The document provides an overview of Greece's debt crisis from its entry into the EU in the 1980s until the present day. It describes Greece's struggles with macroeconomic imbalances and high inflation in the early period. It then discusses Greece joining the Eurozone in 2000 and experiencing a spending boom funded by debt, as well as political scandals that weakened the economy. The crisis began in 2010 when Greece could no longer repay its debt and had to accept bailout loans from the EU and IMF, the conditions of which caused economic hardship and unrest. Options for Greece's future path are also considered.

1.
Greece
Debt
Crises:
Build
up
to
the
Bust
Presented
By:
Aditya
Aima,
140041209
In
partial
fulfilment
of
the:
Full
Time
Master
of
Business
Administration
Submitted
For:
Business
Mastery
Project
Presented
To:
Dr
David
Edelshain
Faculty
of
Management
Cass
Business
School
City
University
London
Date:
1st
Sep
2015
Word
Count:
13,292

2. Greece
Debt
Crises:
Build
up
to
the
Bust
2
Table
of
Contents
TABLE
OF
CONTENTS
......................................................................................................................................
2
LIST
OF
FIGURES
...............................................................................................................................................
4
LIST
OF
TABLES
.................................................................................................................................................
4
LIST
OF
CHARTS
................................................................................................................................................
4
LIST
OF
ABBREVIATIONS
...............................................................................................................................
5
EXECUTIVE
SUMMARY
....................................................................................................................................
6
1.
PROJECT
INTRODUCTION
..........................................................................................................................
8
2.
EU
TO
EURO
–
20
YEARS
............................................................................................................................
9
2.1
1980-­‐1985:
MACROECONOMIC
IMBALANCES
AND
STAGFLATIONARY
TRENDS
............................................
12
2.2
1986-­‐1987
STABILIZATION
PROGRAM
..................................................................................................................
14
2.3
1988
-­‐
1995
–
INTERNAL
AND
EXTERNAL
IMBALANCES
....................................................................................
15
2.4
THE
MAASTRICHT
TREATY
.........................................................................................................................................
16
3.
EURO
–
2000
TO
2008
..............................................................................................................................
21
3.1
GREEK
LOOTING
–
SCANDALS
....................................................................................................................................
25
3.1.1
Greek
Olympics
......................................................................................................................................................
25
3.1.2
J
P
Morgan
Bond
Scandal
.................................................................................................................................
25
3.1.3
Siemens
Scandal
...................................................................................................................................................
25
3.1.4
The
EOT:
Greek
Tourist
Organization
........................................................................................................
26
3.1.5
800,000
House
without
Planning
Permission
..........................................................................................
26
3.1.6
Other
Scandals
......................................................................................................................................................
26
3.2
PROBLEMS
OF
GREEK
ECONOMY
...............................................................................................................................
27
3.2.1
Enviroment
for
Investment
and
Scaling
of
Business
............................................................................
27
3.2.2
Public
Sector:
Overinflated
and
Inefficient
...............................................................................................
28
3.2.3
Rigid
and
narrow
use
of
Human
Resources
..............................................................................................
30
3.2.4
Legal
and
Judicial
System
.................................................................................................................................
31
3.2.5
Informality
..............................................................................................................................................................
31
4.
THE
BEGINNING
OF
THE
FALL
...............................................................................................................
33
4.1
DISASTER
MANAGEMENT
...........................................................................................................................................
33
4.1.1
May
2010
.................................................................................................................................................................
33

3. Greece
Debt
Crises:
Build
up
to
the
Bust
3
4.1.2
March
2012
.............................................................................................................................................................
35
4.1.3
Current
Scenario
..................................................................................................................................................
35
4.1.4
The
Third
Bailout
Package
..............................................................................................................................
36
5.
GREECE
–
RISK
ANALYSIS
........................................................................................................................
40
5.1
FACTORS
DETERMINING
SOVEREIGN
DEBT
RISK
...................................................................................................
45
5.1.1
Degree
of
Indebtness
..........................................................................................................................................
45
5.1.2
Pension/Social
Commitments
.........................................................................................................................
46
5.1.3
Revenue/Inflow
to
Government
.....................................................................................................................
48
5.1.4
Stability
of
Revenues
...........................................................................................................................................
50
5.1.5
Political
Risk
...........................................................................................................................................................
55
5.1.6
Implicit
backing
from
other
entities
............................................................................................................
55
5.2
CREDIT
DEFAULT
SPREAD
..........................................................................................................................................
56
6.
CONCLUSION
................................................................................................................................................
59
6.1.1
Continue
as
Part
of
the
Euro
...........................................................................................................................
63
6.1.2
Grexit
:
Adopt
Drachma
.....................................................................................................................................
64
6.2
IMPACT
OF
GREECE
EXIT
.............................................................................................................................................
66
7.
RECOMMENDATIONS
................................................................................................................................
68
REFERENCE:
......................................................................................................................................................
69

4. Greece
Debt
Crises:
Build
up
to
the
Bust
4
List
of
Figures
FIGURE
1
GDP
GROWTH
FROM
1981-­‐2000
..........................................................................................................................................
10
FIGURE
2
GREECE
GOVERNMENT
DEBT
TO
GDP
1990-­‐2015
............................................................................................................
11
FIGURE
3
INFLATION
RATE
1981-­‐2015
.................................................................................................................................................
12
FIGURE
4
GREECE
CONSUMPTION
AND
INVESTMENT
VERSUS
EUROZONE
...........................................................................................
22
FIGURE
5
GREECE
DEBT
BURDEN
AND
CONSUMER
LENDING
BEFORE
THE
CRISIS
COMPARED
TO
EUROZONE
...............................
23
FIGURE
6
BREAKUP
OF
PUBLIC
EXPENDITURE
........................................................................................................................................
24
FIGURE
7
BREAKUP
OF
TOTAL
MANUFACTURING
WORKFORCE
.............................................................................................................
27
FIGURE
8
BENCHMARKING
THE
GREEK
PUBLIC
SECTOR
........................................................................................................................
29
FIGURE
9
PUBLIC
SECTOR
COMPARISON
WITH
EUROZONE
...................................................................................................................
30
FIGURE
10
GREECE
CREDITORS
.................................................................................................................................................................
39
FIGURE
11
PAYMENT
TIMETABLE
2015
.................................................................................................................................................
42
FIGURE
12
DEBT
TO
GDP
GREECE
2006-­‐2014
....................................................................................................................................
46
FIGURE
13
UNEMPLOYMENT
RATE
EUROZONE
......................................................................................................................................
47
FIGURE
14
AGE
OF
FIRST
PENSION
EUROZONE
......................................................................................................................................
48
FIGURE
15
GREECE
TOURISM
CONTRIBUTION
TO
GDP
.........................................................................................................................
51
FIGURE
16
BREAKUP
OF
TOURISM
CONTRIBUTION
2009-­‐2015
........................................................................................................
51
FIGURE
17
COUNTRIES
WITH
THE
LARGEST
SHIPPING
FLEET
...............................................................................................................
52
FIGURE
18
CDS
SPREADS
GREECE
2006-­‐2010
....................................................................................................................................
57
FIGURE
19
GREECE
CDS
SPREADS
AUGUST
2015
.................................................................................................................................
58
FIGURE
20
EUROZONE
CONTRIBUTION
TO
GREECE
BAILOUTS
..............................................................................................................
66
List
of
Tables
TABLE
1
HARMONIZED
UNEMPLOYMENT
RATES,
EUROSTAT
2008
....................................................................................................
31
TABLE
2
PAYMENT
SCHEDULE
GREECE
....................................................................................................................................................
40
TABLE
3
DEFAULT
SUMMARY
.....................................................................................................................................................................
44
TABLE
4
GREECE
GOVERNMENT
REVENUE
2006-­‐2014
......................................................................................................................
49
TABLE
5
RECEIPTS
FROM
SHIPPING
2000-­‐2014
..................................................................................................................................
53
TABLE
6
RISK
ANALYSIS
SNAPSHOT
..........................................................................................................................................................
59
List
of
Charts
CHART
1
BUDGET
DEFICIT
AS
%
OF
GDP
................................................................................................................................................
10

5. Greece
Debt
Crises:
Build
up
to
the
Bust
5
List
of
Abbreviations
Abbreviation
Full
Form
GDP
Gross
Domestic
Product
EU
European
Union
PASOK
Panhellenic
Socialist
Movement
OECD
Organisation
for
Economic
Cooperation
and
Development
FDI
Foreign
Direct
Investment
ECU
European
Currency
Unit
EMU
Economic
and
Monetary
Union
ECB
European
Central
Bank
OTE
Greece
National
Telecom
VAT
Value
Added
Tax
CAGR
Compounded
Annual
Growth
Rate
UK
United
Kingdom
IMF
International
Monetary
Fund
SBA
Stand
by
arrangement
ESM
European
Stability
Mechanism
PSI
Private
Sector
Involvement
EFSF
European
Financial
Stability
Facility
SMP
Securities
Market
Program
CDS
Credit
Default
Spread
ELA
Emergency
Liquidity
Assistance

6. Greece
Debt
Crises:
Build
up
to
the
Bust
6
Executive
Summary
Greece
is
a
country
that
has
a
rich
history
and
has
been
an
institution
of
pride
for
the
Euro
Zone.
This
report
gives
a
detailed
account
of
the
debt
crises
in
Greece
and
the
possible
solutions
that
could
help
to
avoid
default.
The
current
state
of
the
Greece
is
due
to
number
of
reasons:
high
corruption,
high
tax
evasion,
red
tapism,
overinflated
public
sector,
excessive
borrowing,
high
unemployment
and
poor
business
environment.
To
be
able
to
understand
the
current
crises
in
detail
we
begin
with
analysing
the
economic
growth
and
political
environment
of
Greece
from
the
time
they
joined
the
European
Union.
As
a
country
they
had
witnessed
high
growth
and
low
inflation
till
the
late
1970’s
and
from
then
on
they
have
seen
various
periods
of
erratic
growth.
This
period
was
marked
by
high
inflation
and
low
growth
The
next
part
of
the
report
looks
at
the
growth
of
Greece
once
they
joined
the
Euro.
During
the
period
of
2000-­‐2008
Greece
was
the
fastest
growing
country
in
the
Eurozone,
their
growth
was
solely
fuelled
by
the
high
borrowing
at
extremely
low
interest
rates.
There
was
also
an
extensive
debate
at
the
time
if
the
Government
in
Greece
manipulated
numbers
to
be
able
to
join
the
Euro.
We
then
move
forward
to
the
actually
beginning
of
the
crises
and
how
the
Euro
zone
had
to
step
in
to
save
Greece
from
defaulting
due
to
the
fear
of
a
contagion
effect.
We
look
at
the
various
bailout
packages
that
were
offered
to
Greece
and
also
the
contingency
plans
that
Euro
zone
members
put
in
place
in
order
to
avoid
a
situation
where
other
countries
namely
Portugal,
Spain
and
Italy
would
also
default.
I
have
also
conducted
the
country
risk
analysis
to
assess
the
risk
of
default
for
Greece
based
on
their
current
fundamentals.
The
last
part
of
the
report
focuses
on
my
recommendation
to
avoid
the
default
by
Greece
basis
my
research.
I
have
drawn
parallels
to
the
debt
crises
of
Argentina
basis
which
I
have
drawn
conclusions.
I
would
also
like
to
point
that
towards
my
completion
of
this
report
Greece
underwent
a
political
turmoil
as
the
Prime
Minister
of
Greece
has
resigned
and
has
called
for
a
snap
elections.
Given
that
they
are
undergoing
one
of
the
major
financial
crises
in
the
history
of
Greece
it
would
be
highly
beneficial
to
have
a
strong
political
leader
who
can

7. Greece
Debt
Crises:
Build
up
to
the
Bust
7
guide
them
to
overcome
the
mess
of
the
huge
unsustainable
debt
accumulated
by
the
leaders
before
them.

8. Greece
Debt
Crises:
Build
up
to
the
Bust
8
1.
Project
Introduction
Greece
is
a
country
situated
at
the
far
south
of
the
Balkan
peninsula,
combining
the
towering
mountains
of
the
peninsula
with
over
1400
islands,
with
Crete
being
the
largest.
Greece
has
a
rich
history,
with
the
Greek
civilization
spreading
from
Greece
to
Egypt
and
the
Afghanistan
at
its
peak.
(Wikipedia,
2015).
Greece
has
always
been
a
matter
of
pride
for
Europe
due
to
its
high
cultural
significance.
Greece
is
a
capitalist
economy
with
GDP
of
182
Bn
Euros
(2013)
and
a
GDP
per
capita
of
16,491
Euro.
(FocusEconomics
|
Economic
Forecasts
from
the
World's
Leading
Economists,
2015)
The
top
2
sectors
for
the
Greek
economy
are
tourism,
which
contributed
to
18%
of
the
GDP.
(Theodora.com,
2015).
At
the
time
of
research
the
Greek
economy
has
been
in
the
news
due
to
the
unsustainable
amount
of
debt
and
near
insolvency
situation
with
debates
over
Grexit
i.e.
Greece
exit
from
the
Euro.
Will
Greece
be
able
to
pay
back
its
debt?
Is
being
a
part
of
EURO
the
most
suitable
option?
What
are
the
alternatives
for
Greece?
I
will
explore
all
possible
options
as
we
go
further
in
the
report.
The
crises
in
Greece
have
a
lot
of
similarities
to
the
crises
of
Argentina
and
hence
I
will
draw
certain
references
from
that
too.
Greece
as
a
country
has
very
high
level
of
corruption
(Red
Tapism),
over
inflated
public
sector
and
very
high
tax
evasion,
which
is
an
obstruction
for
growth
in
any
country.
Between
2003
and
2007,
Greece
witnessed
an
average
GDP
growth
of
4
per
cent
but
went
into
recession
in
the
year
2009
due
to
world
financial
crises,
which
resulted
in
tightening
credit
conditions
and
failure
of
the
government
to
address
growing
fiscal
deficit.
As
a
result
of
which
by
2013
the
Greek
economy
had
contracted
by
26%
compared
to
2007.
(Theodora.com,
2015).
To
understand
the
full
extent
of
the
crises
i
will
explore
the
economic
history
of
Greece
in
order
to
understand
what
led
to
the
situation
that
Greece
has
found
itself
in.

9. Greece
Debt
Crises:
Build
up
to
the
Bust
9
2.
EU
to
Euro
–
20
years
The
European
Union
(EU)
emerged
from
the
postwar
initiatives
at
reconciliation
and
partnership
in
Western
Europe.
The
founding
moment
for
the
EU
was
the
Schuman
Declaration.
In
a
speech
on
9th
May
1950,
the
then
Foreign
minister
of
France,
Robert
Schuman
gave
out
the
objectives
for
the
European
Union:
• All
the
member
states
of
the
European
Union
will
never
go
to
war.
• Promoting
World
Peace
• Unify
Europe
through
a
step-­‐by
step,
including
eastern
Europe-­‐
much
of
which
was
under
Communist
control
at
the
time
• Creating
an
international
anti-­‐cartel
agency
• Creation
of
a
single
market
community
within
the
European
Union
for
the
free
flow
of
goods
and
services
(Manolopoulos,
2011)
Greece
was
the
10th
country
to
join
the
EU
in
1981.
The
period
from
the
1973
to
1995
saw
poor
economic
performance
with
the
GDP
growth
in
Greece
slowing
down
to
only
on
average
about
1.5
percent.
The
poor
performance
was
mainly
attributed
to
deteriorating
economic
conditions
in
the
period
starting
1973.
From
the
mid
1970’s
the
Greek’s
ran
large
budget
deficits
and
a
loose
monetary
policy,
which
resulted
in
a
sharp
acceleration
in
inflation,
and
the
high
rates
of
wage
inflation
squeezed
profit
margins
and
weakened
investment
incentives.
From
1953
to
1973,
the
Greek
economy
enjoyed
a
period
of
high
growth
and
low
inflation,
followed
by
the
period
from
1973-­‐1993,
where
the
economy
witnessed
stagnation
and
persistent
and
high
inflation.
(Bosworth
and
Kollintzas,
2001)
Amongst
various
reasons
cited
by
scholars,
the
most
important
reasons
for
the
poor
economic
performance
in
Greece
were
believed
to
be
the
lifting
of
industrial
protection
following
the
EU
membership
and
the
political
cycle
effect
of
a
socialist
party
(PASOK)
taking
over
from
the
conservative
party
in
1981.

10. Greece
Debt
Crises:
Build
up
to
the
Bust
10
Figure
1
GDP
Growth
from
1981-­‐2000
(Greece
GDP,
2015)
The
macroeconomic
environment
totally
collapsed
in
the
Greece
during
the
later
half
of
1970’s
and
remained
like
that
in
the
1980’s.
The
Greek
government
budget
deficits
went
from
an
average
surplus
of
one
percent
of
the
GDP
in
1960’s
to
an
average
of
9
percent
in
the
1980’s
and
peaked
at
16
percent
in
the
1990.
(Bosworth
and
Kollintzas,
2001)
Chart
1
Budget
Deficit
as
%
of
GDP
(Source:
Bloomberg)
-­‐16
-­‐14
-­‐12
-­‐10
-­‐8
-­‐6
-­‐4
-­‐2
0
Budget
DeKicit
%
of
GDP
Budget
DeOicit
%
of
GDP

11. Greece
Debt
Crises:
Build
up
to
the
Bust
11
The
late
1970’s
and
1980’s
also
saw
the
emergence
of
strong
cost
pressures
from
labor
market
as
their
bargaining
power
increased,
and
combined
with
control
on
many
prices,
led
to
the
real
wages
being
raised
well
above
the
productivity
and
depressed
margins
severely.
The
return
on
equity
in
Greek
manufacturing
sector
fell
from
an
average
of
6
percent
during
the
period
1976-­‐80
to
-­‐6.8
percent
during
the
period
1982-­‐86.
(Bosworth
and
Kollintzas,
2001)
The
fiscal
position
of
Greece
also
deteriorated
significantly
during
this
period,
the
budget
deficit
relative
to
GDP
reached
extremely
high
levels
for
an
OECD
member
country,
with
the
public
deficit
rising
from
27
percent
of
GDP
in
1979
to
111.6
percent
of
GDP
in
1993.
This
coincided
with
a
weak
Drachma,
which
lost
about
83
per
cent
of
its
value
during
this
15-­‐year
period
(Bank
of
Greece,
2001)
Figure
2
Greece
Government
Debt
to
GDP
1990-­‐2015
(Greece
Debt
to
GDP,
2015)
In
order
to
tackle
high
inflation
the
Bank
of
Greece
started
using
exchange
rate
as
a
nominal
anchor
and
by
1995
the
exchange
rate
was
explicitly
adopted
as
an
intermediate
target
parallel
to
a
monitoring
range
for
the
rate
of
growth
of
broad
money
(M3).

12. Greece
Debt
Crises:
Build
up
to
the
Bust
12
Figure
3
Inflation
Rate
1981-­‐2015
(Inflation
Rate,
2015)
It
is
important
to
look
at
the
economic
growth
and
policy
reform
initiated
during
this
period
to
understand
how
Greece
was
placed
before
the
entered
they
Euro
and
what
structural
reforms
they
initiated
and
the
road
blocks
to
them
which
caused
the
eventual
debt
crises.
For
this
sole
purpose
lets
breakdown
1980-­‐2000
into
periods
to
get
a
snapshot
of
the
situation.
2.1
1980-­‐1985:
Macroeconomic
Imbalances
and
Stagflationary
Trends
The
Greek’s
adopted
an
accommodative
macroeconomic
policy
during
this
period,
to
fuel
the
growth
of
GDP.
Despite
the
accommodative
macroeconomic
policies,
the
only
impact
it
had
was
on
inflation,
as
real
GDP
fell
during
1981
and
inflation
rose
by
25
per
cent
in
both
1980
and
1981.
(Bank
of
Greece,
2001)
From
the
period
of
1981
to
1984
the
government
followed
accommodative
macroeconomic
policies
without
any
policy
reforms
towards
tackling
inflation.
Such
high
levels
of
inflation
not
only
make
the
money
less
valuable
but
also
cause
the
currency
to
depreciate
causing
the
imports
to
be
more
expensive.
This
would
mean
the
Greek’s
would
had
to
pay
more
for
the

13. Greece
Debt
Crises:
Build
up
to
the
Bust
13
goods
that
they
imported
and
with
the
oil
price
crises
along
the
same
time
reflected
in
a
higher
cost
for
the
economy.
The
period
also
saw
the
rise
in
general
government
consumption,
primarily
being
pension
expenditures
and
deficits
of
pension
funds
on
the
rise,
coupled
with
inadequate
funding.
To
compensate
partially
for
the
large
financing
needs
of
the
public
sector,
the
Bank
of
Greece
restrained
credit
expansion
to
private
sector
by
implementing
complex
credit
allocation
systems.
Thus,
the
private
sector
was
increasingly
crowded
out
of
the
economic
activity.
(Bank
of
Greece,
2001)
Theoretically
crowding
out
of
the
private
sector
hurts
not
only
the
efficient
allocation
of
the
resources
and
employment
opportunities
but
also
impacts
GDP
growth.
Several
other
factors
also
impacted
the
growth
of
GDP
during
this
period:
• According
to
a
1993
study
undertaken
at
the
OECD,
“lack
of
transparency
of
the
bureaucracy,
coupled
with
a
lack
of
clear
rules,
exacerbated
uncertainty”
leading
to
low
FDI
in
Greece
during
the
1980’s.
FDI
contribute
the
growth
in
the
any
economy.
• The
underdeveloped
state
of
Greece’s
infrastructure
raised
both
the
cost
of
business
transaction
as
well
as
hindered
private
investment.
• Public
sector
was
heavily
subsidized
and
not
well
managed.
• Regulations
were
introduced
which
were
aimed
at
raising
the
purchasing
power
of
workers
and
protecting
them
from
dismissal
leading
to
labor
market
rigidities.
This
explains
why
the
strong
bargaining
power
of
unions
in
Greece
and
the
low
productivity. (Bank of Greece, 2001)
Greece’s
economic
performance
further
deteriorated
in
1985.
The
lax
fiscal
stance
was
coupled
with
sharp
expansion
in
domestic
credit
and
the
money
supply.
As
a
result
the
current
account
deficit
increased
from
an
annual
average
of
4
percent
of
GDP
in
the
second
half
of
the
1970’s
to
8
percent
of
GDP
in
1985
and
the
ratio
of
external
government
debt
to
GDP
rose
from
4.5
percent
in
the
late
1970’s
to
18
percent
in
1985.
(Bank
of
Greece,
2001)

14. Greece
Debt
Crises:
Build
up
to
the
Bust
14
2.2
1986-­‐1987
Stabilization
Program
Looking
at
the
deteriorating
condition
of
Greek
economy
the
government
launched
the
stabilization
program
with
following
being
the
measure:
• Drachma
was
devalued
by
15
percent
• Introduced
the
temporary
advance
deposit
for
a
wide
range
of
imports
• Wage
price
index
mechanism
was
modified
to
reflect
projected
inflation
as
opposed
to
past
rate
of
inflation
• Public
sector
borrowing
relative
to
the
GDP
was
to
be
reduced
by
4
percentage
point
• Tighter
monetary
policy
established
through
a
reduction
in
the
growth
of
domestic
credit
and
gradual
establishment
of
positive
real
interest
rates
for
all
borrowers (Bank of Greece, 2001)
This
was
primarily
to
reduce
the
high
inflation
rate
in
the
economy
at
the
same
time
making
sure
that
the
Balance
of
Payment
account
doesn’t
run
too
much
into
deficit
as
weak
currency
only
increases
the
cost
of
imports.
Yet
nothing
could
have
been
done
about
the
capital
inflow
because
according
to
the
Impossible
Trinity,
only
two
of
three
objectives
i.e.
exchange
rate
management,
inflation
and
capital
controls
can
be
managed.
The
strategy
of
these
objectives
was
centered
on
the
firms
income
policy,
which
was
aimed
at
reducing
the
labor
cost
per
unit
of
output
and
maintain
competiveness.
The
European
Communities
with
an
ECU
1.75
billion
loan,
phased
in
two
years,
supported
the
stabilization
package.
(Bank
of
Greece,
2001)
The
program
was
a
success
as
it
led
to
the
following
results:
• During
1986
and
1987,
the
real
wages
fell
and
the
business
profitability
rose
for
the
first
time.
• Public
sector
borrowing
relative
to
GDP
declined
from
18
percent
in
1985
to
13
percent
in
1987.
• The
current
account
deficit
declined
to
2
percent
in
1987
from
8
percent
of
GDP
in
1985

15. Greece
Debt
Crises:
Build
up
to
the
Bust
15
Given
the
tight
fiscal
and
monetary
conditions
to
reduce
inflation,
the
inflation
rate
reduced
from
20
percent
in
1985
to
16
percent
in
1987.
But
as
we
know
that
there
is
a
direct
relationship
between
inflation
and
growth,
the
real
GDP
growth
was
0.5
percent
in
1986
and
fell
by
2.3
percent
in
1987
due
to
restraints
in
domestic
demand.
In
other
words,
as
the
supply
of
money
reduced
in
the
economy
by
4
percent,
it
had
an
impact
on
wages
that
in
turn
impacted
the
consumption
in
the
economy.
2.3
1988
-­‐
1995
–
Internal
and
External
Imbalances
Some
of
the
benefits
of
the
stabilization
package
could
be
seen
in
1988
and
1989
with
improvement
in
economic
conditions,
falling
inflation,
increase
in
export
growth,
falling
current
account
deficit
but
it
was
all
short-­‐lived.
Also
prolonged
electoral
uncertainty
associated
with
weak
coalition
government
eroded
confidence
in
Greece
and
further
easing
of
macroeconomic
policies
lead
to
loss
of
growth
momentum.
Inflation
was
again
hovering
around
the
15
percent
mark
and
the
public
sector
borrowing
exceeded
18
percent
of
GDP
in
1989.
At
the
same
time,
the
government
debt
increased
to
about
70
percent
of
GDP,
which
imposed
a
heavy
burden
on
the
economy. (Bank of Greece, 2001)
At
the
end
of
1990,
the
Greek
government
announced
another
adjustment
program
from
1991-­‐93,
with
optimistic
targets,
notably
being
reduction
in
inflation
to
8
percent
and
public
sector
borrowing
to
3
percent
of
the
GDP.
The
European
Communities
agreed
to
support
this
program
with
a
balance
of
payment
loan
of
ECU
2.2
billion
over
the
3
years.
(Bank
of
Greece,
2001)
During
this
period
Greece
again
experienced
weak
economic
growth,
the
rise
in
the
debt
ratio
for
the
general
government
from
80
percent
of
nominal
GDP
in
1990
to
about
110
percent
of
GDP
in
1993.
There
was
a
fall
in
inflation
but
that
was
primarily
due
to
a
weak
domestic
demand.
In
1992,
the
Maastricht
Treaty
was
signed
which
came
into
effect
on
1st
November
1993,
and
provided
a
list
of
criteria’s
that
needed
to
be
fulfilled
for
any
country
to
join
the
Euro
area.
Yet,
at
the
beginning
of
the
Stage
2
of
Economic
and
Monetary
Union
(EMU)
in
Jan
1994,

16. Greece
Debt
Crises:
Build
up
to
the
Bust
16
Greece
found
itself
in
serious
divergence
from
the
criteria’s
of
the
Maastricht
Treaty
particularly
with
regard
to
Public
finances
and
inflation. (Bank of Greece, 2001)
2.4
The
Maastricht
Treaty
The
Maastricht
treaty
defined
the
conditions
for
entry
at
least
formally.
The
economic
rationale
for
EMU
was
that,
by
ruling
out
competitive
devaluations,
a
major
source
of
economic
instability,
forces
the
countries
to
reform
their
labor
markets
and
open
up
the
economies
to
greater
competition.
The
Maastricht
treaty
set
5
rules
of
convergence
that
every
member
had
to
comply
by:
• The
budget
deficit
must
be
kept
below
3
percent
of
GDP
• Total
public
debt
has
to
be
less
than
60
percent
of
GDP
• Inflation
rate
in
any
country
should
be
within
1.5
percent
of
the
three
EU
countries
with
the
lowest
inflation
• Long
term
interest
rates
in
any
country
must
be
within
2
percent
of
the
three
countries
with
the
lowest
long
term
interest
rates
• Exchange
rates
of
any
country
must
be
kept
within
the
normal
fluctuations
margins
of
Europe’s
Exchange
Rate
Mechanism. (Manolopoulos, 2011)
Greece
did
not
meet
these
criteria’s
and
had
set
themselves
the
target
of
achieving
the
necessary
convergence
by
1997.
The
adoption
of
a
common
currency
and
the
common
monetary
policy
was
seen
by
the
Greeks
as
a
means
to
end
the
long
national
mismanagement
of
the
monetary
and
fiscal
policy.
The
Greek’s
didn’t
want
to
be
left
behind,
in
a
second-­‐class
group
of
countries.
(Herz
and
Kotios,
2000).
Acoording
to
Mundell
(1961)
“Optimal
Currency
Area”
,
the
closer
a
country
is
to
the
common
currency,
following
are
the
benefits
:
• larger
is
the
bilateral
trade
with
other
members
of
the
currency
area
relative
to
its
total
trade
• The
external
shocks
that
hit
the
country
and
the
currency
area
are
similar

17. Greece
Debt
Crises:
Build
up
to
the
Bust
17
• Labor
mobility
is
higher
between
the
country
and
the
rest
of
the
countries
in
the
currency
area
• Effective
fiscal
redistribution
mechanism
across
the
country
and
the
rest
of
the
countries
in
currency
area
in
response
to
an
asymmetric
shock. (Hardouvelis, 2007)
The
problem
with
being
in
a
common
currency
area
is
that
you
lose
monetary
independence.
For
example
if
the
domestic
investment
is
to
drop
because
of
the
pessimistic
enterprenuerial
expectations,
the
domestic
monetary
authority
cannot
reduce
the
interest
rates.
Also
if
the
consumers
go
on
a
borrowing
spree,
driving
up
the
aggregate
demand
resulting
in
the
economy
overheating,
the
monetary
authorities
can
only
use
regulatory
tools
to
contain
the
excitement,
but
not
the
interest
rate.
After
having
failed
to
converge,
due
to
the
criteria’s
listed
above
in
1998,
Greeks
in
another
attempt
to
converge
with
the
criteria
requested
for
a
re-­‐examination
in
2000.
After
carefully
monitoring
the
then
situation
in
Greece,
the
ECB
made
the
following
observations
:
• Average
Inflation
in
Greece
was
in
the
year
2000
was
2%
which
lower
than
the
reference
value.
• The
government
deficit
had
fallen
to
1.6
percent
of
GDP
which
was
below
the
reference
value
of
3
percent.
The
government
debt
ratio
was
104.4%,
which
was
still
higher
than
reference
point
of
60%,
although
it
had
reduced
by
6.9%
since
1996.
• Greece
had
participated
in
the
Exchange
Rate
Mechanism
for
atleast
2
years
without
any
severe
tensions.
The
Drachma
was
revalued
by
3.5%
in
Jan
2000.
• Greece’s
nominal
long
term
interest
rate
was
6.4%
,
which
was
below
the
reference
value.
(Banque
de
France,
2001)
It
was
important
to
look
at
the
economic
build
up
to
joining
the
Euro
for
Greece,
as
it
clear
enough
that
the
Greek
economy
couldn’t
have
suddenly
improved
on
the
criteria’s
in
two
years.
There
was
huge
debate
about
whether
Greece
had
fiddled
around
with
the
figures
to
be
able
to
join
the
EMU.
The
true
nature
of
the
Greek
government’s
structural
deficit
did
not
become
clear
until
after
the
elections
in
2009,
when
the
incoming
PASOK
announced
that
the

18. Greece
Debt
Crises:
Build
up
to
the
Bust
18
government
deficit
was
not
around
6%
of
the
GDP
but
around
12%
of
the
GDP.
This
market
the
beginning
of
the
current
crises.
(Manolopoulos,
2011)
(Willis,
2009)
Greece
in
a
bid
to
join
the
EMU
hid
a
part
of
its
debt
with
a
help
of
bankers
like
Goldman
Sachs
and
Societe
General.
Goldman
took
the
debt
issued
by
Greece
in
dollars
and
yen
and
swapped
it
for
Euro
at
historical
exchange
rate,
which
made
the
debt
looker
smaller
than
it
actually
was.
The
swaps
made
2%
or
Euro
2.37
billion
of
the
Greece
debt
disappear
from
its
national
accounts.
(The
Independent,
2015).
Although
this
swap
backfired
on
Greece
a
few
years
later.
After
the
9/11
attack,
bond
yields
plunged,
and
due
to
the
formula
used
by
Goldman
to
calculate
the
debt
repayments,
resulted
in
a
huge
loss
for
Greece.
By
2005,
Greece
ended
up
owing
almost
double
of
what
it
had
put
into
the
deal,
with
the
off
book
debt
rising
to
5.1
billion
euros
from
2.8
billion
euros.
As
a
result
the
deal
was
restructured
and
5.1
billion
euros
in
debt
was
locked
in. (Truthdig,
2015)

19. Greece
Debt
Crises:
Build
up
to
the
Bust
19
In
other
practices
adopted
by
the
Greeks,
they
took
the
loss
making
railways
out
of
the
national
accounts,
by
the
way
of
government
buying
shares
issued
by
the
railways,
so
that
it
shows
on
the
books
as
an
asset
instead
of
an
expenditure.
(BBC
News,
2012)
So
clearly,
Greece
meeting
the
conditions
of
the
Stability
and
Growth
Pact
was
as
a
result
of
falsification
of
accounts.
As
they
managed
to
do
that,
they
had
the
same
credit
risk
as
Germany
and
so
they
kept
borrowing
even
more,
leading
to
the
current
debt
crises.
They
could
borrow
at
extremely
low
interest
rates
and
with
a
lot
of
ease
and
none
of
it
was
spent
of
development
of
infrastructure
or
to
fuel
supply
side
growth.
The
money
helped
the
politicians
offering
jobs
in
the
overinflated
public
sector
in
return
for
votes
and
increasing
the
ever
inefficient
pension
system.
Before
the
dwell
into
the
period
of
2000
to
now,
we
need
to
look
briefly
at
the
reforms
initiated
and
possible
improvements.
There
were
some
reforms
that
contributed
to
the
growth
:
• Financial
market
liberalisation,
that
started
in
the
beginning
of
1990’s,
led
to
the
increase
in
the
private
credit
between
2000
and
2009
• Improvement
in
product
markets
regulation,
which
did
reduce
but
was
still
high
as
compared
to
other
OECD
countries
• The
fiscal
stimulus
and
the
associaied
improvement
in
certain
infrastructure
created
by
the
2004
Olympic
Games
• Influx
of
funds
from
European
Union,
which
contributed
to
the
improvement
in
infrastructure
facilities. (Mētsopoulos and Pelagidēs, 2011)
Yet
Greece
did
retain
certain
severe
weaknesses
that
undermined
its
growth.
These
included
low
domestic
supply
of
goods
and
services,
as
the
expansion
of
private
credit
and
fund
from
EU,
increased
the
domestic
demand,
but
the
demand
was
met
by
competitive
and
available
imported
goods,
Unattractive
business
environment,
which
was
the
reason
for
low
FDI
into
the
economy,
still
highly
regulated
product
market,
excessive
government
intervention,
high
levels
of
corruption
and
use
of
command
and
control
as
a
mechanism
for
hindrance
to

20. Greece
Debt
Crises:
Build
up
to
the
Bust
20
entrepreneurial
activity.
As
we
will
explore
more
in
detail
later
in
the
paper,
Greece
has
the
potential
to
gain
most
from
rectifying
these
proven
deficiencies.

21. Greece
Debt
Crises:
Build
up
to
the
Bust
21
3.
Euro
–
2000
to
2008
Greece
joined
the
EU
in
2002
and
outgrew
most
other
European
countries
and
even
the
US
during
this
period.
The
once
the
crises
unfolded
it
turned
out
the
most
of
that
growth
in
Greece
was
as
a
result
of
government
and
consumer
spending
resulting
from
easy
and
low
interest
credit.
It
was
clear
from
the
debt
crises
that
the
Greek
had
a
flawed
economic
model.
The
Chronic
overconsumption
in
the
public
sector
spilled
over
to
the
private
sector,
exposing
the
major
structural
gaps
in
the
economy
in
terms
of
competitiveness
and
productivity.
The
large
public
and
private
sector
spending
between
2000
and
2008
(97%
of
the
cumlative
GDP
growth
was
driven
by
consumption)
created
a
deteriorating
trade
balance,
as
the
demand
could
not
be
met
by
foreign
and
domestic
investment.
As
a
result
of
this,
Greece’s
debt
burden
was
phenomenally
high
(214%
of
GDP
in
2008)
with
public
debt
(111%
of
GDP)
and
consumer
lending
(15%
of
GDP)
the
highest
in
Europe,
which
was
again
due
to
the
fact
that
since
joining
the
EU,
Greek’s
had
easier
access
to
funds
both
internally
(due
to
maintaining
low
interest
rates
in
line
with
the
rest
of
the
countries
in
EU)
and
the
externally
because
of
enjoying
credit
ratings
similar
to
Germany.
(Mckinsey
&
Company,
2012)

22. Greece
Debt
Crises:
Build
up
to
the
Bust
22
Figure
4
Greece
consumption
and
investment
versus
Eurozone
(Mckinsey
&
Company,
2012)
As
you
can
see
from
the
figure
above
Greece
as
compared
to
peer
had
high
consumption,
which
resulted
in
an
increase
in
the
GDP,
whereas
the
investment
was
the
lowest
and
negative
growth
in
exports.

23. Greece
Debt
Crises:
Build
up
to
the
Bust
23
Figure
5
Greece
debt
burden
and
consumer
lending
before
the
crisis
compared
to
Eurozone
(Mckinsey
&
Company,
2012)
As
you
can
see
from
the
figure
6
the
total
country
debt
for
Greece
was
214
per
cent
in
2008,
the
public
debt
was
at
111
per
cent
of
GDP,
Private
debt
was
at
104
per
cent
of
GDP
and
Consumer
lending
was
at
15
per
cent
of
the
GDP,
which
explains
the
growth
in
GDP.
Despite
being
in
the
European
Union
since
1981,
and
Euro
since
2002,
Greece
had
never
managed
to
managed
reap
economic
benefit
from
the
membership.
The
exports
never
managed
to
pay
for
the
imports.
Private
consumption
in
Greece
was
very
high-­‐
almost
20%
of
the
GDP
higher
than
the
most
of
the
European
countries
(Mckinsey
&
Company,
2012).
Even
export
oriented
sectors
like
tourism
had
mainly
demand
from
Greek
consumers.
Over
the
same
period,
Greece’s
real
GDP
had
an
average
annual
growth
rate
of
4.2%,
against
the
1.9%
average
annual
growth
rate
in
GDP
in
the
euro.
(Athanassiou,
2009)
Although
the
growth
was
higher
than
the
euro
zone
average,
the
domestic
investments
and
a
high
level
of
domestic

24. Greece
Debt
Crises:
Build
up
to
the
Bust
24
demand,
which
was
inflated
by
ample
available
credit
and
an
overleveraged
public
sector,
fueled
Greek
growth.
The
government
spending
during
the
period
had
to
increase
by
6.5%
(2000-­‐2009)
to
keep
up
with
the
accruing
expenses,
mainly
in
the
form
of
increase
in
public
employee
salaries
and
pensions.
Over
the
same
period,
the
government
income
reduced
by
5
percentage
point
of
the
GDP,
as
the
majority
portion
of
the
revenue
due
form
sales
tax
was
vulnerable
to
evasion
and
difficult
to
audit.
(Mckinsey
&
Company,
2012).
Figure
6
Breakup
of
Public
Expenditure
(Mckinsey
&
Company,
2012).
Figure
6
presents
the
breakup
of
Public
expenditure
incurred
during
the
period
2000-­‐2009.
We
can
clearly
see
that
most
of
the
expenditure
was
allocated
towards
social
benefits,
instead
of
supply
side
reforms.

25. Greece
Debt
Crises:
Build
up
to
the
Bust
25
3.1
Greek
Looting
–
Scandals
To
understand
how
the
poor
regulatory
and
judicial
framework
was
exploited
by
the
politicians
and
corporates
we
look
at
some
of
the
scandals
during
this
period.
3.1.1 Greek Olympics
The
final
cost
of
the
Olympic
games
for
the
Greece
was
almost
3
times
of
what
was
initially
estimated,
which
was
at
9
billion
euros.
It
was
regarded
as
one
of
the
most
expensive
Olympic
Games
ever
held,
and
looked
as
one
of
the
least
successful
in
creating
benefits
for
the
host
country. (Manolopoulos, 2011)
Within
days
of
the
closing
ceremony,
the
2004
deficit
numbers
came
in
at
6.1
per
cent
of
GDP,
which
was
more
than
double
the
euro-­‐zone
limit,
while
debt
to
GDP
was
at
110
per
cent.
As
a
result
of
which
Greece
was
the
first
country
in
the
Euro
Zone
to
be
placed
under
fiscal
monitoring
by
European
Commission
2005.
(Malkoutzis,
2012)
Although
for
any
country
building
of
infrastructure
is
also
a
useful
expense
as
it
can
be
utilised
later,
but
in
case
of
Greece
the
overpriced
infrastructure
has
been
underutilised
ever
since
and
also
shows
the
inefficiency
of
the
governments
to
capitalise
on
the
opportunity.
3.1.2 J P Morgan Bond Scandal
In
2007,
it
was
brought
to
light
that
four
Greek
pension
funds
had
significantly
overpaid
for
the
280
million
euro
Greek
government
bonds.
JP
Morgan
initially
sold
the
bonds
at
92.95
cents
on
the
euro
to
North
Asset
Management,
London.
On
the
other
hand,
it
bought
the
bonds
from
the
Greece
at
100
cents
on
the
euro,
and
the
bank
and
the
government
entered
into
a
swap
transaction,
to
exchange
fixed
rate
payments
for
those
based
on
floating
rates.
The
very
same
day,
it
bought
the
bonds;
North
Asset
sold
them
to
Hypo
Vereinsbank,
part
of
UniCredit,
for
99.9
cents,
which
sold
them
to
Athens
brokerage
Acropolis
Axepey
at
99.95
cents,
who
then
sold
it
to
the
pension
funds
at
100
cents
on
euro.
(Manolopoulos,
2011)
3.1.3 Siemens Scandal

26. Greece
Debt
Crises:
Build
up
to
the
Bust
26
The
investigation
by
Greek
authorities
in
2007-­‐2011
revealed
that
the
Siemens
officials
bribed
government
officials
during
1997-­‐2002
to
get
telecoms
as
well
as
during
2004
Olympics
to
get
security
contracts.
Investigations
into
the
Siemens
scandal
also
found
that
the
company
had
an
annual
slush
of
some
15
million
euros,
just
to
pay
for
commissions
for
securing
contracts.
To
secure
that
500
million
euro
OTE
(Greek
national
telecom)
contract,
Siemens
made
a
payment
of
35
million
euros
in
miza
in
the
late
1990’s.
Also
it
is
believed
that
it
is
only
due
to
the
bribes
that
the
Greek
state
ended
up
paying
57
million
euros
more
for
the
telecom
equipment.
(Manolopoulos,
2011)
3.1.4 The EOT: Greek Tourist Organization
The
EOT
has
a
long
history
of
waste,
corruption
and
scandals.
According
to
prosecutor
in
Athens,
the
EOT
had
been
accused
of
misappropriation
to
the
tune
of
more
than
70
million
euros
in
funding
destined
for
tourism
promotion
campaigns
in
2008
and
2009.
Also
in
one
of
the
audits
it
emerged
that
20,000
community
holidays
–
holidays
given
to
people
who
can’t
afford
it-­‐
worth
about
1.8
million
euros
were
given
to
people
who
did
not
fit
the
criteria.
(Manolopoulos,
2011)
3.1.5 800,000 House without Planning Permission
In
one
such
case
that
reached
the
court
in
August
2010,
it
was
discovered
that
some
157
illegal
properties
were
built
in
the
Cycladic
islands,
with
bribes
to
the
tune
of
15000-­‐20000
euros
paid
officials
(Manolopoulos,
2011)
3.1.6 Other Scandals
Other
scandals
include
the
secretary
general
and
the
special
secretary
having
64
phone
lines
between
them,
with
a
phone
bill
for
the
period
2006-­‐08
amounting
to
20
million
euros,
Macedonian
Protein
owned
by
three
offshore
companies
with
a
turnover
of
250,000
euros
and
zero
employees
getting
a
development
grant
of
8.5
million
euros
under
Development
Law

27. Greece
Debt
Crises:
Build
up
to
the
Bust
27
3299/04.
(Manolopoulos,
2011)
There
are
countless
more
scandals
throughout
this
period
due
to
the
availability
of
ample
credit
at
extremely
low
interest
rates
3.2
Problems
of
Greek
Economy
3.2.1 Enviroment for Investment and Scaling of Business
The
Backbone
of
the
Greek
economy
is
mostly
the
small
and
micro
enterprises.
For
eg
30%
of
the
manufacturing
employment
in
Greece
is
in
firms
which
have
less
than
10
employees.
As
you
can
see
in
the
figure
below
the
same
figure
stands
at
5%
in
Germany
and
11%
in
Netherlands.
Figure
7
Breakup
of
total
manufacturing
workforce
(Mckinsey
&
Company,
2012)

28. Greece
Debt
Crises:
Build
up
to
the
Bust
28
Also
according
to
the
OECD
regulation
database,
the
World
Economic
Forum
competitiveness
survey,
the
World
Bank
Doing
Business
reports
and
estimates
of
the
European
Commission
(2006),
the
administration
burden
is
high,
excessive
regulation
in
the
product
market,
high
intervention
by
the
government
which
is
a
hurdle
to
competition
as
well
as
the
efficient
allocation
of
resources
and
pricing
decision
in
important
industries
and
high
regulation
for
professional
services
firms
as
far
as
entry
and
pricing
is
concerned.
(Mētsopoulos
and
Pelagidēs,
2011).
Apart
from
the
above
Greece
also
has
a
rigid
labor
market
and
tax
laws
that
hinder
investment.
3.2.2 Public Sector: Overinflated and Inefficient
The
Greek
public
sector
is
clearly
large
and
highly
inefficient,
as
compared
to
the
other
countries
in
the
euro
zone.
The
public
sector
has
also
been
used
as
a
tool
to
win
political
mileage.
This
has
been
a
major
point
of
debate
even
during
the
bailout
packages
offered.
To
give
a
snap
shot
for
a
country
of
10
million
people,
there
were
768,009
civil
servants
according
to
a
census
conducted
in
July
2010.
According
to
a
story
covered
by
Kerin
Hope
of
the
Financial
Times,
a
Greek
public
sector
rarely
complains
of
workload.
Amongst
a
few
interviews
that
he
conducted,
a
officer
in
her
40’s
working
at
the
office
that
records
VAT
payments,
said
that
“If
a
family
member
falls
sick,
she
stays
at
home.
She
doesn’t
feel
bad
because
there
are
plenty
of
people
to
cover
for
her.
Nobody
there
has
too
much
to
do”.
(Manolopoulos,
2011)
Also
according
to
Athens
News
columnist
Mark
Dragoumis,
“if
those
employed
in
Greece’s
public
administration
were
paid
the
market
price
for
the
services
they
actually
offered,
their
cost
to
the
budget
would
be
27
percent
lower
than
it
is
today.
So
Greek
taxpayers
overpay
in
return
for
lousy
service.” (Manolopoulos, 2011)
So
huger
amount
of
money
is
being
spent
on
the
public
sector
where
the
productivity
is
extremely
low.
This
is
again
an
economic
failure
as
there
isn’t
efficient
utilization
of
resources

29. Greece
Debt
Crises:
Build
up
to
the
Bust
29
A
report
by
a
leading
economist
in
2010
noted
that
“
Employees
in
Greece
could
retire
at
58
will
full
pension,
provided
that
they
had
completed
37
years
of
work.
The
retirement
age
was
lower
than
the
OECD
average
of
63.2
years.
Also
the
average
pension
was
higher
than
the
OECD
average,
it
was
95.7
percent
of
an
employee’s
average
lifetime
earning
as
compared
to
the
OECD
average
of
60.8
percent”.
Also
if
the
Greece
pension
system
were
left
unreformed,
it
would
create
an
additional
deficit
of
12.5
percent
of
the
GDP
by
2050.
(Manolopoulos,
2011)
Figure
8
Benchmarking
the
Greek
public
sector
(Mckinsey
&
Company,
2012)
Figure
8
clearly
states
that
the
public
sector
employment
as
a
percentage
of
total
employment
was
highest
in
Greece,
at
22.3
per
cent
with
the
public
sector
having
a
CAGR
of
8.6
for
the
period
2000-­‐2008.

30. Greece
Debt
Crises:
Build
up
to
the
Bust
30
Figure
9
Public
Sector
comparison
with
Eurozone
(Mckinsey
&
Company,
2012)
As
you
can
see
from
the
figure
above,
Greece
has
the
lowest
quality
outcome
amongst
the
other
countries
in
the
EU.
The
only
countries
that
even
remotely
to
Greece
are
also
the
countries
that
are
in
trouble,
like
Spain,
Italy,
Portugal
and
Ireland.
3.2.3 Rigid and narrow use of Human Resources
Greece
has
still
not
capitalised
its
human
resources
and
labor
force
potential.
Although
there
have
been
reforms
have
been
introduced
but
still
due
to
high
legal
requirement
and
inflexibility
associated
with
collective
labor
agreements,
employers
are
still
hesitant
in
hiring
more
workers.
After
Greece
joined
the
EU,
the
average
per
capita
GDP
and
average
family
earnings
converged
towards
the
European
average.
The
percentage
of
people
employed
started
to
rise
for
the
first
time
in
2000
after
decades,
as
Greece
in
the
past
had
high
unemployment
rates,
although
the
rate
was
slower
than
the
rate
of
growth
of
GDP.

31. Greece
Debt
Crises:
Build
up
to
the
Bust
31
Table
1
Harmonized
unemployment
rates,
Eurostat
2008
Greece
Eurozone
US
Males
under
25
years
17
15.3
14.4
Females
under
25
years
28.9
15.5
11.2
Total
population,
15-­‐65
years
7.7
7.5
5.8
(Mētsopoulos
and
Pelagidēs,
2011)
The
failure
of
the
labor
market
to
create
new
jobs
for
those
entering
the
labor
market
for
the
first
time,
which
seems
to
showcase
the
lack
of
dynamism
of
the
supply
side
of
the
economy,
which
results
from
excessive
regulation
and
administrative
burden.
Also
an
economy
that
is
not
able
to
expand
its
production
base
will
not
be
able
to
offer
jobs
to
the
young
who
are
ready
to
join
the
job
market.
(Mētsopoulos
and
Pelagidēs,
2011)
3.2.4 Legal and Judicial System
Running
business
in
Greece
is
hindered
by
a
cumbersome
legal
system,
which
consists
of
a
large
number
of
laws,
which
are
ambiguous,
obsolete
and
contradictory
with
multiple
overlaps.
The
resulting
complexities
create
inefficient
administration,
excessive
delays,
confusion
and
friction
with
businesses.
(Mckinsey
&
Company,
2012)
3.2.5 Informality
The
informal
sector
in
Greece
is
approximately
about
30
percent
of
the
total
economic
activity.
This
results
into
a
huge
gap
in
tax
receipts:
in
2009,
between
15-­‐20
billion
euros
was
lost
in
personal
,
corporate
and
sales
tax
with
more
than
half
in
forgone
revenue
due
to
tax
evasion.This
is
equal
to
7-­‐9%
of
the
GDP
of
Greece
and
60-­‐80%
of
2010
fiscal
deficit.
(Mckinsey
&
Company,
2012).
Tax
evasion
as
a
habit
is
ingrained
in
the
culture
of
the
Greek’s.
According
to
the
tax
collection
agency
doctors,
lawyers
and
businessmen
had
sent
up
to
euro
million
each
to
Swiss
accounts
while
declaring
only
about
euro
40,000
to
euro
80,0000.
(Manolopoulos,
2011).
The
wealthy
have
been
transferring
money
out
of
Greece
since
the

32. Greece
Debt
Crises:
Build
up
to
the
Bust
32
beginning
of
the
debt
crises
because
of
the
risk
of
bank
runs,
defaults
and
expulsion
from
euro,
which
is
effectively
a
drain
in
the
consumption
cycle.
According
to
Knight
Frank,
in
April
2010
Greek
buyers
compromised
of
6
percent
of
all
property
purchases
above
2
million
pounds
in
UK.
The
Greek
government
desperately
needs
some
convictions
or
heavy
penalties
on
the
high-­‐income
people
so
as
to
make
sure
that
there
is
higher
tax
compliance,
which
only
contribute
to
the
income
of
the
country.

33. Greece
Debt
Crises:
Build
up
to
the
Bust
33
4.
The
Beginning
of
the
Fall
Overreliance
on
the
international
capital
markets
to
fund
budget
and
trade
deficits
left
the
Greek
Government
vulnerable
to
shifts
in
investor
confidence.
If
the
investors
lost
confidence
in
the
ability
of
Greek’s
to
pay
back
there
debt,
they
would
either
not
lend
money
or
charge
high
interest
rates.
As
the
global
financial
crisis
of
2008-­‐2009
caused
global
economic
downturn,
the
public
finances
of
many
advanced
economies,
including
Greece,
started
getting
strained,
as
government
spending
on
programs
such
as
unemployment
benefits
increased
and
tax
revenues
decreased.
Greece’s
public
debt
increase
from
106%
of
GDP
to
126%
of
GDP
in
2009.
Also
at
the
same
time,
as
mentioned
above
as
well,
the
actual
budget
deficit
number
was
revealed
and
finally
revised
upwards
a
number
of
times
to
15.4%
of
GDP.
This
resulted
in
the
investors
becoming
increasingly
nervous
about
the
ability
of
Greek
government
to
payback,
and
staring
asking
for
higher
interest
rates
for
buying
and
holding
Greek
bonds.
As
a
result
of
this
,
it
drove
up
the
borrowing
cost,
exacerbated
its
debt
levels
and
forced
Greece
to
move
towards
default.
(Congressional
Research
Service,
2011)
4.1
Disaster
Management
European
leaders,
the
IMF
and
the
ECB
agreed
that
a
default
by
Greece
could
have
a
contagion
effect
and
would
eventually
lead
to
default
by
other
countries
with
high
level
of
debt
(this
included
Spain,
Portugal,
Italy,
Ireland).
The
contagion
effect
would
be
due
to
the
fact
that
default
by
Greece
would
trigger
a
major
sell
off
by
financial
markets
of
bonds
of
other
European
countries
with
similarly
high
level
of
debts
and
that
European
banks
exposed
to
Greece
debt
and
other
European
countries
would
not
be
able
to
sustain
losses
on
these
investment.
4.1.1 May 2010
The
first
round
of
crises
response
was
financial
assistance
by
other
members
of
the
Euro
and
the
IMF
in
a
bid
to
avoid
triggering
debt
crisis
other
European
countries.
The
European

34. Greece
Debt
Crises:
Build
up
to
the
Bust
34
countries
agreed
to
provide
bilateral
loans
(called
“Greek
Loan
Facility”),
which
was
a
total
of
80
billion
euros
that
would
be
disbursed
over
a
period
of
May
2010
to
June
2013.
The
amount
was
further
reduced
by
2.7
billion
euros
as
Slovakia
backed
out
from
providing
loan
and
at
the
same
time
Ireland
and
Portugal
as
they
asked
for
financial
assistance
too.
Apart
from
the
amount
the
IMF
agreed
to
commit
an
additional
30
billion
euros
under
a
stand-­‐by
arrangement
(SBA).
(European
Commission,
2015)
In
a
bid
to
prevent
the
crisis
to
spread
beyond
Greece,
EU
created
a
temporary
European
mechanism
to
provide
financial
assistance
to
Eurozone
member
states
under
the
pressure
from
market.
The
mechanism
consisted
of
two
three-­‐year
lending
facilities
each
that
could
make
loans
totalling
500
billion
euros.
In
2011,
they
agreed
to
create
a
permanent
lending
facility,
the
European
Stability
Mechanism
(ESM).
(Congressional
Research
Service,
2011)
As
part
of
the
condition
for
the
financial
assistance
the
Greeks,
had
to
follow
austerity
measures.
The
had
set
a
target
of
reducing
the
government
deficit
from
14%
of
the
GDP
in
2010
to
under
3%
by
2014.
This
was
to
be
achieved
through
reduction
in
public
spending
which
was
initiated
by
freezing
civil
service
compensation
and
civil
service
hiring
freeze
as
they
had
an
overinflated
public
sector
and
increase
revenue
which
was
initiated
by
increase
average
Value
Added
Tax
and
tax
on
certain
commodities.
The
ECB
also
during
this
started
buying
European
bonds
in
the
secondary
market
as
a
way
increase
the
confidence
and
lower
bond
spreads.
ECB
bought
between
2010
and
2011
bought
government
bonds
worth
78
billion
euros
and
most
analyst
estimate
that
about
45
billion
euros
worth
of
bonds
amongst
the
total
were
Greek
bonds.
Private
banks
in
Greece
were
also
provided
liquidity
by
ECB,
which
increased
from
47
billion
euros
in
Jan
2010,
to
98
billion
euros
in
May
2011,
which
was
roughly
at
about
40%
of
Greece’s
2011
GDP.
(Congressional
Research
Service,
2011)
In
2011,
it
became
more
the
evident
that
the
Greek
economy
was
contracting
more
severely
at
a
fast
pace
and
hence
there
was
a
need
for
a
second
bailout
package
to
avoid
Greece
from
defaulting
on
its
debt.

35. Greece
Debt
Crises:
Build
up
to
the
Bust
35
4.1.2 March 2012
Considering
the
severity
of
the
situation
the
Euro
zone
member
approved
the
Second
Adjustment
Program
for
Greece,
which
included
the
pending
amount
from
the
first
program
plus
an
additional
130
billion
euros
for
the
years
2012-­‐2014.
Additionally,
private
sector
involvement
(PSI)
to
improve
the
sustainability
of
Greece’s
debt
was
agreed
upon.
As
a
result
there
was
high
participation
in
Greece’s
debt
exchange
offer
in
the
spring
of
2012.
Out
of
the
total
of
205.6
billion
euros
in
bonds
up
for
the
exchange
offer
197
billion
euros
were
exchanged.
(European
Commission,
2015)
As
part
of
the
second
adjustment
program
for
Greece,
it
was
agreed
that
the
fiscal
adjustment
would
involve
reduction
of
Greece’s
debt
to
124%
of
the
GDP.
The
ministers
of
the
Euro
zone
also
agreed
to
the
following
measures:
• Lowering
of
100
basis
points
of
the
interest
on
the
loans
provided
under
the
Greece
Loan
Facility
• Guarantee
fee
on
EFSF
loans
to
be
lowered
by
10
basis
points
• Bilateral
and
EFSF
loan
maturities
extended
by
15
years
and
interest
payments
on
EFSF
loans
deferred
by
10
years
• Commitment
by
the
member
states
to
pass
on
to
Greece’s
segregated
account,
amount
equivalent
to
the
income
on
the
Securities
Market
Programme
(SMP)
portfolio
accruing
to
their
national
central
bank
as
from
budget
year
2013.
(European
Commission,
2015)
4.1.3 Current Scenario
Even
after
the
policy
measures
introduced
there
was
limited
success
towards
recovery,
forcing
the
need
for
another
bailout.
Due
to
lack
of
growth
in
the
Greek
economy
there
was
lack
of
debt
sustainability.
Moreover,
there
was
unrest
in
the
economy
due
to
the
introduction
of
austerity
measures.
The
period
from
Sep
2012
to
July
2015
saw
a
lot
of
protests
against
the
austerity
measures,
referendum,
elections
and
then
agreement
of
harsher
terms
to
be
able
to
save
the
country
from
bankruptcy.
This
period
also

36. Greece
Debt
Crises:
Build
up
to
the
Bust
36
unemployment
peak
at
26.8%,
the
highest
in
EU
(2013),
and
youth
employment
peak
at
almost
60%
(April,
2013).
(BBC
News,
2015).
For
any
economy
to
grow
out
of
recession
and
the
austerity
measures
to
be
a
success,
you
need
to
have
low
unemployment
as
it
has
the
following
effects
on
the
economy:
• It
creates
disposable
income,
which
can
then
be
spent
on
goods
and
services,
contributing
to
GDP.
• It
also
leads
to
higher
tax
revenue
for
the
government.
• The
government
has
to
pay
less
in
unemployment
benefits.
The
Greeks
requested
for
a
third
bailout
package
from
the
EU
as
they
realised
they
will
not
be
able
to
make
future
payments.
The
final
nail
in
the
coffin
came
at
the
point
when
Greece
missed
the
1.6
billion
euro
payment
due
to
the
IMF.
Although
the
Greek
voters
had
refused
the
stricter
bailout
terms
that
were
attached
to
the
third
bailout
package,
but
eventually
started
negotiating
the
new
deal
as
even
the
banks
in
Greece
needed
to
be
capitalised.
4.1.4 The Third Bailout Package
The
third
deal
is
still
in
the
process
of
being
finalised
with
the
lenders
getting
even
tougher
with
the
conditions.
There
has
been
a
loss
of
confidence
in
the
ability
of
Greece
to
pay
back
the
loan
amounts
and
there
have
been
a
lot
of
talks
of
Grexit
(Greece
Exit
from
EU).
We
will
explore
more
on
the
ability
of
Greece
to
pay
back
the
loan
amounts
and
move
towards
a
path
of
growth
in
the
next
section.
Looking
at
the
third
bailout
draft
following
are
the
key
details
of
the
draft:
• A
three-­‐year
bailout
package
for
85
billion
euros
has
been
agreed
so
that
Greece
doesn’t
default
on
its
payments
due
and
secure
its
future
in
the
Euro.
• Primary
surplus
targets
to
be
achieved:
0.25%
GDP
deficit
in
2015,
0.5%
surplus
in
2016,
1.75%
surplus
in
2017
and
3.5%
surplus
in
2018.
• Reduction
in
fiscal
surpluses
for
the
next
three
years
by
11
percent
of
the
GDP

37. Greece
Debt
Crises:
Build
up
to
the
Bust
37
• Recapitalisation
of
the
banking
sector
completed
by
2015,
with
10
billion
euros
being
immediately
available.
• The
deal
will
provide
for
a
35
billion
euro
development
package,
known
as
the
Juncker
package
• Complete
phase
out
the
early
retirement
and
a
gradual
increase
in
the
pension
age
to
67
by
2022
• Review
of
Greek
social
welfare
system
and
deregulation
of
Greece
gas
market
by
2018
• Privatisation
of
ports
of
Piraeus
and
Thessaloniki
• Increase
in
the
tax
on
shipping
(BBC
News,
2015)
Greece
has
relied
on
bailouts
worth
240
billion
euros
from
Eurozone
members
and
the
IMF
since
its
high
debt
concerns
locked
it
out
of
the
bond
market.
To
secure
these
loans,
the
Greek
government
had
to
increase
taxes
and
reduce
spending.
While
the
austerity
measures
did
reduce
budget
overspending,
it
compounded
into
a
deeper
recession
and
pushed
unemployment
to
record
high.
(British
Telecom,
2015)
While
the
money
was
intended
to
help
Greece
in
stabilizing
its
finances
and
reduce
market
fears
about
the
Euro
union
breaking
down,
the
economic
problems
in
Greece
haven’t
gone
away.
The
economy
has
only
shrunk
in
the
last
5
years
and
there
has
been
unemployment
in
excess
of
20%.
The
problem
is
that
the
bailout
money
goes
towards
paying
back
the
huge
debt
that
Greece
owes
to
the
international
creditors,
leaving
very
little
for
any
economic
recovery.
On
top
of
it
being
part
of
the
monetary
union
requires
maintaining
an
inflation
target,
whereas
economic
theory
states
that
when
a
country
moves
from
recession
on
the
path
of
growth,
there
has
to
be
a
certain
tolerance
for
inflation,
as
inflation
is
directly
proportional
to
employment.
While
many
economist
blame
the
austerity
measures
for
the
continuing
economic
problems,
the
international
creditors
like
Germany
blame
the
poor
adherence
to
economic
reforms
required
under
the
bailout
agreement.
The
problem
being
the
size
of
the
inefficient
public
sector,
leads
to
government
expenditure
being
directed

38. Greece
Debt
Crises:
Build
up
to
the
Bust
38
towards
salaries
and
pension
payments,
instead
of
investing
in
infrastructure,
which
can
create
jobs
and
reduce
unemployment.

39. Greece
Debt
Crises:
Build
up
to
the
Bust
39
Figure
10
Greece
Creditors
Out
of
the
total
debt,
Greece
owes
about
200
billion
euros
to
the
Eurozone
bailout
fund
and
other
euro
member
countries,
on
which
no
payment
has
to
be
made
till
2023.
The
IMF
has
proposed
extending
the
grace
period
until
mid-­‐century.
Although
Greece
does
have
to
make
payments
on
the
loans
from
the
IMF
and
the
bonds
held
by
the
European
Central
Bank
which
amount
to
more
than
24
billion
euros
in
the
middle
of
2018.
(Times,
2015)