The Anatomy of Greek Tragedy

Brief on the current happenings in Greece's economy

Land of ancient Greece

Ελλάδα, the Greek version of Greece is the land of democracy, western philosophy, literature, mathematics, sculpture, dramatic tragedies and the birth place of Olympics. This culture rich nation earns revenues mainly through tourism sector and merchant shipping followed by agriculture (traded only amongst the European nations). It is also the largest regional investor in Balkan Peninsula i.e. southeast Europe comprising of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Montenegro, Romania, Serbia, and Slovenia. After achieving the much acclaimed goodwill throughout centuries, the credit worthiness of Greece soon went into thin air when it got stung by the bug called Europeanization.

Hallmark entry of Greece in the European Nation

In the late 90's, performance of the Greek economy was appalling. Low government spending not only affected the economic development of the nation but also dented the standard of living of common man. Though the unemployment rate was pretty decent but the cause of worry was the low wage rate which reduced consumer spending leading to a double-digit inflation rate that hovered closer to 20-25 percent which welcomed large fiscal and external imbalances. The country was engulfed in misery that prompted its political parties to integrate Greece with the European Union so as to strengthen the Greek economy by providing it with new markets. In the run to achieve this integration, the then-government of Greece fudged up its budget deficit to meet the qualification bar that was set to enter the European Union. 19 June, 2000 was the day when Greece passed the final stages and became a part of the Economic and Monetary Union of the European Union, also giving up its struggling Greek drachma to the Euro.

This hallmark entry of Greece into the euro area seemed to mark a transformation in the country’s economic performance as its credibility increased due to the association. Equities and bond markets cheered this integration the most. The interest-rate spreads between the 10-year Greek and German sovereigns dropped to 10-50 basis points, from over 600 basis points in the late 1990's. There was a dramatic fall in the inflation rate with rising capital inflows owing to improved business confidence. The general public of Greece took full advantage of this situation by taking huge amount of loans that led to a surge in consumer credit. Moreover, the government were in a fix as about 49 percent of the Greek population evaded tax payments accompanied with decline in public-sector saving which left little money in their hands thereby forcing them to depend upon borrowed money from the neighbouring countries so as to balance its book of trades. The current account deficit rose from 11.5 percent of GDP in 2001 to a peak of 18.0 percent of GDP in 2008 which was a call of concern but was ignored by the creditors.

Tragic disclosure acted as a major set-back for the entire Euro-zone

At the onset of 2009, there were disputes between the newly elected governments who questioned over the accuracy of data calculation who finally disclosed that Greece’s budget deficits were running more than 5 percent of the GDP than its previously stated 3 percent. This shocking opening of Pandora box invited a lot of questions to the European Union statistical agency's capability to check financial data declared by governments. In fact UK was apprehensive then to give the agency new supervisory powers.

Greece was shut out from borrowing in the financial markets which caused jitters in the bond market. The sovereign 10 yr bond yields which were trading closer to 7 percent took an upward climb and never came back to the same level again. As large amount of Greek bonds were held in banks portfolios, surging bond yields caused them huge losses and got them downgraded in the process. They were later forced out of the global financial markets which made them difficult to provide liquidity to Greeks economy and had to rely increasingly on emergency liquidity assistance from the Central bank i.e. Bank of Greece. This assistance came at a higher price than borrowing through monetary-policy operations. The liquidity problem then turned into a solvency problem which threatened to set off a new financial crisis.

TROIKA-the ultimate saviour came to the rescue on a condition: AUSTERITY!

By 2010-11, the publicly known troika i.e. European Commission, European Central Bank and International Monetary Fund came out with two international bailouts for Greece which totalled to more than 240 billion Euros on a condition to implement strict austerity measures. The bailout money was used to pay off Greece’s international loans instead of investing into the staggering economy and correcting the debt load. The soaring government debt to GDP reached to its highest level in 2012 which spilled over to the Greek banking system. Increased uncertainty prompted the depositors to pull back their savings and lower their spending. Slowly the general public who once

had taken huge loans started defaulting on them which eventually paved way for rising non-performing loans.

To better this catastrophic situation the troika came up with various structural programs which turned out to be a disaster for the Mediterranean nation. There were immense employment problems (25 percent unemployment rate) as the dictator troika did not give any freedom of work style to Greece. The bond yield spread swelled into an unsustainable territory thereby making the private capital lending market inaccessible as a funding source for Greece. In between May 2010-June 2011, in order to bring back stability back in the bond market the ECB started buying €78 billion bonds, out of which €45 billion from Greece government from secondary markets to reduce bond spread and increase confidence of investors.

When it came to repayment of loan, the debt-ridden country faced innumerable problems. The Greek government was paying handsome pension to the retired individuals thereby leaving them with less monetary resources to use for their restructure program. Due to lack of political stability in Greece, the Euro zone finance ministers extended their bailout in December 2014 for two months. The newly elected Greek Prime Minister Alexis Tsipras got further four-month extension in February 2015 in return for dropping key anti-austerity measures and undertaking Euro-zone's prescribed reform programme.

Finally on 12th May 2015, Greece who owed approximately €324 billion to its international creditors made a payment of €750m to the IMF by drawing on its cash reserves through pension cuts and labour reforms so as to keep the country afloat. For its next early June repayment, IMF and all the international creditors agreed to give some breathing room to Greece by postponing the €1.5-billion payment date late until the end of June. Both the parties discussed upon the budget proposals so as to avert an imminent debt default. The creditors wanted Athens to have budget surplus of 1 percent of annual GDP by the end of the 2015 in the hope of achieving a 2 percent target in 2016 and 3 percent in 2017. To achieve this the troika came out with strict reforms like increase in corporate taxes from its current 26 percent rate, cut in military spending by €400 million accompanied with tighter rules on provision for pensions. Since the Greek PM did not want to cross the red lines and distort the Greeks faith in him, he rejected upon the creditors proposals that demanded more austerity. Ultimately on 30th of June, 2015 due to continuous falter in negotiations, the debt-ridden country defaulted on its €1.5-billion payment. Moreover, the ECB froze its emergency lending to Greek banks which prompted the Greek officials to keep their banks closed till 10th July so as to impose strict capital controls.

After much hullabaloo, the Greek parliament approved to accept the tough economic measures that were prescribed by the creditors so as to avail a three-year €86-billion bailout. The Mediterranean nation utilized the bridge finance of €7-billion that was provided by the European Union and repaid its key creditors i.e. the ECB and IMF. Moreover, the ECB rescued the Greek banks by providing €900- million of emergency funding thereby helping the cash-starved banks to reopen for the first time in three weeks. Currently, the Greek government parliament approved the latest legislation that will enable the European leaders including Greece to start talks on a multibillion euro rescue package.

The end-game for Greece

Looking in totality, the latest move by the European leaders to force Greece to adopt the tough austerity rules so as to avoid Grexit will not only be gloom-ridden for Greece but also for the entire Euro-zone. Adopting these reforms requires Greece to reduce its debts and follow tough rules; rules which are mostly laid by Germany who acts like a stern parent; providing goodies only if the misbehaviour is controlled. Due to this adoption of strict policy, under developing countries in Europe like Spain, Greece and Portugal will face huge employment problems. Moreover, banks won’t be able to operate freely due to red tapism by Germany as huge money is involved which will affect many economies. This will result to less spending which will eventually contract the economy leading to further disruption. So either the EU most preferably Germany bends its way or allow the debt-ridden countries to leave the euro-zone which is highly unlikely since Germany exports 2/3 to European countries. With respect to Greece, if this cash-starved nation returns to its original currency i.e. the drachma there will be a massive loss of purchasing power. New markets will take time to open up to the newly independent Greece owing to lack of faith in the country’s ability to manage its own currency, given its inability to collect taxes and produce workable budgets. The choice seems sharply delineated but the truth is that any indecisive move may ultimately lead to the destruction of the single European currency.

 

 

Reviews

[AliceaRW]

Very interesting read, especially now after Brexit and other fall out in Europe over the EU & Currency. Your article gave clear insight, I think if someone who did not know of the EU problems read this, they would have at least a clearer understanding of what Greece has been through.