Introduction:<br />Greece achieved independence from the Ottoman Empire in 1829. During the second half of the 19th century and the first half of the 20th century, it gradually added neighboring islands and territories, most with Greek-speaking populations. In World War II, Greece was first invaded by Italy (1940) and subsequently occupied by Germany (1941-44); fighting endured in a protracted civil war between supporters of the king and Communist rebels. Following the latter's defeat in 1949, Greece joined NATO in 1952. In 1967, a group of military officers seized power, establishing a military dictatorship that suspended many political liberties and forced the king to flee the country. In 1974, democratic elections and a referendum created a parliamentary republic and abolished the monarchy. In 1981, Greece joined the EC (now the EU); it became the 12th member of the European Economic and Monetary Union in 2001<br />Greek Economy:<br />The economy of Greece is the twenty-seventh largest economy in the world by nominal gross domestic product (GDP) and the thirty-third largest by purchasing power parity, according to the data given by the International Monetary Fund for the year 2008. Its GDP per capita is the 25th highest in the world, while its GDP PPP per capita is also the 25th. Greece is a member of the OECD, the World Trade Organization, the Black Sea Economic Cooperation, the European Union and the Euro zone.<br />The Greek economy is a developed economy with the 22nd highest standard of living in the world. The public sector accounts for about 40% of GDP. The service sector contributes 75.8% of the total GDP, industry 20.8% and agriculture 3.4%. Greece is the twenty-fourth most globalized country in the world and is classified as a high income economy.<br />Economy Overview<br />Greece has a capitalist economy with the public sector accounting for about 40% of GDP and with per capita GDP about two-thirds that of the leading euro-zone economies. Tourism provides 15% of GDP. Immigrants make up nearly one-fifth of the work force, mainly in agricultural and unskilled jobs. Greece is a major beneficiary of EU aid, equal to about 3.3% of annual GDP. The Greek economy grew by nearly 4.0% per year between 2003 and 2007, due partly to infrastructural spending related to the 2004 Athens Olympic Games, and in part to an increased availability of credit, which has sustained record levels of consumer spending. But growth dropped to 2% in 2008. The economy went into recession in 2009 and contracted by 2%, as a result of the world financial crisis, tightening credit conditions, and Athens' failure to address a growing budget deficit, which was triggered by falling state revenues, and increased government expenditures. Greece violated the EU's Growth and Stability Pact budget deficit criterion of no more than 3% of GDP from 2001 to 2006, but finally met that criterion in 2007-08, before exceeding it again in 2009, with the deficit reaching 12.7% of GDP. Public debt, inflation, and unemployment are above the euro-zone average while per capita income is the lowest of the pre-2005 EU countries; debt and unemployment rose in 2009, while inflation subsided. <br />Debt Crisis of Greece:<br />`Greece has themselves – and all Euro wielding countries in a predicament. Continuous borrowing has placed them in a position where they cannot pay any loans back, and the other Euro countries are not willing to give them loans to bail them out.<br />Some senior German policy makers went as far as to say that emergency bailouts should bring harsh penalties to EU aid recipients such as Greece. However, such plans have been described as unacceptable infringements on the sovereignty of eurozone member states and are opposed by key EU nations such as France.<br />There has also been criticism against speculators manipulating markets: Angela Merkel stated that "
institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere"
.<br />On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. The IMF has said it was "
prepared to move expeditiously on this request"
. The size of the bailout is expected to be €45 billion ($61 billion) and it is expected to take three weeks to negotiate, with a payout within weeks of €8.5 billion of Greek bonds becoming due for repayment. On 27 April 2010, the Greek debt rating was decreased to BB+ (a 'junk' status) by Standard & Poor's amidst fears of default by the Greek government. The Greek government was offering borrowers 15.3% on two-year government bonds. Standard & Poor's estimates that in the event of default investors would lose 30–50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement. <br />On May 1, a series of austerity measures was proposed. The proposal helped persuade Germany, the last remaining holdout, to sign on to a 110 billion euro bail-out package for Greece. On May 5, a national strike was held in opposition to the planned spending cuts and tax increases. Protest on that date was widespread and turned violent in Athens, killing three people.<br />Sovereign debt crisis:<br />Recent crisis in Greece is the new addition to the long list of casualties of the global financial and economic crisis that started in 2007. It has called into question financial institutions as diverse as the public accounting system to the common currency policy of the Euro zone.<br />In October 2009, the newly-elected government of Greece revealed that the country’s budget deficit was far higher than previously thought: more than 12% as opposed to less than 3%, as required for membership in the EU. Ever since, the deficit has been revised upwards and currently hovers around 13.6%. In addition, the sovereign debt of Greece is nearly 400 billion dollars, close to 120% of its GDP and it runs a current account deficit of nearly 14% in the Euro zone. These data together strongly imply that Greece has invested more than it saved (i.e., private and public sector savings taken together), supporting this extra investment by borrowing from the rest of the world. In short, Greece appears to have lived beyond its means.<br />International finance has responded to this situation by downgrading its outlook of the public finances of Greece. The Credit Default Swap (CDS) spread on Greece government bonds (which gives the financial markets’ perception of the possibility of default on its debt by the Greek government) has sharply increased in the recent past as the rating of these bonds was continuously degraded by agencies. In the past fortnight, the bonds were relegated by a rating agency to the status of “junk” bonds. In less than six month, the interest payable on these bonds has climbed from less than 4% to more than 15%. Greece certainly cannot afford to borrow at such prohibitive rates. Being a Euro zone country Greece doesn’t have the choice of treating its internal and external crisis separately: Greece can’t print currency for deficit financing at home and devalue its currency to attempt to regain export competitiveness. In these conditions, its only choice appears to be to appeal for a bail-out from the EU and/or IMF.<br />Greek Government Funding Crisis:<br />Causes<br />The Greek economy was one of the fastest growing in the eurozone during the 2000s. From 2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. Since the introduction of the Euro, debt to GDP has remained above 100%. The global financial crisis that began in 2008 had a particularly large effect on Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009. <br />To keep within the monetary union guidelines, the government of Greece has been found to have consistently misreported the country's official economic statistics. In the beginning of 2010, it was discovered that since 2001 Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees for arranging transactions that will hide the actual level of borrowing. The purpose of these deals made by several subsequent Greek governments was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers. <br />May In 2009 the government of George Papandreou revised its deficit from 5% to 12.7%. In 2010, the Greek government deficit was estimated to be 13.6% which is one of the highest in the world relative to GDP. Greek government debt was estimated at €216 billion in January 2010. Accumulated government debt is forecast, accor ng to some di estimates, to hit 120% of GDP this year. The Greek government bond market is reliant on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally. Estimated tax evasion costs the Greek government over $20 billion per year. Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January). According to the Financial Times on January 25, 2010 "
Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on."
In March, again according to the Financial Times, "
Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount. <br />Speculator’s Role:<br />Speculators and hedge funds engaged in selling Euros have also been accused by both the Spanish and Greek Prime Ministers of worsening the crisis. Angela Merkel has stated that "
institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere"
.<br />The role of Goldman Sachs in the Greek bond 'crisis' is also under scrutiny. It is not yet clear to what extent this bank has been involved in the unfolding of the crisis or if they have made a profit as a result of the sell-off on the Greek government debt market.<br />Economic Events of socialist government:<br />Here is a timeline of economic events in Greece since Prime Minister George Papandreou’s socialist PASOK party won an election last October.<br />November 2009 <br />The new government pledges in its 2010 draft budget on November 5 to save Greece from bankruptcy by cutting the budget deficit of 12.7 percent of GDP — more than double the previously announced figure — while keeping electoral promises to help the poor.<br />A final budget draft on November 20 shows Greece aims to cut the deficit to 8.7 percent of GDP in 2010 to show EU partners and markets it is serious about restoring fiscal health.<br />It also sees public debt rising to 121 percent of GDP in 2010 from 113.4 percent in 2009. EU 2010 forecasts on Greece are worse, with the deficit seen at 12.2 percent of GDP and national debt rising to 124.9 percent, the highest ratio in the EU.<br />December 2009<br />On December 8, Fitch Ratings, which had cut Greece to A- when the government revealed the higher deficit, cuts Greek debt to BBB+ with a negative outlook, the first time in 10 years a ratings agency has put Greece below the A investment grade.<br />On December 14, Papandreou outlines policies to cut the budget deficit and try to regain the trust of investors and the EU.<br />December 16 S&P cuts Greece’s rating to BBB+ from A-, saying austerity steps announced by Papandreou are unlikely to produce a sustainable reduction in the public debt burden.<br /> December 22 – Moody’s cuts Greek debt to A2 from A1, the third agency to downgrade Greece, but still two notches above that of Fitch and S&P. Spread between 10-year Greek and German Bunds tightens because downgrade less severe than expected.<br />January 2010<br />Greece unveils a stability program on January 14 saying it will aim to cut its budget gap to 2.8 percent of GDP in 2012 from 12.7 percent in 2009. Unions protesting against the austerity plan announce strikes for February.<br />February 2010<br />Papandreou says on February 2 the government will extend a public sector wage freeze to those making below 2,000 euros a month for 2010, excluding seniority pay hikes.<br />On February 3 the EU Commission says it backs Greece’s plan to reduce its budget deficit below 3 percent of GDP by 2012 and urges Greece to cut its overall wage bill.<br /> Greece must refinance 54 billion euros in debt in 2010, with a crunch in the second quarter as more than 20 billion euros becomes due. A 5-year bond issue in January is five times oversubscribed but the government has to pay a hefty premium.<br /> A one-day general strike on February 24 against the austerity measures cripples Greece’s transport and public services.<br />An EU mission to Athens with IMF experts delivers a grim assessment of the nation’s economy on February 25.<br />Finance Ministry official says the inspectors anticipate Greece can cut the deficit by about 2 percentage points, short of a 4 percentage point target for 2010<br />March 2010<br />EU Economic Affairs Commissioner Olli Rehn asks Greece to announce further measures to tackle its budget crisis.<br />New package of public sector pay cuts and tax increases passed by the government on March 5 to save an extra 4.8 billion euros. The measures include raising VAT by 2 percentage points to 21 percent, cutting public sector salary bonuses by 30 percent, increases in tax on fuel, tobacco and alcohol, and freezing state-funded pensions in 2010.<br /> Public and private sector workers strike on March 11.<br />March 15, Euro zone finance ministers agree on a mechanism that will allow them to help Greece financially if needed, but reveal no details.<br /> March 18, Papandreou warns Athens will not be able to make deficit cuts if its borrowing costs remain high and may have to call in the IMF.<br />March 19, European Commission President Jose Manuel Barroso urges EU member states to agree a standby aid package for Greece. Barroso says the 16 countries that share the euro currency should be ready to make coordinated bilateral loans.<br />March 25, European Central Bank President Jean-Claude Trichet says that the ECB will extend softer rules on collateral, easing the risk of Greek institutions being cut off from funding at the end of this year.<br />Euro zone leaders agree to create a joint financial safety net, with the IMF, to help Greece and to try to restore confidence in the euro. Under the accord, Athens will receive coordinated bilateral loans from other countries that use the euro and money from the IMF, but only if all states agree to the bailout and if it has exhausted its borrowing options. April 2010 – The finance minister on April 6 denies that Greece is seeking an amendment to the safety net agreement. Investors batter Greek assets before and after the denial.<br />April 2010<br />April 11 – Euro zone finance ministers approve a giant 30-billion-euro ($40 billion) emergency aid mechanism for debt-plagued Greece but stress Athens had not requested the plan be activated yet.<br /> April 13 – European Central Bank policy makers give the thumbs-up to the euro zone’s rescue package as the country passed a key test of its ability to raise fresh funds.<br />April 15 – EU monetary chief Olli Rehn says there is no possibility that Greece will default on its debts and no reason to doubt Germany’s commitment to an EU pledge to help.<br /> An International Monetary Fund official says that Greece has expressed interest in a three-year precautionary IMF agreement, which will only be tapped when Greece requests the funding.<br />Parliament adopts a tax reform bill, backing government moves to tackle tax evasion and shift the fiscal burden to higher-income earners as Athens looks for ways to slash its massive budget deficit.<br />April 16 – European finance ministers, meeting in Madrid, discuss Greece’s debt crisis but say Athens was seeking to clarify how an emergency aid mechanism would work, rather than requesting it.<br />April 23 – Greek Prime Minister George Papandreou asks for the activation of an EU/IMF aid package aimed at pulling the euro zone member out of a debt crisis in what could be the largest state bailout ever attempted.<br />Solution of crisis: <br />
European Union leaders have made two major proposals for ensuring fiscal stability in the long term. The first proposal is the creation of a common fund responsible for bailing out, with strict conditions, a EU member country. This reactive tool is sometimes dubbed as the European Monetary Fund by the media. The second is a single authority responsible for tax policy oversight and government spending coordination of EU member countries. This preventive tool is dubbed the European Treasury. The monetary fund would be supported by EU member governments, and the treasury would be supported by the European Commission.
The eurozone requires a common fiscal policy rather than controls on portfolio investment. In exchange for cheaper funding from the EU, Greece and other countries, in addition to having already lost control over monetary policy and foreign exchange policy since the Euro came into being, would therefore also lose control over domestic fiscal policy.
Greece currently faces a crisis on two fronts: there has been a long-run build-up of public sector debt due to persistently high budget deficits, and a very rapid build up of excessive external debt due to several years of massive current account deficits. Greece has been living beyond its means and must immediately cut spending and imports to check its unsustainable deficits.
The government went into the global economic crisis with an already high budget deficit and public sector debt above 100% of GDP, much of which is held by EU banks. The global crisis compounded the problem as the government sought to boost growth rather than prioritizing fiscal prudence - hiding the overshoot in the budget until late 2009.
Whether Greece adopts austerity measures or has austerity imposed by financial market turmoil, there is little option but to cut the twin deficits rapidly, implying a steep recession and drop in imports. Achieving both growth and fiscal consolidation seems highly unlikely - growth will have to give way.
Close monitoring of progress by the European Commission should provide the credibility Greece needs to meet its financing requirements through the market (at least this year) but if Greece still fails to control its runaway finances, it will have no choice but to seek a bailout.
The most drastic solution - abandoning the euro as a prelude to devaluation - would not change the requirement to cut the twin deficits since short-term export competitiveness is not the key issue and opportunities to boost exports (including tourism) are quite limited, especially as the European economy remains weak. Those who see exit from the euro as attractive should also recall the instability generated by historic episodes of devaluation.
Other Solutions:<br />
Control the Speculators activities.
Greece must cut on public expenditure to pay debts
Greece has to reduce import and increase imports to maintain the balance.