Sunday, June 10, 2012

Greek Economic Crisis


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.


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:
CNP Assurances
Marfin Investment Group
Socite Generale
Alpha Bank
ATE bank Deutsche Bank
BNP Paribas
Bank of Greece
FMS Wertmanagement
Piraeus Bank
Eurobank EFG
European National Central Banks
National Bank of Greece
World Government
Greek Public Sector
European Union
Eurosystem SMP
Various Institutions from around the world

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.


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.”


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.

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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