were civil
servants and private sectors. At fault were the officials who were
in office at the time.
The
reason behind this economic collapse as in part with the officials
who were there at the time in to be misreporting on its economic
statistics. The economic problems caused lenders to begin charging
higher interest rates in order to lend Greece more money. Also began
the tax evasion along with the demonstrations against the
government's measures to deal with its debt. For the cuts that were
implemented were towards the public sector, pensions, reducing
benefits and increasing taxes.
Now
the question of why is Greece so important in this incident will be
answered. It is noted that the economy of Greece is thirty-second in
the world. It is also the fifteenth largest economy in the European
Union. On top of that its major export is olives. The world is not
going to be ruined if olives are not continuously harvested. However
the major problem was the fact that the money was borrowed from
European banks. This in turn means that Greece owes $500 billion in
US dollars. Which is a 160% debt-to-gross domestic product ratio.
Greece was unable to pay this large amount of debt and this debt was
on the European banks books'. This means that there is now a lack of
confidence in the bond markets. Once Greece defaulted it was feared
that if it left the European zone it would cause a domino effect.
Spending
was too high and revenue was far below that spending ratio.
Discretionary spending on defense and non-discretionary on medicare
and social security are automatic and take precedence. Then the debt
service is part of the spending in which the principal amount and the
interest needs to be paid.
ANTI-THESIS
Prime
minister George Papandreou outlines policies to cut the country's
ballooning budget deficit and try to regain the trust of investors
and EU partners. These include a crack down on corruption and
reigning-in public spending. Also announces a 90 percent tax on
bonuses for senior bankers in the private sector, a ban on bonuses
for executives at public sector corporations, and 10 percent cut in
civil servants' allowances. At this point the the ratio debt-to-GDP
stood at 165.3 percent of the nominal gross domestic product.
What
was Greece prepared to do in order to change their future path of
bleak outlooks? They decided to take measures to make a difference
and create a more elevated path with a better outlook. The austerity
packages would be put into place. An austerity in other words is a
way for the government to implement a policy that lowers spending,
reduces benefits and the public services provided by the government.
Their first austerity was implemented in February of 2010 which
included a loan from the International Monetary Fund and the European
Central Bank in the amount of €80
billion. This austerity package ended the salaries of all employment
for the government.
The
second austerity package was implemented in March of 2010. This
month saw the passing of the Economy Protection bill. This bill
aimed to save €4.8 billion which cut into Christmas, Easter and the
bonuses for leaves of absence. There were even more cuts in bonuses
for the public by 12%, 7% in
salaries,
and there was a rise of 15% tax on petroleum and an increased tax on
imported cars of 20%.
However
these austerity packages did find their intended goal. The economic
advancement expected by the Greek government did not meet
expectations. Due to these failed attempts further measures needed
to be taken.
The European Union, the European
Central Bank and the International Monetary Fund on May 1 agreed to
create an aid program of financial stability that would span three
years for Greece with a total of € 110
billion in aid money. During the span of three years this money
would be provided to Greece to help pay off their debt. This amount
of money was part of a €750
billion bailout plan aimed to help the struggling European economies
that were in financial trouble.
However
at the same time on May 1 2010 the
third austerity package saw the most opposition from Greek citizens.
It was a bold move that proposed a very large chain of measures.
Some of these measures will be listed:
There
would be a cut of 8% on public sector allowances and this was in
addition to the previous packages
Extraordinary
taxes imposed on company profits
Public
sector limit of €1000
bonuses abolished for those earning €3000
These measures sparked an outrage
from the public with protests and violence as riots erupted over
Greece as it was approved in June.
Then
on May 9, 2010 the European Union and its twenty-seven states created
the European Financial Stability Facility, or EFSF for short. This
facility has the ability to supply bonds to the market and or other
debt instruments. It would achieve this with the help of the German
Debt Management Office to raise the necessary funds to provide the
loans necessary to bring relief to the euro-zone countries that
require assistance, the countries that need to recapitalize banks,
and to buy their sovereign debt. This was known as the first rescue
package provided by the European Union and the International Monetary
Fund and it became active in January of 2011 where it issued its
first €5
billion five-year bond.
Also
during 2010 the International Monetary Fund began to advise the Greek
government on applying reforms to their tax policy, controlling
budget spending, and tax collection. The aim of the mission is to
offer technical assistance so that the government in Greece can
address the budget deficit. With this in motion the Greek government
showed its cooperation by aiming to bring the deficit down and by
cutting government spending and fighting tax fraud.
After
six months of implemented plans and ideas the managing director
Dominque Strauss-Kahn of the International Monetary Fund had this to
say about the steps being taken by Greek government:
“Much
has been achieved in the six months since the program began, and more
still
needs to be done. Indeed, the next phase of structural reform is
even more
crucial
to unlock the true potential of the Greek economy and the Greek
people.”
“This
is a defining moment for Greece. While difficult challenges lie
ahead, I am
confident
from my discussions here that the government and people are
determined
to do what it takes to ensure that Greece emerges from the crisis
even
stronger
than before. I want to assure you that the IMF will do all we can to
help
Greece
succeed.”
These
positive anecdotes from Mr. Strauss-Kahn were taken from a press
release on December 7 and 12, 2010 when asked about an update with
the technical assistance that Greece was being provided by the IMF.
Mr. Strauss-Kahn also said “we will work with our European partners
on a solution to give Greece some further breathing room”. What
this meant is that the International Monetary Fund is seeking
cooperation from the European banks
The
fourth austerity package was passed in June 2011 as the protests were
still taking place after a year had passed. The protests led to
strikes as well that called for a debate on whether or not to allow
this new austerity package to be released upon the people of Greece.
The measure on this new package would include:
Selling
government property
Raising
money from private institutions
Increasing
taxes on income greater or equal to €8000
Lower
pension payments
Either
way it passed and ended up gaining revenue of €1.9 billion, however
the Greek government spent €2.7 billion. These packages were meant
to prevent a sovereign default and something that is still trying to
be avoided.
In
July of 2011 the European Union with its newly created European
Financial Stability Facility was to apprehend its previous aid
attempt and acknowledge it as insufficient. After acknowledging this
they would move forward with the proposition of a second rescue
package. This package now contained €100
billion. The repayment for this loan would be fifteen years with a
low interest rate of 3.5% The EFSF was not acting on its own as it
had help from the private sector of creditors that offered to
purchase Greek bonds.
With
the looming Greek default on the horizon and before the final
decision was made on this second aid package some considerations and
planning was being made in order to avoid a domino effect. This
required European banks to cooperate in their capitalization of loans
to be 9% and of course the banks would comply as they would benefit.
The finalized plan allowed Greece to cut their debt-to-GDP from 160%,
rounded off, to 120% as well as receiving a bailout loan of €130
billion that required Greece to adhere to certain guidelines.
This
year of 2012 saw a number of changes that can set the precedence of
what is to occur to Greece. The attempts made by the newly formed
EFSF, IMF, and the EU can be commended for their efforts to not allow
Greece to default. With this in mind the Greek government moved
forward with a fifth austerity package for parliament to vote on in
order to receive the €130
billion bailout.
This package included the following:
A 22% reduction for minimum wage
Holiday bonuses are canceled
Job cuts of 150,000 in the state
sector in increments up to 2015
Pension cuts of €300
million
Easier layoffs
Health and defense will see
spending cuts
According
to Kerin Hope a writer from The
Financial Times
“The latest round of austerity measures means Greece will likely
face at least another year of recession, presaging another round of
business closures, before the economy will start to grow again.”
This package was approved by parliament on the 13 of February.
According
to Reuters “It is the world's biggest debt restructuring deal,
affecting some
€206
billion worth of bonds.” The Euro-group said in their statement
“The creditors
are
invited to swap their current Greek bonds into new bonds with a
maturity of
between
11 and 30 years and lower average yields of 3.65% thus facilitating a
€100
billion
debt reduction for Greece.”
SYNTHESIS
In
order to find a solution to the debt problem a macro-analysis of the
policies in Europe and Greece need to be looked at in depth. The
European Union and the International Monetary Fund will need to apply
interest rates reduction and Greek tax optimization which will cause
a positive effect on the gross domestic product of Greece. The
following are some proposed solutions.
The
first focus for the future events as this is the month of election
for Greece, is to focus on fighting tax evasion. The Organization
for Economic Co-operation and Development had estimation for the
month of August in 2009 for the Greek black market. It was estimated
that it was a €65
billion industry which meant that €20 billion went untaxed.
Attempts to counter this have been taken in the past, but to no
avail.
There
needs to be a more efficient system to collect these taxes. There
also needs to be a more efficient police task force to enforce the
new tax laws. This would include an investigation unit for taxes so
that this facet of the government can function properly.
On
top of this the corruption factor falls upon corruption. This topic
refers to bribing. According to Transparency International Greece
was ranked 49th
place in 2004, moved down to 57th
in 2008 and then fell to 71st
in 2009. The bribery was estimated at €1 billion paid out to
public establishments and officials to avoid laws, rules, and taxes.
The
Greek government presented fraudulent data to investors in the past
as they issued bonds. In order to help this situation out it might
be a good idea to let those bondholders lose face value by at least
50%. That is because the European Union and the European Central
Bank did not purchase any Greek bonds and that might mean that the
bailouts being presented to Greece will possibly return a profit for
them.
Those
bonds could then be moved into a special place by one of the
financial institutions that are directly involved with Greece. The
most prominent one is the European Central Bank. It could be called
the PIIG Fund. It was already proposed that Greece would have until
2020 to fulfill their debt reduction to 27%. In the mean time their
bonds should be stashed away in order to be monitored and to reduce
the debt immediately.
In
Greece there currently are protests and riots on a weekly basis due
to the pension cuts and the benefits that were eliminated by the
accepted austerity packages for Greek citizens who are unemployed as
the businesses closed left and right. A solution to this might be to
adopt an internal monetary supply of some sort exclusively for
Greece. It could be considered a temporary system as the country
restores itself via external manners from aid received by the IMF and
the ECB as well the EFSF. This would allow citizens to purchase the
goods and services they need. It would be ethical and viable
although the government might not want to adopt this solution as the
money newly adopted and implemented represents power and albeit they
would not want to lose power.
Defaulting
is not an option as it would cause the European Union and its
economies to suffer greatly from the loans administered to Greece.
Therefore the International Monetary Fund, the European Central Bank,
the European Financial Stability Facility, and the European Union
will strive at any cost to keep Greece from defaulting for
self-interest. Due to the fact that French and German Financial
Institutions hold the majority of the debt from Greece. With Germany
being the most prominent country of this zone it is noted that
anything will be done to keep Greece from defaulting.
CONCLUSIONS
The
outcome of the future for Greece is uncertain. However what can be
said is that the European Union will do its best to prevent it from
defaulting as it presents a nominal influx of loan repayment. Even
if Greece did default, the fear is that of the domino effect. The
other countries such as Ireland and Portugal are weaker countries in
the Euro-zone and could not afford to borrow more money and will
continue to need bail outs from the European Union and the
International Monetary Fund.
However
these institutions would not allow for these countries to follow
suit. It would be for certain that these institutions, in the wake
of Greece leaving the Euro-zone, dismissing the Euro as currency, and
or defaulting. EU, ECB, and IMF would instantly administer
extensions on their programs, there would be a reduction of interest
rates.
The
public response from the austerity packages presented by the Greek
government were not well thought out. These spending cuts were swift
and rigid on the economic growth. The austerity packages helped
reduce the debt-to-GDP ratio. However the recession was only
worsened as the spending cuts did not help the public citizens. It
was almost as if these documents were written without consent of what
was going to happen with the Greek citizens.
These
events were the effects from the mismanagement of newly acquired
loans to the purpose of gaining in self-interest. The public
officials at the time would alter the numbers in the books and the
spending that occurred did not have any promise to render profit.
The corruption at the time allowed for the events to follow up to
what is occurring today. The want for personal gain affected more
than they bargained for. These actions led to an economic meltdown
in the European region.
However
there are new elections in which those running for political sides
and parties are wanting to put an end to such acts or to at least
minimize it some cases. The parliament of Greece has to choose
between two possibilities. One side confirms that they will accept
the bailout from the European Union and the International Monetary
Fund and agree to its terms in order to receive them. The other side
however is against the idea of receiving bailouts.
The
grand total for the debt Greece has to pay stands at €340
billion. In US dollars that it is $485 billion. Currently there are
talks of having more debt being written off with an even larger
bailout being paid out and Greece already received €349 billion in
total from the bailouts up this point during the last two years.
by Josue Solares
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