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For Investors The Financial Crisis In Greece Will Be Ongoing

220px-2011_Greece_Uprising (2)The crisis in Greece will continue regardless of the outcome of the present negotiations between the government and the troika of creditors. Investors will find that Greece will be mired in debt for years to come, because the economy will be unable to grow sufficiently to meet present expenses and liabilities. The idea that enough income will be generated to repay the massive debt owed to the International Monetary Fund (IMF), the European Central Bank (ECB) and the German government through the European Commission, is nonsensical. The austerity that would be necessary at this point to meet the numerous financial obligations of the Greek government, is politically untenable.

The reality is that Greek citizens wish to maintain living standards that are part of the developed world. That the Greek economy can not sustain this under the present circumstances, is something that too many individuals inside the country refuse to concede. The present government (Syriza) came into power at the beginning of the year, by convincing Greek voters that there was a way around austerity. That somehow Greece would be able to renegotiate debt repayments and at the same time reverse the spending constraints, the previous government had in place.

Austerity Protests In Greece

Austerity Protests In Greece

The prospects for the Greek economy is moribund. Unemployment is presently over 26% and recent data shows that the number of people out of work for over a year, jumped from 67.1% in 2013 to 73.5% in 2014. This is not an encouraging sign and is among the highest in the Eurozone. The longer that one is not part of the work force, the less likely they will ever rejoin the labor pool.

The Greeks have a demographic problem as well. The country already has one of the highest percentages of elderly people at around 19.5%. The birthrate inside the country is not sufficient to replace the present population. In addition, more people especially young adults have decided that their futures will be better by emigrating away from the country of their origin. So the brain and talent drain is accelerating, as the Greek economy continues to stumble.

The result of a declining population, is that there will be far fewer working people available to support a pension system. The payments to the elderly are already absorbing near 75% of all central government spending outside of debt servicing. That is just making interest payments on the debt, with no hope of reducing the actual amount. Regardless of any agreement, this population situation is not about to change.

Greek_debt_and_EU_average_since_1977 (3)The national debt of Greece stands at close to $379 billion USD (United States Dollar) that is 336 billion Euros. The interest on this massive amount of indebtedness is already in excess of $25 billion USD annually. That works out to be $798 USD per second. Greece has a population of slightly above 11 million, so the debt incurred is $34,349 per citizen.

The GDP (Gross Domestic Product) of Greece is just above $192 billion USD, the equivalent of 170.6 billion Euros. The total debt is now at 196.86% of GDP. Only Japan among the industrialized world, is dealing with this comparable amount of liability. The Japanese debt ratio to GDP stands at 199.55%. In comparison debt saddled Italy comes in at 140.59%, Portugal at 133.15% and Ireland at 114.50%.

These debt ridden nations compare unfavorably if one considers the debt to GDP ratio of the United Kingdom at 82.06%, Spain at 86.09%, France at 94.83% and Germany with 68.81%. The United States comes in at 105.13%. Any time debt exceeds GDP, there should be cause for anxiety.

A nation locked in this spiral of debt in a traditional manner, would devalue their currency and attempt to export their way out of this financial morass. The resulting internal inflation and rising foreign account surpluses through the sale of devalued exports, would provide a partial solution however painful to the present insurmountable debt. The Greek economy is quite dependent on shipping, services and tourism. These economic sectors would all benefit from a devalued Greek currency if one existed.

Public Debt, GDP, Debt-To-GDP ratio.

Public Debt, GDP, Debt-To-GDP ratio.

This option is not available to Greece, as a member of the Euro-zone. Leaving the common currency zone will have costs as well and is currently not what the majority of Greeks voters want. Yet an increasingly uncertain financial future, may leave the government of Greece little choice. The creditors of the country are demanding the cuts in expenditures, that the former government voted out of power, had previously agreed to.

The Greek government had in 2014, achieved a primary budget balance at least on paper for 2015. That is income meeting expenditures, minus interest payments on the debt. It would have been the first balanced budget, the country would have experienced in 4 decades of profligacy. Since the repayments of debt totaling $4.1 billion USD were equal to 3% of Greek GDP, the troika of creditors asked for additional cuts in government expenditures.

The demands for more savings after 6 years of recession and austerity were unrealistic considering the mood of Greek voters who have grown impatient. The election results at the beginning of 2015 proved this. The tax cuts and other growth incentives of the previous government, have mostly been allowed to lapse. Lays off of civil servants have been reversed and the promised reforms of the pension system have been totally abandoned. In fact, the new government has insisted that cuts in the retirement system are a nonstarter as far as negotiations. It is after all, what was promised by the present leadership to voters before the election.

Long-term Interest Rates (secondary market yields of government bonds with maturities of close to ten years) Of Most Euro-zone Countries.

Long-term Interest Rates (secondary market yields of government bonds with maturities of close to ten years) Of Most Euro-zone Countries.

Syriza came to power on an anti-austerity platform and it will be difficult for the credit troika to get them to agree to basically continue the fiscal self-discipline, that was imposed and agreed upon by the previous more conservative government coalition.

The primary budget surplus that was achieved in the first quarter of 2015 at $1.98 billion USD (1.74 billion Euros) will not last, as spending will begin to pick up as electoral promises are fulfilled by the new governmental leadership.

According to the Greek government the demands for cuts to pensions and further tax rises made by foreign creditors, will derail the small economic recovery that the country is now experiencing.

The present impasse, is taking a toll on the Greek Stock Market. Last Friday, the market declined by over 4% and the same thing happened this past Monday. On Tuesday the market slid even further by 4.7%. Confidence in a solution to the crisis is rapidly eroding. The central bank of Greece has already forecast that the failure of a deal will have dire consequences for the country.

The economy of Greece has a way to go before recovering the 25% fall in GDP since 2010. Worse yet, Greece is rapidly losing appeal as a place for investment. The Heritage Foundation in their annual Index for Economic Freedom has downgraded the country by an additional 1.7 points. The reason cited is the substantial deterioration in the control of government spending. This was along with declines in business, fiscal and labor freedom. Greece is now rated 40 out of 43 nations in the European region. The overall score of 54 is now below regional and world averages.

Since 2011 the index score has declined by 6.3 points, with ratings falling in 7 out of 10 measured categories. The ranking of moderately free has been reduced to mostly unfree. With the 10th largest score decline in the 2015 index, Greece is now recording its lowest economic grade ever.

Syriza Party Chairman, And Present Leader Of Greece Alexis Tsipras

Syriza Party Chairman, And Present Leader Of Greece Alexis Tsipras

Along with the insuperable debt, Greece is saddled with pervasive corruption, tax evasion, and a decline in the rule of law. Property rights are being enforced far less vigorously. The previous governmental efforts to create a more business friendly marketplace has stalled. The labor pool remains rigid and lethargic in adjustment to the present economic reality. Greece continues to keep barriers in place. Professional services are a prime example.

In addition, foreign investment is capped in a number of sectors. The financial system is beginning to buckle under the strain of continuing crisis, with nonperforming loans accounting for over 30% of the total portfolio of domestic banks. If the Greek banking sector did not receive substantial subsidies from the ECB (European Central Bank), there would be a panic among the populace as individual banks would begin to fail.

Despite insistence by the Greek government to the contrary, regulatory reform remains elusive. It is lagging far behind all other countries in the European Union. Although opening a business in Greece would seem to be reasonable with 5 procedures within 13 days, the reality is quite different. Licensing requirements still take at least 4 months on average.

The individual income tax rate in Greece is at 42% and the corporate rate is 26%, but as previously stated tax evasion is widespread. There is also a value added tax and real estate taxes. Overall tax revenue equals 33.8% of GDP with public spending taking up 58.5% of domestic output.

The economic growth in GDP for Greece is expecting to grow at a meager 0.5% in 2015 and a possible 2.9% in 2016. This is in contrast to the growth of 0.08% in 2014 and the negative rate of 3.9% in 2013. However, the present financial crisis could easily undermine any improvement in the GDP of Greece.

Syrzia Party Logo

Syrzia Party Logo

The governmental financial choices will become more difficult and the likelihood of a Greek exit from the common currency, will increase as the year progresses. Short term fixes and stop gap funding like raiding pension plans and local government bank accounts, will not solve the Greek debt crisis. Nor will a temporary bailout from the current creditors of the country. Either the Greeks will default on their debt obligations or the financial institutions that hold the loans, will need to start canceling much of the overall Greek debt.

More stringent austerity will not work with the present government. If it falls in response to the crisis, it is not really known what would follow. A more pliable leadership could be installed or just as easy a more radical one. More stringent austerity is no longer possible, under the present political climate in Greece. Additional foreign investment in the country at this point, is no longer a good calculated risk. In fact, divestiture is becoming the far better approach. The only exception to this rule may be the ownership of individual real estate property.

 

Interest Rate Of Greek Two-Year Government Bonds Traded In The Secondary Market Reflecting The Markets' Assessment Of Investment Risk

Interest Rate Of Greek Two-Year Government Bonds Traded In The Secondary Market Reflecting The Markets’ Assessment Of Investment Risk

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