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Greece On The Precipice Of Financial Disaster?

The Academy of Athens is Greece’s national academy and the highest research establishment in the country.

The debt crisis in Greece has been an ongoing state of affairs, ever since the international financial crisis of 2007 and 2008. The aftermath of this instability would hit the Greek economy in late 2009. The immediate trigger would be the turmoil caused by the Great Recession, that started in the United States and spread throughout the world.

The structural weakness in the Greek economy, along with the constant under reporting of deficits and accumulated debt by the government, led to a full blown crisis.

Investors in Greek debt began to lose confidence in the ability of the government to remain solvent. This in turn, led to a rapid rise in bond yields for Greece. It was going to be increasingly difficult for the government to service this higher cost debt.

100,000 people protest against the austerity measures in front of parliament building in Athens (May 29, 2011).

In response the Greek government was forced to enact 12 separate rounds of spending cuts, tax increases and various reform packages. These were formulated and passed from the years 2010 to 2016.

The ongoing spending austerity imposed by the government, would periodically lead to local riots and nationwide protests in this nation of 11 million people.

Despite these efforts, Greece would require massive bailout loans in 2010, 2012 and 2015. These came from the Euro-group, the European Central Bank (ECB) and the International Monetary Fund (IMF).

These institutions also negotiated a 50% reduction on debt, owed to private banks in 2011.

More protests in Athens in 2011.

A change in government in 2015, allowed for a popular referendum on further austerity measures. The newly installed socialist regime, had promised to bring a halt in further austerity.

Greek voters rejected further steps in reforming the domestic economy, to qualify for a third round of bailout loans.

What followed was the closure of banks, as they simply ran out of money to disburse to their customers. The situation was chaotic for a number of weeks.

On June 30, 2015 Greece became the first developed country ever, in the postwar era, to fail to make an IMF loan payment that had become due.

Greece’s debt percentage since 1977, compared to the average of the Euro-zone.

Debt levels by then had hit 323 billion Euros or more than $340 billion USD (United States dollar).

Government debt alone would reach 176.90% of the country’s GDP (Gross Domestic Product) in 2015. It was only slightly lower, than the 180.1% that had been attained the year before.

The public budget deficit for 2015 was -7.20% of GDP, more than double, the agreed upon Euro-zone limit of 3%.

Since these dark days, Greece has slowly worked its way toward some financial stability, however tenuous it still remains. The government was finally able to post a primary budget surplus above 0.5% in 2016. This still excludes interest on debt, already accumulated in past years.

The forecast of the government budget surplus in 2017 is 1.75%.

The Greek economy has at last stopped hemorrhaging jobs. Although still stubbornly high at 23%, unemployment has gradually declined from its peak of 28%.

Location of Greece (dark green) in the European Union shaded in (light green).

In 2016, GDP only shrank a mere 0.1%, from an initial estimate of 0.3% growth. This was the result of a dismal 1.2% contraction in the 4th quarter, after posting advances of 0.3% and 0.6% in the 2nd and 3rd business quarters respectively.

The Greek economy is expected to return to growth in 2017. It will be the first yearly expansion in 7 years. Much of the basis for this upsurge, is an expected increase in tourism. If the forecast of 2.7% actually materializes, it will result in a timely uptick for tax revenues.

It must be said that despite the optimistic forecast of the Tsipras government, leading economists only see growth of 0.6%, in the year ahead. Nonetheless, the painfully long recession seems to be coming to an end, at least for now.

Alexis Tsipras
Prime Minister of Greece 2015-

There also seems to be a renewed investor interest, in the ongoing privatization program. Although it has been rough going and politically unpopular, the government was given little choice by creditors, but to proceed.

Still overall, the Greek economy is weak, after a loss of some 25% of GDP since 2008.

Investment is still anemic in comparison to before the Great Recession. Small business which is the mainstay of the Greek economy struggles from the lack of credit. Half of all bank loans at present, remain non-performing.

In a further disincentive to smaller firms, business regulations and tax codes are quite changeable, due to the existing fluid environment.

Current account imbalances (1997–2014)

Although marginal tax rates have been increased, in order to raise more funds for the government, numerous exemptions that encourage tax avoidance and cheating, remain a major concern.

It is quite telling that over 50% of all wage earners in Greece, are still not paying any taxes on income.

For Greece to move forward financially, two fundamental problems need to be resolved. The first one is the lack of sufficient growth in the domestic economy. The other issue is the unrealistic expectations the electorate still has, for public spending in general.

To enhance economic growth in Greece, the government must reform the antiquated labor and investment laws. These are both politically popular among certain constituencies, but have been detrimental to the nation as a whole.

Necessary government spending has been substantially reduced, but the pension system remains totally unrealistic.

A person retiring in Greece, can still expect to earn at least 80% of an average wage. It is below 50% in many other European countries. In Germany, the wealthiest nation on the continent, the rate is almost half that at just 43%.

Another hurdle facing Greece is the delusional belief among creditors, that they will be repaid in full sometime in the future. To expect that the Greek economy can generate enough surpluses to pay back more than $320 billion USD in loans, is simply not feasible.

The building of the Hellenic Parliament in central Athens.

The entire GDP of Greece last year came in at $195.3 billion USD. Per capita is now just $18,109 USD, as compared to $24,858 USD back in 2006. These numbers give pause to those who insist the Greeks can afford to pay far more to their creditors, now that the economy may be showing signs of growth.

The bailouts from the beginning, have allowed a shell game to continue among the major creditors. These include the European Central Bank (ECB), the International Monetary Fund (IMF), individual European member states (especially Germany) and private investors.

New money is provided, in order to pay off older loans. As new maturity dates are reached, more loans are furnished.

A new debt impasse now exists. The conflict is between the two main creditors, on how best to assess the public debt. The present standoff is now threatening to derail a payment from the Euro-zone’s bailout fund, known as the European Stability Mechanism (ESM).

A political cartoon of the “domino effect” view of a Grexit.

If the ESM fails to provide the funds, to redeem the equivalent of $6.7 billion USD in bonds due in July, Greece will be in default. Under these conditions, with no additional loans, Greece would be inevitably forced to leave the Euro-zone. This would bring about the long feared Grexit.

The hope that a solution would be reached, before a meeting among the finance ministers of the Euro-zone on February 20th failed to materialize.

The disagreement is being caused by the IMF, which has made its participation in this next round of bailout loans conditional. According to the rules of the IMF, they may not participate, unless the debt burden is sustainable. That would indicate a level of debt, that is declining and can be successfully financed.

IMF officials have determined that this stipulation, is no longer possible with Greece. The present bailout package has set a long term ongoing target of 3.5% beginning in 2018, for a primary budget surplus. In the opinion of the IMF, for European creditors to insist on this measure, could well push Greece back into recession.

The IMF wants to slow the pace of austerity, and have the Greeks pursue more reachable reforms and economic restructuring.

IMF authorities want their European partners to consider debt relief for Greece once again. In the present political environment, this will be indeed difficult. Anti-European Union activists and populist movements will benefit enormously, if Greece is offered any meaningful debt relief.

For their part, the governments of Germany and the Netherlands in particular, will not allow any further disbursement of funds, unless the IMF is part of the rescue loan package.

A growing number of Euro-zone nations, no longer have confidence that the European Commission will be able to force Greece, to move along with the needed reforms. These efforts by Greece are necessary, to keep the loans flowing.

Marine Le Pen, populist right wing presidential candidate.

As elections loom in France, Germany and the Netherlands, any real movement on debt cancellation for Greece is unlikely. Instead these governments and others, are offering extended debt maturities at very low interest rates. They assert these steps permit repayment, without undue hardship on the economy of Greece.

The latter solution, will simply keep the charade going on for a bit longer. It simply allows a payment from one Euro-zone institution to another.

The solution is obvious, but politically near impossible to achieve, with the present socialist government in Greece.

Legislation that begins the reform of the Greek pension system is paramount, if the country is to ever regain control over it finances. A major reduction in exemptions for income tax payments,will also be necessary.

Only by reducing expenditures and increasing revenues at the same time by at least 2.5% of GDP, can Greece finally get a handle on the debt crisis.

Syriza Party Logo

The socialist government under Prime Minister Alexis Tsipras, will find it most difficult to pass these two aforementioned reforms. The leftist Syriza party came to power, on the principle of easing the pain of austerity.

Eventually, the inability to push through these two measures legislatively, will force new elections in Greece. Given the declining popularity of Syriza and its failure to offer the country a real platform for growth, may well shift the balance of power once again.

New Democracy Party Logo

When Syriza stumbles, the chief beneficiary will be the center right party of New Democracy.

However, it is becoming increasingly obvious, that the conditions attached to each new bailout program, is taking control of the Greek economy away from the domestic politicians.

Relative change in unit labor costs, 2000–2012

Without pension and tax reforms, debt levels in Greece are not sustainable and will begin to mount once more.

When the endless rounds of bailouts finally end, the Greek electorate will face the choice that has been delayed for a number of years. That is sustained austerity, which will be the price to remain in the Euro-zone, or leaving the common currency zone.

If Greece decides to remain locked in the Euro-zone, then the only alternative is internal devaluation, which will lower wages and standards of living. Under these conditions, the Greek economy will eventually reach the point, of becoming competitive relative to their neighbors once again.

The other alternative is to leave the Euro and return to the drachma. This will permit an immediate devaluation,which will allow Greek goods and services to become competitive, in a relatively rapid fashion. Of course, this also will lead to a decline in the Greek standard of living.

Employment and unemployment in Greece from 2004 to 2014.

The latter decision might well lead to a more speedy economic recovery, provided the Greek government continued with needed reforms and resisted the temptation to start unsustainable spending again.

That is of course, a return to the beginning of the crisis. Unsustainable long term government spending. The Greek electorate has often elected political leadership that promises social programs, that are totally unaffordable, given the productivity and size of the Greek economy.

For now, Prime Minister Tsipras insists there has been significant progress with lenders on the bailout review. He remains hopeful that a comprehensive deal will be in place by April. However, the talks have been dragging on for months, over fiscal targets and whether the IMF will finally be part of the agreement. In the meantime, the July deadline to avoid a Greek default moves ever closer.

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