Greek Sovereign Debt Crisis

Categories: Crisis Greece Debt Crisis Greece Economic Crisis

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Greece's ability to significantly improve their finances during the 1990s by lowering inflation and budget deficit rates to below 3% impressively put them in qualification of the convergence criteria, finally allowing them to join the European Monetary Union and officially enter the Eurozone. However, despite Greece's remarkable economic growth of nearly 4% annually through the 90s and early 2000s, record high government spending among other dreadful factors lead Greece's 2008 economy into the beginning one of the Eurozone's worst recessional financial crisis's.

The main contributing causes of the Greek sovereign debt crisis were inappropriate government spending, unsustainably increasing debt-to-GDP levels, and tax evasion within Greece.

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Bailout loans, austerity measures, and other forms of rescue packages have been handed to Greece in the past few years, singlehandedly keeping the economy afloat in hopes of achieving sustainable economic levels and financial stability, but have thus far shown little positive outlook for Greece.

Although many other aspects of Greece's monetary and fiscal organizations may have contributed to the economic catastrophe, along with external factors such as the 2008 Global Financial Crisis, the aforementioned issues played the most detrimental positions in the deterioration of Greece's newly recovered economy.

Not only did these three activities individually precipitate economic collapse but also their effects collaborated with one another and greatly expedited the ongoing process of economic corrosion. This became apparent as the Greek government's over expenditures were hardened by their inability to collect enoughrevenue due to a major tax evasion epidemic, thus leading to an unsustainable level of debt to-GDP ratio.

An in depth look at each of these three factors, and the countermeasures that have been taken to restore Greece's economy, will make the occurrence of this financial nightmare all the more clear. In doing so, reasonable recommendations of what Greece should do can be more informatively developed and proposed. In the years leading to Greece's sovereign debt crisis, economists have agreed that the government failed to properly control it's spending even as GDP growth slowed. Ever since Greece joined the Eurozone German and French financial firms have spoiled them with cheap credit.

Barclays Capital claimed these institutions held over $100 billion worth of Greek government bonds. Along with hyper-spending resulting from a period of large investments into the Greek economy at the beginning their entry into the Eurozone, it is said that “Excessive costs to maintain government and union pensions, and liberal increases in benefits and wages, pushed Greece's expenditures to unsustainable levels." However, the Greek government did not start this detrimental downfall from an entirely positive positions, they initially appeared eligible to join the European Monetary Union through dishonesty and misrepresentation of budget deficit statistics.

The Whitehead Journal of Diplomacy and International Relations reported, “...in late October 2009, the newly elected government in Athens dropped a bombshell. Prime Minister George Papandreou announced that Greece's budget deficit was in fact a prohibitive 12.7 percent of GDP (not the 6 percent tabled by the previous government) and far above the 3.7 percent of GDP Greek authorities had reported to the European Commission in early 2009. Not only did Greece's government deliberately misreport this number, but they consequentially staged the countries economy for further and easier failure. In any financial situation, living beyond one's means is unsustainable; a standard of such has proved to be one of the major flaws in Greece’s government leading up to the declaration of their sovereign debt crisis in 2008.

The immaturity of Greek government officials and their inappropriate spending habit has contributed tremendously to the financial collapse, but not without the help of corruption lead by Greece's very own citizens. Prior to and during the start of Greece's debt crisis spending had been no challenge. Unfortunately, paying back the creditors was become increasingly difficult largely due to tax evasions and related economic corruption. Unofficial economies in Greece, also known as the “Black Market”, bring in a whopping revenue equal to 25% of Greece's GDP. With an average annual rate of 25% of GDP, a cost of 65 billion potential Euros is prevented from adding to and strengthening the overall growth of Greece's economy. In October of 2012, the Wall Street Journal reported, "Evangelos Vanizelos, a former Greek finance minister, testified before Parliament that financial crime investigators had turned a blind eye towards Greeks who had deposited more than €1 billion of alleged "black money” in Swiss bank accounts.”

Removal of money from the Greek economy to this extent was a principal cause of the countries recession, and it appears even more devastating that citizens have continued their illegal activities in a time where revenue collection is much more desperate. A report shows, “The country's tax revenue has been significantly lower in the past five years as Greece has been stuck in a deep recession." The recession itself is fueling this trend because individuals are less apt to pay dues while the economy is weak, in order to save money while "times are hard."

Additionally frightening is how tax evasions are almost entirely credited to white-collar workers, the ones who greatly influence the direction of Greece's economy. Two economists reported in their study, Tax Evasion Across Industries: Soft Credit Evidence From Greece, “that €28bn of tax was evaded in 2009 by self-employed people alone." It is especially discouraging to see citizens such as financial investigators and professional workers continuously damaging an economy that is in demand of their leadership more then ever. Greed and selfishness may drive their motivations, but until a drastic change of attitude is achieved, tax revenue collection will remain record low and sovereign debt will hang high. Inappropriate government spending complemented by financial corruption and tax evasion, among numerous other factors, have driven Greece's economy into a sovereign debt crisis.

Subsequently, unsustainable and accelerated levels of debt-to-GDP ratio have expedited Greece's recessional monetary era and have magnified the effects of Greece's uncontrollable debt. Between the years of 2000 and 2007 Greece's economy showed strong economic growth and presented the government with an opportunity to reduce the debt-to-GDP ratio, which was slowly rising. Unfortunately they continued to run high structural deficits and when the 2008 debt crisis began the ratio started to accelerate out of control. The debt rate rose from a mere 100% of GDP at the beginning of 2007 to an all time high of over 170% of GDP by the end of 2011, a tragically unsustainable ratio.

In addition, the global financial recession of 2008 directly impacted some of Greece’s biggest moneymakers, greatly lowering revenues in industries such as tourism and shipping by 15%. As Greece suffered a constantly increasing unsustainable level of debt, financial markets and investors demanded a higher and higher interest rate on their loans in order to cover the ever-increasing risk of Greek default. This negative trend span out of control, rapidly creating higher debt level and higher interest rates, ultimately leading to the downgrade of Greece's credit rating to BBB, the lowest in the Eurozone. Following was a heavy selloff of Greek stocks and bonds amid fears that Greece would suffer a financial meltdown."

Despite a quick response by the International Monetary Fund to provide public finance advice for Greece, and Greece's overly optimistic three-year reform plan, desperate financial aid was needed. For the next three years to the present day, Greece’s economy has been assisted with bailout loans, austerity measures, and rescue packages from the European Union (EU) countries, the European Central Bank (ECB), the International Monetary Fund (IMF), and other financial institutions. The Troika, composed of the European Commission (EC), the ECB, and the IMF, oversees the policies and measures taken to better Greece's financial stability progress. Frequent measures and strategies, whether successful or not, have been at the heart of Greece’s survival during their sovereign debt crisis. May of 2010 marked the first bailout loan and austerity measures for Greece.

The EU and IMF agreed to collaborate on a Greek bailout worth nearly 110 billion Euros in order to financially support the country as they implemented unpopular and drastic changes, including long awaited spending cuts and much needed tax increases. Unfortunately, the bailout and austerity plan was a much longer process then predicted and the uprising of a national riot made it all the more harder to achieve. As a result, Greece's credit rating was downgraded even further to CCC. In order to gain vital bailout funds, EU leaders pressed Greece to take additional austerity measures. In July of 2011 an article published, “Greece's government is proposing additional spending cuts worth 28bn Euros over five years. If these are passed then Greece will get its next 12bn-euro installment from the current 110bn euro bail-out package from fellow Eurozone countries and the International Monetary Fund."

Although Greece's first bailout loan was not as successful as expected, the funds provided the country with just enough aid to give time for a second, and more powerful, bailout plan to be constructed. In July of 2011 the second round of bailout loans and austerity measures were decided to cut the current interest rates to 3.5%, a 50% write off of Greek debt to banks would be granted, and a 130 billion Euro loan from the EU and European Financial Stability Facility (EFSF). At one point, measures of this kind were predicted to hurt Greece in the short-run, and a default was encouraged. Fortunately for Greece, officials realized the devastating effects this would have on the rest of the EU members, along with its 1 trillion Euro cost.

So instead the second rescue package was to be soon cancelled or revised and approved, along with a temporary 48 billion Euro loan in the meantime. In February of 2012, a lifeline was extended out to Greece, and the 130 billion Euro deal was passed. Just days after the approval, mixed feelings were evident, as an article in USA Today reported, "The deal is expected to bring Greece's debt down to 120.5% of gross domestic product by 2020 — around the maximum the Eurozone and IMF consider sustainable. At the moment, the debt stands at more than 160% of GDP." Followed by, “But as Greece's economy faces a fifth year of recession, confidence that it can reach the 120% target in 2020 was already fading." Regardless to what extend people may be optimistic or pessimistic about the countries financial future, Greece has been fortunate enough to have been pledged roughly 240 billion Euros to date.

In return, Greece has had to impose, and must continue to do so, rounds upon rounds of tough austerity measures. Year in and year out of economic depression, while fighting to become more competitive at such high costs, may prove worthwhile in the moment, but will eventually become an unsustainable approach. The safest and most logical route for Greece is to follow Argentina's lead, who performed a miraculous financial recovery after defaulting from a currency crisis in 2001 worth over 130 billion US dollars. By leaving the European Monetary Union, Greece would be able to experience most of the same benefits that guided Argentina to full economic recovery.

First and foremost, Greece would retake control of their old currency, the drachma. It is essential for a country in Greece's situation to have complete political and monetary control over their currency. Unlike in a monetary union such as the euro's, direct control of the drachma will provide a currency that is fully backed by a single country and government, eliminating fragility. Greece will also regain full ability to issue debt, instead of relying on the ECB to make those decisions for them. In addition, the ability to devalue the drachma may greatly benefit Greece when more competitiveness is needed. Most importantly, asymmetric shocks will be eliminated.

Policy changes in other countries will not affect the economic conditions in Greece, and therefore large divergences in competitive positions will be prevented, both of which currently play frequent roles damaging the economies of EU member states. If Greece were to default, leave the EMU, and regain their own currency, the activities of inappropriate government spending, tax evasion, and consequential unsustainable debt levels could be prevented, as Greece would have full control over a single currency, giving them a better understanding of which monetary policies work best and benefit the country for the greater good. The aforementioned benefits in resurrecting the drachma offer the necessary tools for Greek's government to pull the economy out of the gutter and back on track to positive annual GDP growth rates, and sustainable debt-to-GDP ratios. Although this switch may come at a cost, 5 years of modern societies worst sovereign debt crisis has confirmed this option to be the best, and maybe even the last.