Greek Debt Dramas
Before the Global Financial Crisis (GFC) in 2008, the Greek had positive economic growth and it was considered high among countries in eurozone. Average economic growth reached almost four per cent between 1999 and 2007. Then the crisis hit in 2007 where housing bubble burst and made the subprime mortgage market in the United State collapsed. The crisis in the U.S. created a chain reaction which causing global banking crisis and credit crunch that lasts through 2009. The crisis made Lehman Brothers, big financial company, collapsed and the government in the United States and Europe prepared to bail out their banks. Greece failed to pay their huge debt since borrowing costs rose and financing dried up.
The financial crisis affected the Greek economy by reducing financial liquidity and business activity. Greece had been fortunate enough to face the crisis with the euro instead of its national currency, if they were using their national currency the crisis would hit Greece economy in more severe manner. After the global financial crisis, many experts predict a significant increase in unemployment and zero or negative GDP growth for 2009. Some suggest that the Greek government should follow a bold Keynesian stimulus to prevent recession (George Pagoulatos & Christos Triantopoulus, 2009). However, Greek was incapable in implementing fiscal discipline and this attitude reduced the capacity of the Greek economy to produce effective and optimal outcome when the economy was still expanding. Greece failed gain benefits from the momentum to produce budget surpluses and reduce the public debt.
If history repeats itself first as tragedy and then as farce, it continues thereafter as endless iterations of Greek debt dramas. To avoid default, the International Monetary Fund and EU agree to provide Greece with 110 billion euros ($146 billion) in loans over three years. In 2012, Greece got its second bail out worth 130 billion euros ($172 billion). Greece and its private creditors complete the debt restructuring on March 9, the largest such restructuring in history. Greek bailout expires in 2015, The Greek government misses its 1.6 billion-euro ($1.7 billion) payment to the IMF when its bailout expires on June 30, making it the first developed country to effectively default to the Fund.
Whose fault was all this? Europe’s politicians probably should not have allowed Greece to enter the euro in 2001, two years after the currency was created. Furthermore, Greek governments used the state as an instrument of patronage, spent wildly in the years before 2008, and—like Ireland, Portugal and Cyprus—could not use the opportunity of a bail-out to implement crucial structural reforms.
Greece’s Crisis and the Condition after Crisis
Global financial crisis affected Greece financial system, moreover after Lehman Brothers collapsed the Greece’s real economy slowed down. At first, the crisis disturbed the credit institutions. The interbank market faced the drying up of liquidity. Banks tightened their finance, then the shortage of liquidity of the interbank market was transmitted to the ‘real’ economy. Foreign institutional investors moved their money to the safe place (US Treasury bonds), there were mass capital outflows. Then, the crisis affected the economic sectors whose relies on bank credit, for example housing and consumer lending, and the shipping industry (George Pagoulatos, 2009). The crisis also affected small and medium-size enterprises (SMEs) and tourism sector.
GDP, current prices, continued to fall after the crisis. It was 242 billion Euro in 2008 and it decreased to 176 billion Euro in in 2012. On the other hand, unemployment increased and reached the highest percentage in 2013 which was 27.5%. The social cost after the crisis was very high, income inequality raised and reached the highest percentage in 2012. Moreover, relative and anchored poverty continued to increase.
Measures to Confront the Crisis
The Greek government implemented some measures in response to the crisis. The measures objectives were increasing the liquidity of the economy, regaining the confidence in the market and society in the Greek banking system, providing protection to borrowers, and supporting the business activity of the SME sector. The government provided a 28 billion Euro package to the Greek banks to increase the liquidity and stabilizing the national banking system. In the short run, the measures should support the real economy and could protect those afflicted the most by the financial market crisis. The capital strengthening of the banking system would allow credit institutions to overcome the difficulties of raising funds from the interbank market, confront concerns about their capital adequacy, and provide the economy with much needed liquidity.
The Greek government also undertook fiscal consolidation measures and economic reforms. The program, which outlined in May 2010, tried to reduce the government’s budget deficit by 11 percent points through 2013, bringing it below 3% of GDP by 2014. In the short run, the program could cut public spending and enhance revenue growth through tax increases and a crack-down on tax evasion (Rebecca M. Nelson, 2011). Most spending cuts have been to the civil service and the government raised the average value-added tax rate and increased taxes on certain commodities (fuel, tobacco, and alcohol) to increase the revenue. Strengthening tax collection and cracking down for tax evaders has been done by the government to add more revenue. The government also implemented healthcare and pension reforms which were vital to consolidating public finances. Furthermore, important reforms in the labour market had been implemented by decentralising the wage bargaining system, easing hiring and firing restrictions, reducing the minimum wage, and differentiating it for young workers.
But, after a year of the first bail out, the Greek economy was worsened than expected and would need more assistance to avoid defaulting on its debt. In July 2011, European leaders announced a second bail out for Greece totaling €109 billion ($157 billion). Figure 2 clearly showed that real GDP of Greek was worsened after the first bail out in 2010.
After the first bail-out, the economy of Greek was worsened and the reason behind was challenges in implementing the structural reforms. They could not overcome the challenges and got the second bailout. In 2015, the third bail-out was agreed for the Greek. The past reform mix has been unbalanced, demand was drastically reduced because of front-loaded fiscal and wage adjustments. Moreover, weak and fragmented implementation has made the reforms less effective. If product market reforms could not be implemented well, it gave little economic impact but generated high political costs (OECD, 2016).
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