The economy of Greece is the 34th or 42nd largest in the world at $299 or $304 billion by nominal gross domestic product or purchasing power parity respectively, according to World Bank statistics for the year 2011. Additionally, Greece is the 15th largest economy in the 27-member European Union. In terms of per capita income, Greece is ranked 29th or 33rd in the world at $27,875 and $27,624 for nominal GDP and purchasing power parity respectively.
The Greek government-debt crisis is one of a number of current European sovereign-debt crises. In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece’s ability to meet its debt obligations due to strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany.
The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets practically were no longer available for Greece as a funding source. On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points: 1. Implementation of austerity measures, to restore the fiscal balance. 2. Privatisation of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable. 3. Implementation of outlined structural reforms, to improve competitiveness and growth prospects. In January 2010 the Greek Ministry of Finance highlighted in their Stability and Growth Program 2010 these five main causes for the significantly deteriorated economic results recorded in 2009 (compared to the published budget figures
ahead of the year.
GDP growth rates: After 2008, GDP growth rates were lower than the Greek national statistical agency had anticipated. In the official report, the Greek ministry of finance reports the need for implementing economic reforms to improve competitiveness, among others by reducing salaries and bureaucracy, and the need to redirect much of its current governmental spending from non-growth sectors (e.g. military) into growth stimulating sectors.
Government deficit: Huge fiscal imbalances developed during the past six years from 2004 to 2009, where “the output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues.” In the report the Greek Ministry of Finance states the aim to restore the fiscal balance of the public budget, by implementing permanent real expenditure cuts (meaning expenditures are only allowed to grow 3.8% from 2009 to 2013, which is below the expected inflation at 6.9%), and with overall revenues planned to grow 31.5% from 2009 to 2013, secured not only by new/higher taxes but also by a major reform of the ineffective Tax Collection System.
Government debt-level: Since it had not been reduced during the good years with strong economic growth, there was no room for the government to continue running large deficits in 2010, neither for the years ahead. Therefore, it was not enough for the government just to implement the needed long term economic reforms, as the debt then rapidly would develop into an unsustainable size, before the results of such reforms were achieved. The report highlights the urgency to implement both permanent and temporary austerity measures that – in combination with an expected return of positive GDP growth rates in 2011 – would result in the baseline deficit decreasing from €30.6 billion in 2009 to only €5.6 billion in 2013, finally making it possible to stabilize the debt-level relative to GDP at 120% in 2010 and 2011, followed by a downward trend in 2012 and 2013.
Budget compliance: Budget compliance was acknowledged to be in strong need of future improvement, and for 2009 it was even found to be “A lot worse than normal, due to economic control being more lax in a year with political elections”. In order to improve the level of budget compliance for upcoming years, the Greek government wanted to implement a new reform to strengthen the monitoring system in 2010, making it possible to keep better track on the future developments of revenues and expenses, both at the governmental and local level.
Statistical credibility: Problems with unreliable data had existed ever since Greece applied for membership of the Euro in 1999. In the five years from 2005–2009, Eurostat each year noted a reservation about the fiscal statistical numbers for Greece, and too often previously reported figures got revised to a somewhat worse figure, after a couple of years. In regards of 2009 the flawed statistics made it impossible to predict accurate numbers for GDP growth, budget deficit and the public debt; which by the end of the year all turned out to be far worse than originally anticipated. In 2010, the Greek ministry of finance reported the need to restore the trust among financial investors, and to correct previous statistical methodological issues, “by making the National Statistics Service an independent legal entity and phasing in, during the first quarter of 2010, all the necessary checks and balances that will improve the accuracy and reporting of fiscal statistics”. Rescue packages provided by the EU and IMF:
First rescue package (May 2010)
Having had the credit rating agencies further downgraded Greece’s ability to achieve and the risk premiums on long-term Greek government bonds first record levels, the Greek government requested on 23 April 2010 official financial assistance.
The European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) agreed on 1–2 May 2010 with the Greek government to a three-year financial aid programme (loan commitments) totaling €110 billion. The Greek debt in exchange for household should be consolidated within three years, so that the budget deficit should be reduced by 2014 to below 3 percent.
Of the €110 billion promised by the IMF took €30bn, the Eurozone €80bn (as bilateral loan commitments). Instrumental in determining the rates of the individual euro area countries in the €80bn of the Eurozone was the respective equity interest in the capital of the ECB, which in turn is determined every five years after the prorated share of a country in the total population and economic output in the EU. The German share of the €80bn was 28%, or about €22.4bn in three years while France paid €16.8bn.
In May 2010 Greece received the first tranche of the bailout money totaling €20bn. Of this total, 5.5 billion came from the IMF and 14.5 billion of Euro states. On 13 September the second tranche of €6.5bn was disbursed. The 3rd tranche of the same amount was paid on 19 January 2011. On 16 March, 4th tranche in the amount of €10.9 billion was paid out, followed by the 5th installment on 2 July. The 6th tranche of €8bn was paid out after months of delay in early December. Of this amount, the IMF took over €2.2bn. Second rescue package (July 2011 – February 2012)
Early version – July 2011
Since the first rescue package proved insufficient, the 17 leaders of Euro countries approved a (preliminary) second rescue package at an EU summit on 21 July 2011. It was agreed that the aid package has a volume of €100 billion, provided by the newly created European Financial Stability Facility. The repayment period was extended from seven to 15 years and the interest rate was lowered to 3.5%.
For the first time, this also included a private sector involvement, meaning that the private financial sector accepted a voluntary cut. It was agreed that the net contribution of banks and insurance companies to support Greece would include an additional €37 billion in 2014.The planned purchase of Greek bonds from private creditors by the euro rescue fund at their face value will burden the private sector with at least another €12.6 billion.
It was also announced at the EU summit, a reconstruction plan for Greece in order to promote economic growth. The European Commission established a “Task Force for Greece”. Political analysis:
From a political perspective, Greece has been facing significant challenges in the last decades that have worsened its ability to perform financially in a healthy pattern. Foreign relations with Turkey and the terrorist activities within the country have given rise to political unrest. The support of Greek population in Cyprus has long been a source of conflict with Turkey.
Moreover, individual terrorist attacks at US targets have affected, in the past decades, diplomatic relations with the US.9 However, the level of these relations remains high and has recently been meliorated with the abolishment of the special visa previously required for Greek citizens to travel to the US.10 Furthermore, corruption has been, and continues to be, a part of the political culture of Greece. The country has been hit in the last several years by a series of large political and financial scandals, under both the Pasok Party and the ND Party. All the governments have publicly criticized corruption and nepotism and taken more measures against them. Characteristically, we can see below that Greeks are the least satisfied EU nation by the way the administration is run. Economic analysis:
From an economic perspective, Greece has emerged as one of the fastest growing economies in the EU since the mid 1990s when it has recorded strong GDP growth, significantly outperforming EU averages. The liberalization of the financial sector and the low interest rates lead to a significant expansion in consumer credit and demand. This demand also leads to large scale investments which are responsible for the above mentioned growth. Due to this economic success, the difference in real per capita income between Greece and EU-15 has decreased drastically.
Despite the above, poor government budgets and planning along with the poor competitiveness of the Greek economy increased the deficits at a rapid pace. Moreover, Greek exports have been increasingly becoming uncompetitive, due to an increase in labor costs and higher inflation than other EU member-states. Many manufacturing firms rely upon cutting costs, thus affecting the number of workers in these sectors. Furthermore, in the touristic sector, arguably the most important sector for the country’s economy also faces low profitability due to increasing labor costs and poor labor quality in the sector. In spite of recent initiatives, like the easing of overtime restrictions, the Greek labor market remains quite rigid in an international comparison.
The World Bank’s latest Doing Business report suggests that Greece is ranked 142 among 178 countries when it comes to the regulation of employment, and the complexity of the employment index. The latter is almost twice as high as the OECD average. Finally, the wage increases have not kept in pace with productivity development. This factor and its bigger image, the springiness of the labor market, have also contributed to a significant extent to the poor competitiveness of the Greek economy. However, one cannot ignore the fact that Greece is performing very well in real labor productivity as depicted in the diagram below.
1.Nelson R.M. , Belkin P. (2011) “Greece’s Debt Crisis Overview, Policy Responses, and Implications”
2. Papadimitriou D., Merc (2011) “ The debt crisis in Greece “.
4. Haidar R., Ibrahim J. (2011) “Sovereign Credit Risk in the Eurozone”
5. Xypolia T., Ilia S. (2012) ”London Progressive Journal”.
6. Debt Crisis Overview, Policy Responses, and Implications http://www.fas.org/sgp/crs/row/R41167.pdf , 2011
7. “Greece debt crisis” http://studenttheses.cbs.dk/bitstream/handle/10417/2529/dimitrios_papadimitriou.pdf?sequence=1 2011