Greek Debt Crisis Explained

Imagine a situation where the government has stopped all government employee’s salaries and pension; all over the country, the ATMs are exhausted, unemployment rate of a whopping 58% and about 4,00,000 people departing the country and all this public frustration has led to nationwide protests.

This situation is what is known as the biggest bankrupt country case in History. We are talking about the Greek debt crisis.

Greece, in a total of 8 years owes the European Union (EU) and the International Monetary Fund (IMF) a sum of 300 billion Euros. Out of which it has paid only 41.6 billion euros as of January 2019. Greece has it payments to it debtors scheduled even beyond 2060. People of Greece have now lost hope of any recovery. Furthermore, the IMF has stated that it will be leaving Greece, after all the help they have done to get them build the path for a debt-free economy, as it was originally set up to supervise Greece through the worst crisis the world has seen. But let’s have a look at what led Greece into this situation in the first place.

Greece had joined the Eurozone in 2001. Eurozone basically means a set of nations in Europe who had adopted Euro as their currency for ease of trade. Greece had also joined the Eurozone so that it would be considered to be a safe place for investment.

But before joining the EU, in 1981, the party in power launched various liberal welfare policies, like salaries being increased annually, not based on performance; pension was generous; people could retire at the age of 58; and women could retire at an even lower age of 50. The most generous policy being employees getting a two months’ additional payment, one for holiday and one which they’d receive in December along with their regular salary. Also on Easter, employees would receive a month and a half’s salary. Naturally, all of this led to lower productivity and lowered competitiveness. At a certain point, the government was borrowing money to fund all of these unnecessarily generous policies.

Greece wasn’t stable, but to cope up with the situation, instead of strengthening the economy they then tried increasing the inflation rate, higher trade and fiscal deficits, low growth rate and also various exchange rate crisis. With of its problems, joining the EU was the last resort as it was backed by the European Central Bank (ECB).

But there were several conditions for joining the Eurozone. The government deficits should be a maximum of 3% of the GDP and the public deficit had to be limited to 60%. Greece’s financials were nowhere near the limit, but they window dressed their statements and entered the Eurozone. In 2009, the economy had announced that its budget deficits would be around 12.9% of the GDP, which is more than 4 times the EU limit. This scared off investors and the price of Greek bonds fell drastically. People took out their money from the economy, as S&P, too had lowered Greece’s credit rating.

After joining the EU, Greece could borrow at a much cheaper rate than before joining the EU. But all these borrowing, increased the debt to GDP ratio from 103% in 2000, to peaking at 180% in 2011. In 2008, the subprime crisis happened and it showed the true colours of Greece. Greece was banned from borrowing from the financial markets as it was heading towards bankruptcy. In 2010, Greece warned that it might default paying its debts. That’s when the first bailout happened and the EU and the IMF provided Greece with 240 billion Euros. But most of this fund was used pay interest on existing debt and for capitalizing the banks. In 2011 again, the European Financial Stability Facility added 190 billion Euros to the bailout. The third bailout occurred in 2015

Some bond holders had not disinvested thinking the prices would bounce back, but had regretted not selling the investments. In 2012, these bondholders helped the economy by agreeing on a haircut. Many economists also suggested that Greece should leave the EU, but those against it were of the opinion that since Greece owes a lot of money to the EU, its exit from the union would give birth to a crisis even worse than the collapse of the Lehman brothers. As of now, the tourism industry is helping the economy on a majorly.

Greece has shrunk about 20% since 2009. In 2014, the economy grew 0.7%, but it successfully sold all of it bonds and balanced the budget. Yet, the unemployment was 22% and there were various other issues.

The origin of the Greek debt crisis can be rooted in the actions of the previous governments. Their generosity led to the birth of the biggest bankrupt economy case the history has witnessed. It led the economy to its current state of adversity.

Thank you
Regards
Nishi Sanghvi
Kautilya
IBS Mumbai