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All About Greece Debt Crisis and Bailout
by
Rajesh Goyal
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I was thinking of writing an article on this topic for long but in view of the fast changing developments, I decided to write on this issue once it was settled towards a direction. As on the date of concluding of this article (17th July 2015), things have started looking up positive and third bailout has been approved by Greece Parliament. Greece Debt crisis or Greece Crisis is complex issue with different experts taking different views about the origin and reasons for this crisis. I will try to summarise these in simple words so that our readers can have a grasp of the topic. [On some earlier occasions we have found that our articles are just copied and pasted by other websites and are shown as if they are the real authors of such articles. It is ethical wrong. You are free to study these but do not copy and post on other websites, as comments or on blogs. You are welcome to give links for this article ]
(A)Greece Joining the Euro : Till 2001, currency of Greece was Drachma. In 2001, Greece joined Euro. Till that time Greece was considered as middle class economy but with poor governance, and thus was considered as higher risk investment economy as compared to other countries in the Europe. When in 2001, Greece joined the Euro, the perception of creditors changed and its credit risk was thought to be almost equal to Germany, as both had the same currency as Euro and it was believed that in case of problems, Germany will come to the rescue of smaller nations. Thus, the seeds of present Greece debt crisis were sown when this perception of low risk for Greece became a norm for investors.
(B) After Effects of Greece Joining Eurozone : Once this perception of low risk for Greece took roots, investors began lending to Greece at lower rates i.e. about the same rates as they lend to Germany! This was mainly on account of common monetary policy of Euro zone. This helped the economy of Greece to grow at faster rate. However, faced with this sudden availability of cheap money, Greece began borrowing like crazy and thus debt burden started increasing. Although there was common monetary policy for Euro Zone but there was no common Fiscal Policy for Euro Zone and each country followed its own fiscal policy. The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007: during this period it grew at an annual rate of 4.2%, as foreign capital flooded the country newly backed by the euro.However, such inflow of foreign capital led to overspending by successive Greece governments. Due to this, the country continued to record high budget deficits each year.
(C ) Impact of 2008 Financial Crisis on Greece : After the 2008 financial crisis, things started to get tough for Greece. Every country in Europe faced a recession, but Greece was hit more as it was one of the poorest and already among most indebted countries in Europe. We have seen above that Greece benefited from joining Eurozone in the initial years. However, now under huge debt, it had little choice to frame its own monetary policy as Greece had to follow the same monetary policies which rest of the Europe. German-dominated European Central Bank (ECB) policies were framed keeping in view the needs of Germany and this pushed Greek economy to depression. Thus joining Eurozone, which was a boon for Greece in initial years, became a bane now with little leverage to frame its own policies to tame the depression. In view of the independence in following fiscal policies, Germany could not do much to check the ever increasing fiscal deficit in Greece and few other countries, who continued to spend more than what they could actually collect as taxes. Some of these overspending were kept under the carpet by fudging the figures of fiscal deficit.
(D) Years from 2007 to 2010 : The after effect of financial crisis was that the flow of funds from the European core countries to the periphery began to dry up. Usually, a country facing a “sudden stop” in private investment and a high debt load allows its currency to depreciate (i.e., inflation) to encourage investment and to pay back the debt in cheaper currency, but Greece did not have this option was it was tied to Euro. In late 2009, it came to light that till that time Greece has been faking its budget deficits. This discrepancy was massive. On 5th November 2009, the newly elected socialist Prime Minister, George Papandreou disclosed that the year’s budget deficit would be 12.7% of GDP rather than what early government had claimed to be mere 3.7%. Thus fears developed about Greece's ability to meet its debt obligations, due to revelations that previous data on government debt levels and deficits had been misreported by the Greek government. This led to a crisis in confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other Eurozone countries – Germany in particular. Thus Reports in 2009 of fiscal mismanagement and deception increased borrowing costs for Greece and this combination of events meant, Greece could no longer borrow to finance its trade and budget deficits. All the above led to the start of the Greek government-debt crisis (also known as the Greek depression) from late 2009. Thus, Greece faced turmoil among its people due to Great Recession. Structural weaknesses in the Greek economy, and a sudden crisis in confidence among lenders compounded the problems. Two of the country's largest earners are tourism and shipping, and both were badly affected by the downturn, with revenues falling 15% in 2009. It was the first of five sovereign debt crises in the eurozone – later referred to collectively as the European debt crisis.
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(E) Who is to be blamed for beginning of Greece Crisis : Greece people believed that this crisis is the creation of other European countries as tying to Euro left little maneuverability with Greece to adjust its monetary policies. However, the creditors felt that it was the creation of Greece as this nation has raised debts which were not sustainable and had faked its deficit financing levels. There was massive tax evasion by citizens and businessmen of Greece leading to higher deficit. Government failed to contain tax evasion and at the time of crisis, people of Greece failed to adopt austerity measures leading to this financial mess.
(F) Deepening of Crisis from 2010 to 2014 : In April 2010, the reported 2009 deficit was further increased to 13.6%, and the final revised calculation, using Eurostat's standardized method, set it at 15.7% of GDP; the highest deficit for any EU country in 2009.The rating of Greece continued to fall leading to The Greek/German 10-year debt yield spread surpassing 1000 basis point by April 2010. On 2nd May 2010 – The IMF, Greek Prime Minister Papandreou, and other eurozone leaders agree to the First bailout package for €110 billion ($143 billion) over 3 years. Greece was forced to adopt the Third austerity package, which led to unrest in Greece. The problems kept on compounding as Greece was forced to adopt more austerity measures and unemployment continued to rise. There was a turmoil on political fronts too. The elections were held but no stable government could be formed. The Second bailout programme was finally ratified by all parties in February 2012, and by effect extended the first programme, meaning a total of €240 billion was to be transferred at regular tranches throughout the period of May 2010 to December 2014. Due to a worsened recession and continued delay of implementation of the conditions in the bailout programme, in December 2012 the Troika (European Commission, the European Central Bank, and the International Monetary Fund) agreed to provide Greece with a last round of significant debt relief measures, while the IMF extended its support with an extra €8.2bn of loans to be transferred during the period of January 2015 to March 2016. In April 2013, Greek parliament approved a reform bill: it promised to abolish 15,000 state jobs by the end of 2014, including 4,000 in 2013; made it easier to fire civil servants; increases the working hours of teachers; and cuts a property tax by 15%. In order to become more competitive and meet the requirements of austerity measures, Greek wages fell nearly 20% from mid-2010 to 2014, a form of deflation. This resulted in a significant reduction in income or GDP, resulting in a severe recession and a significant rise in the debt to GDP ratio. Unemployment rose to nearly 25%, from below 10% in 2003. However, significant government spending cuts also helped the Greek government return to a primary budget surplus, meaning it now collects more revenue than it pays out but excluding interest. During this period, there was another big change, which has curtailed the power of Greece to arm twist the world. In 2010, Greek debt was widely held by private banks, so a Greek default could trigger a financial panic and failure of banks. But since then, this debt was consolidated in the hands of rich European governments, greatly reducing the risk of a financial crisis if Greece defaults. Thus, Greece was more cornered and any threat / action of pulling out from Euro and default on payment would have hurt it the most and there might not have been any failure of banks across the world. Thus, we can say that for last five years the arm twisting power of Greece has reduced and it has been negotiating with the Troika for financial assistance with its debt burden. Since 2010, the Troika has been providing Greece with loans in exchange for tax hikes and spending cuts (i.e. austerity measures). Thus, crisis was being avoided or at best delayedby financial assistance of troika.. Rich European nations such as Germany believe they're simply insisting that Greece live within its means. But the austere terms of the bailouts have caused resentment among Greeks and contributed to crisis-level unemployment and poverty. Greece population did not understand that in the long run it has remain within its limits and nobody will continue to finance its fiscal deficit.
(G) Developments in 2015: Amid all the above turmoil and unrest in Greece, Greek legislative elections were held in late January 2015, wherein Syriza(Syriza is the name of a young left-wing party in Greece) won a historic victory. Syriza and the independent Greeks joined hand to form a new coalition government and Alexis Tsipras was elected as the new Prime Minister. Syriza had promised during elections that it will reject the previous bailout deal and secure a more favourable agreement. Thus in early February 2015, Syriza Government tried to renegotiate terms of the bailout but failed to get much, On 20th February 2015, Eurogroup was able to broke an agreement between Greece and the eurozone for a four month loan extension only after Greece had agreed for certain concessions and adopt more austerity measures. It was considered as a huge defeat for Syriza. Now the next installment was due for payment on 5th June, Greece requested for extension of payment date by the end of month (i.e.upto 30th June 2015). Having been cornered and no chance of payment on 30th June, Prime Minister announced that it will go for Referendum on Bailout Package. He thought by this exercise Greece will be able to put pressure for better terms for bailout package. However, this led to immediate crisis in Greece. Prime Minister had to announce that Greek banks will remain closed for a while; he also announced the imposition of capital controls (€60/day withdrawal limit; most foreign transfers banned).
(H) Latest Developments of July 2015 : Finally Greece failed to pay on the due date and thus IMF loan became falls in arrears. On June 30, 2015, Greece became the first developed country to fail to make an IMF loan repayment. At that time, Greece's government had debts of €323bn. As announced by Greece PM, a referendum was held on 5th July, 2015. Over 61% voted against the proposed measures by the Juncker Commission, the ECB and the IMF. However, it failed to impress the lenders and had no impact on the terms of the bailout package. Thus, Greece Govt was forced to ignore the results of the referendum, as it became evident that Greece had absolutely no leverage whatsoever in arm twisting in the present circumstances. The result was the eurozone offered Greece to agree to terms even worse than the ones they had initially rejected. On 13th July, 20105 Euro zone leaders made Greece surrender much of its sovereignty to outside supervision for agreeing to talks on a Euro 86-billion ($95-billion) bailout to keep the near-bankrupt country in the single currency. This will be termed as Third bailout. If the summit on Greece’s third bailout had failed, Athens would have been staring at an economic abyss, with its banks on the brink of collapse and the prospect of having to print a parallel currency and exit the euro. The terms imposed by international lenders, led by Germany, obliged leftist Prime Minister Alexis Tsipras to abandon promises of ending austerity. However, this could fracture his government and lead to an outcry in Greece. “Clearly, the Europe of austerity has won,” Greece’s reform minister George Katrougalos said. “Either we are going to accept these draconian measures or it is the sudden death of our economy through the continuation of the closure of banks. So, it is an agreement that is practically forced upon us,” he told BBC Radio The Greek parliament voted on 15th July 2015 to undertake the package of reforms needed to begin negotiations for an €86bn bailout programme. Despite 32 of its MPs voting against the plans, the Syriza-led government won out by 229 votes to 64, but under lot of unrest and dissent. . Greece may have voted to authorise the deal but it also needs to be approved by other eurozone parliaments before any funds are released. Even in those countries of Eurozone that will not require a formal vote, tensions may emerge further down the road within governments that have small majorities. Even after all the Eurozone’s governments have passed the same it is still likely that there will be some more hurdles to overcome before formal negotiations begin. International Monetary Fund (IMF) has made clear that it will not send any new programme to its board that doesn’t include debt restructuring – a position not shared with all eurozone governments – nor review the current one, which would be required to release pending funds. If both the IMF and the European Union stick to their respective positions a renewed impasse is likely. Therefore, it may still take some more time before it is confirmed that the third bailout package will start rolling out. The whole crisis has been nicely summed up by a civil engineer from Greece when he acknowledged that "We are Europe's bankrupt child and as a child, Europe has been supporting us for five years and told us what we needed to do to get out of this situation. We did nothing and now we are paying the consequences." (updated on 17th July 2015)
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