. Beginning in late 2009, fears of a
concerning Greece's ability to meet its debt obligations due to strong increase in
levels. This led to a crisis of confidence, indicated by a widening of
, most importantly Germany.
The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets. On 2 May 2010, the eurozone countries and the IMF agreed on a bailout loan for Greece, conditional on the implementation of austerity measures. In October 2011, Eurozone leaders agreed to offer a second bailout loan for Greece, conditional not only the implementation of another austerity package, but also that all private creditors should agree to a restructure of the Greek debt, reducing the debt burden from a forecasted 198% of GDP in 2012 to 121% of GDP by 2020.
The second bailout deal was finally ratified by all parties in February 2012, and became active one month later, after the last condition regarding a successful debt restructure of all Greek government bonds, had also been met. The latest bailout plan is to cover all Greek financial needs from 2012-2014. If Greece can manage to comply with all economic targets outlined in the bailout plan, a full return to use the private capital markets for covering future financial needs, will be possible again in 2015.
In mid-May 2012 the crisis and impossibility to form a new coalition government after elections, led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as "Grexit" and started to affect international market behaviour.
In order to understand when, how and why the Greek government-debt crisis erupted and eventually how it can be solved, it is important to note the crisis is not limited to a simple debt level problem. Several other main causes exist along with the debt level problem. In January 2010, before the extent of the debt-crisis was truly known, the
these five main causes for the significantly deteriorated economic results recorded in 2009 (compared to the published budget figures ahead of the year):
Statistical credibility: Problems with unreliable data had existed ever since Greece applied for membership of the Euro in 1999. In the five years from 2005?2009, Eurostat each year noted a reservation about the fiscal statistical numbers for Greece, and way too often previously reported figures got revised to a somewhat worse figure, after a couple of years. In regards of 2009 the flawed statistics made it impossible to predict accurate numbers for GDP growth, budget deficit and the public debt; which by the end of the year all turned out to be far worse than originally anticipated. As the new Greek government acknowledged the need for a stronger statistical credibility, both in order to restore the trust among financial investors and as a mean for the government to better know the level and necessity of future economic reforms (in advance), they now pledged to correct all previous statistical methodological issues, "by making the National Statistics Service an independent legal entity and phasing in, during the first quarter of 2010, all the necessary checks and balances that will improve the accuracy and reporting of fiscal statistics".
The Greek economy was one of the fastest growing in the eurozone from 2000 to 2007; during that period, it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits.
According to an editorial published by the Greek conservative newspaper Kathimerini, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974. After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance public sector jobs, pensions, and other social benefits.
Since 1994, the ratio of debt to GDP has remained above 94.0%. In the turmoil of the Global Financial Crisis it rapidly grew above the maximum sustainable level for Greece (defined by many economists to be 120%). According to "The Economic Adjustment Programme for Greece" published by the EU Commission in October 2011, the debt level is even expected to reach a highly unsustainable level of 198% in 2012, if the proposed debt restructure agreement is not implemented.
Initially, currency devaluation helped finance the borrowing. After the introduction of the euro in January 2001, the devaluation tool disappeared. Throughout the next 8 years, Greece was however able to continue its high level of borrowing, due to the lower interest rates government bonds in euro could command, in combination with a long series of strong GDP growth rates. Problems however started to rise, when the Global Financial Crisis peaked with negative repercussions hitting all national economies in September 2008. The Global Financial Crisis had a particularly large negative impact on the GDP growth rates in Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn, with revenues falling 15% in 2009.
Another consistent problem Greece has suffered from in recent decades, is the government's tax income. Each year it is several times below the expected level. In 2010, the estimated tax evasion costs for the Greek government amounted to well over per year.
To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing. The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU. As reported in the table below, the revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Euros stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and also the debt level clearly exceeding the recommended limit at 60% of GDP.
In February 2010, the new government of George Papandreou (elected in October 2009), revised the 2009 deficit from a previously estimated 5% to an alarming 12.7% of GDP. In April 2010, the reported 2009 deficit was further increased to 13.6%, and at the time of the final revised calculation by Eurostat it ended at 15.6% of GDP, which proved to be the highest deficit for any EU country in 2009. The figure for Greek government debt at the end of 2009, was also increased from its first November estimate at (113% of GDP), to a revised (129% of GDP).
This major upward revision of the deficit and debt level, was caused by flawed estimates and statistics previously being reported by the Greek authorities in 2009, resulting in the need for Eurostat to perform an in depth Financial Audit of the fiscal years 2006-09. After having conducted the financial audit, Eurostat noted in November 2010, that all "methodological issues" now had been fixed, and that the new revised numbers for 2006-2009 now finally was considered as being reliable.
Despite the crisis, the Greek government's bond auction in January 2010 had the offered amount of ?8bn 5-year bonds over-subscribed by four times. At the next auction in March, the Financial Times again reported: "Athens sold ?5bn in 10-year bonds and received orders for three times that amount". The continued successful auction and sale of bonds, was however only possible at the cost of increased yields, which in return caused a further worsening of the Greek public deficit.
As a result, the rating agencies downgraded the Greek economy to junk status in late April 2010. In practical terms this caused the private capital market to freeze, so that all the Greek financial needs now instead had to be covered by international bailout loans, in order to avoid a sovereign default. In April 2010, it was estimated that up to 70% of Greek government bonds were held by foreign investors (primarily banks). The subsequent bailout loans paid to Greece, were mainly used to pay for the maturing bonds, but of course also to finance the continued yearly budget deficits.
| + Government debt, inflation, GDP growth and budget deficits (1995?2013)Source: Eurostat and European Commission | ||||||||||||||||||||
| Greek Economy (main indicators) | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 20011 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 fc2 | 2013 fc2 | |
| align="left" | 95.0 | 107.7 | 114.9 | 115.7 | 122.3 | 141.0 | 151.9 | 159.2 | 168.0 | 183.2 | 195.4 | 224.2 | 239.3 | 263.3 | 299.7 | 329.5 | 355.6 | |||
| 97.0 | 99.4 | 96.6 | 94.5 | 94.0 | 103.4 | 103.7 | 101.7 | 97.4 | 98.6 | 100.0 | 106.1 | 107.4 | 113.0 | 129.4 | 145.0 | 165.3 | ||||
| align="left" | 5.4 | 4.5 | 2.1 | 2.9 | 3.7 | 3.9 | 3.4 | 3.0 | 3.5 | 3.3 | 3.0 | 4.2 | 1.3 | 4.7 | 3.1 | |||||
| align="left" | 2.4 | 3.6 | 3.4 | 3.4 | 3.5 | 4.2 | 3.4 | 5.9 | 4.4 | 2.3 | 5.5 | 3.0 | ?0.2 | ?3.3 | ?3.5 | ?6.9 | ||||
| align="left" | 36.7 | 37.4 | 39.0 | 40.5 | 41.3 | 43.0 | 40.9 | 40.3 | 39.0 | 38.1 | 39.0 | 39.2 | 40.8 | 40.7 | 38.2 | 39.7 | 40.9 | |||
| align="left" | ?9.13 | ?6.63 | ?5.93 | ?3.83 | ?3.13 | ?3.7 | ?4.5 | ?4.8 | ?5.6 | ?7.5 | ?5.2 | ?5.7 | ?6.5 | ?9.8 | ?15.6 | ?10.3 | ?9.1 | |||
| Notes: 1 Year of entry into the Eurozone. 2 Forecasts by European Commission>EC in Oct.2011 (excl. the impact of the debt deal in March 2012; next update slated for 11 May 2012).3 Figures calculated by old method in 1995-1999 and with EDP method subsequently. 4 After 1.6% reduction from extraordinary "privatisation income". | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Evolution of the crisis
In the early-mid 2000s, Greece's economy was strong and the government took advantage by running a large deficit, partly due to high defense spending amid historic enmity to Turkey. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries ? shipping and tourism ? were especially sensitive to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early 2010, as concerns about Greece's national debt grew, policy makers suggested that emergency bailouts might be necessary.Danger of default
Without a bailout agreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring.A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to ?110�billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent. It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.
Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an ?orderly default? on Greece?s public debt which would allow the country to withdraw simultaneously from the eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.
At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy, as has happened with other economic zones, for example the U.S. Federal Reserve expanding its balance sheet over since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt.
Downgrading of creditworthiness
On 23 April 2010, the Greek government requested an EU/IMF bailout package to be activated, providing them with a loan of to cover their financial needs for the remaining part of 2010.A few days later on 27 April Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amidst hints of default by the Greek government, in which case investors were thought to lose 30?50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement.Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts continue to question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would fail to get 30?50% of their money back. Stock markets worldwide declined in response to this announcement.
Following downgradings by Fitch and Moody's, as well as Standard & Poor's, Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear."
On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold for Greek debt "until further notice", meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier. As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.
First bailout loan and austerity measures (May 2010 - June 2011)
On 1 May 2010, the Greek government announced a series of austerity measures to persuade Germany, the last remaining holdout, to sign on to a larger EU/IMF loan package. The next day the eurozone countries and the International Monetary Fund agreed to a three year loan (see below) retaining relatively high interest rates of 5.5%, conditional on the implementation of austerity measures. Credit rating agencies immediately downgraded Greek governmental bonds to an even lower junk status. This was followed by an announcement of the ECB on 3 May that it will still accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating, in order to maintain banks' liquidity.The new austerity package was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece. On 5 May 2010, a national strike was held in opposition to the planned spending cuts and tax increases. In Athens some protests turned violent, killing three people.
Still the situation did not improve. It was originally hoped that Greece?s first adjustment plan together with the support package would reestablish Greek access to private capital markets by the end of 2012. However it was soon found that this process would take much longer. The November 2010 revisions of 2009 deficit and debt levels made accomplishment of the 2010 targets even harder, and indications signaled a recession harsher than originally feared. In May 2011 it became evident that due to the severe economic crisis tax revenues were lower than expected, making it even harder for Greece to meet its fiscal goals.
Following the findings of a bilateral EU-IMF audit in June, which called for even further austerity measures, Standard and Poor's downgraded Greece's sovereign debt rating to CCC, the lowest in the world. After the major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuffled cabinet, and asked for a vote of confidence in the parliament.
The crisis sent ripples around the world, with major stock exchanges exhibiting losses. To ensure the release of the next 12 billion euros from the eurozone bail-out package (without which Greece would have had to default on loan repayments in mid-July), the government proposed additional spending cuts worth over five years.
On 27 June 2011, trade union organizations commenced a forty-eight hour labor strike, intended to pressure parliament members into voting against the austerity package, the first such strike since 1974. One United Nations official also cautioned, that the next planned package with new extra austerity measures in Greece could potentially pose a violation of human rights, if it was implemented without careful consideration to the peoples need for "food, water, adequate housing and work under fair and equitable conditions". Nevertheless, the new extra fourth package with austerity measures was approved on 29 June 2011, with 155 out of 300 members of parliament voting in favor.
Second bailout loan and austerity measures (July 2011 - current)
EU emergency measures continued at an extraordinary summit on 21 July 2011 in Brussels, where euro area leaders agreed to extend Greek (as well as Irish and Portuguese) loan repayment periods from 7 years to a minimum of 15 years and to cut interest rates to 3.5%. They also approved the construction of a new support package, of which the exact content was to be debated and agreed on at a later summit, although it was already certain to include a demand for large privatization efforts. In the early hours of 27 October 2011, eurozone leaders and the IMF also came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt, the equivalent of , to reduce the country's debt level from ?340bn to ?240bn or 120% of GDP by 2020.On 7 December 2011, the new interim national union government led by Lucas Papademos submitted its plans for the 2012 budget, promising to cut its deficit from 9% of GDP 2011 to 5.4% in 2012, mostly due to the write-off of debt held by banks. Excluding interest payments, Greece even expects a primary surplus in 2012 of 1.1%. The austerity measures have helped Greece bring down its primary deficit before interest payments, from ?25bn (11% of GDP) in 2009 to ?5bn (2.4% of GDP) in 2011, but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.
Overall the Greek GDP had its worst decline in 2011 with -6.9%, a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005, and with 111,000 Greek companies going bankrupt (27% higher than in 2010). As a result, the seasonal adjusted unemployment rate also grew from 7.5% in September 2008 to a record high of 19.9% in November 2011, while the Youth unemployment rate during the same time rose from 22.0% to as high as 48.1%.Overall the share of the population living at "risk of poverty or social exclusion" did not increase significantly during the first 2 year of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010, which was also just slightly worse than the EU27-average at 23.4%, but for 2011 the figure was now estimated to have risen sharply above 33%.
In February 2012, an IMF official negotiating Greek austerity measures, admitted the so far implemented measures were harming Greece in the short term, and cautioned that although further spending cuts were certainly still needed, it was important the fiscal consolidation was not implemented with an excessive pace, as time should now also be given for the implemented economic reforms to start to work.
Some of the economic experts had argued in June 2010, that the best option both for Greece and EU, would be to engineer an orderly default on Greece?s public debt, and by the same time force Greece to withdraw from the eurozone, with a reintroduction of its national currency the drachma at a debased rate. The argument for the latter part of this radical approach, was that Greece also strongly needed to improve its competitiveness in order to reestablish positive growth rates, and a reintroduction of the old drachma would enable Greece to return using the devaluation tool as a mean for that.
In June 2011, a majority of the economists indeed agreed to recommend an orderly default straight away, as it was predicted to be unavoidable for Greece at the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just wind up hurting EU lenders and neighboring European countries even more. However, if Greece were to leave the euro, the economic and political impact would be devastating. According to Japanese financial company Nomura an exit would lead to a 60 percent devaluation of the new drachma. UBS warned of "hyperinflation, military coups and possible civil war that could afflict a departing country". A confidential staff note drawn up in February 2012 by the Institute of International Finance, also revealed that they now favoured an orderly default with a continued Greek membership of the Euro, as the opposite scenario was expected to create losses of at least .
To avoid a chaotic Greek disorderly default and/or the systemic risks to the Eurozone in the scenario with Greece leaving the Euro, the EU leaders decided in October 2011, to engineer and offer an orderly default combined with a ?130bn bailout loan, making it possible for Greece to continue as a full member of the Euro. The offered orderly default and bailout loan, was however conditional, that Greece at the same time approved a new austerity package.
2012
On 12 February 2012, amid riots in Athens and other cities that left stores looted and burned and more than 120 people injured, the Greek parliament approved the new austerity package, with a 199-74 majority. Forty-three lawmakers from the ruling Socialist PASOK and conservative New Democracy who voted against the bill were immediately expelled from their parties, reducing the ruling coalitions's majority in the 300-seat parliament from 236 to 193. The vote is now expected to pave the way for the EU, ECB and IMF to jointly release the funds, which are supposed to cover all the Greek financial needs in 2012-2014. According to the bailout plan, Greece should then be stable enough for a full return in 2015, to obtain all its future needs of economic funding from the private capital markets.On 21 February 2012 the Euro Group finalized the second bailout package (see below), which was extended from ?109 billion to ?130 billion. In a marathon meeting in Brussels private holders of governmental bonds accepted a slightly bigger haircut of 53.5% Creditors are invited to swap their Greek bonds into new 3.65% bonds with a maturity of 30 years, thus facilitating a ?110bn debt reduction for Greece, if all private bondholders accept the swap. EU Member States agreed to an additional retroactive lowering of the bailout interest rates. Furthermore they will pass on to Greece all profits that their central banks made by buying Greek bonds at a debased rate until 2020. Altogether this is expected to bring down Greece's unsustainable debt level from 165% in 2011, to a more sustainable level of 117% of GDP in 2020, somewhat lower than the originally expected 120.5%. The deal is expected to be finalized before 20 March, when Greece needs to repay bonds worth ?14.5bn or default on its debts.
On 9 March 2012 a crucial milestone was reached, when it was announced that 85.8% of private holders of Greek government bonds regulated by Greek law (equal to ), had agreed to the debt restructuring deal. As this number was above the 66.7% threshold, it enabled the Greek government to activate a collective action clause (CAC), so that the remaining 14.2% (equal to ) were also forced to agree. At the same time it was announced that 69.8% of private holders of Greek government bonds regulated by foreign law (equal to ), also had agreed to the debt restructuring deal. Thus, the total amount of debt to be restructured was now guaranteed to be minimum 95.7% (equal to ), while the remaining 4.3% of the private holders (equal to ) were offered a prolonged deadline at March 23 to voluntarily join the debt swap. A deadline that subsequently got prolonged further to April 20, with the positive outcome, that the total and final amount of acceptance rose to 96.9% (equal to ), corresponding to a haircut or debt relief worth . The Greek government currently discuss, how they shall treat the remaining group of foreign bondholders who opted to refuse the deal, and a final answer is only expected after the May 6 national election; but in all circumstances no later than May 15, where the first holdouts are due for a repayment of their maturing bond.
After the announcement from Greece, that minimum 95.7% of the holders of Greek government bonds would be a part of the scheduled debt swap, the president of the Euro Group Jean-Claude Juncker declared, that Greece had now also met the last of the conditions, for the next bailout package to be activated. As the debt swap deal caused significant economic losses to private creditors, Fitch downgraded Greece's sovereign debt rating from C to RD (Restricted Default), and the ISDA declared a credit event, meaning that worth of credit default swaps (CDSs) on Greek debt would be triggered. The deal with a ?107 bn debt relief, is the largest government debt restructuring in history.
In regards of the debt to GDP ratio, it should however be noted the deal only slightly improved the numbers. The reason for this, is that Greece along with the debt relief, had to setup some "temporary debt" in the form of a ?35 bn bank guarantee for the restructured debt and ?25 bn to recapitalize Greek banks. So the net reduction of debt, will straight away only have the seize of ?46.5bn (equal to a 22%-point GDP ratio decline), with the full ?106.5bn (equal to a 50%-point GDP ratio decline) only to take effect some years ahead if the situation develop as planned. The temporary debt will of course be financed by the new ?130bn bailout package. In May 2012, the EU threatened Greece to either agree to the debt rescue plan or leave the eurozone.
International ramifications
Greece represents only 2.5% of the eurozone economy. Despite its size, the danger is that a default by Greece may cause investors to lose faith in other eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues. Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister Jos� Luis Rodr�guez Zapatero as "complete insanity" and "intolerable".Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, and according to Standard & Poor's it does not risk a default. Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.
Countermeasures
Measures taken by the Greek government
Greece adopted a number of austerity packages since 2010. According to research published on 5 May 2010 by Citibank, the fiscal tightening is "unexpectedly tough". The first 3 austerity packages will amount to a total of ?30�billion (equal to 12.5% of the 2009 Greek GDP), and consist of tightenings equal to 5% of GDP in 2010, with a further set of tightenings equal to 4% of GDP in 2011.First austerity package ? February 2010
The first round came with the signing of the memorandums with the IMF and the ECB concerning a loan of ?80�billion. The package was implemented on 9 February 2010 and included a freeze in the salaries of all government employees, a 10% cut in bonuses, as well as cuts in overtime workers, public employees and work-related travels.Second austerity package ? March 2010
On 5 March 2010, amid new fears of bankruptcy, the Greek parliament passed the "Economy Protection Bill", which was expected to save another ?4.8�billion. The measures include (in addition to the above): 30% cuts in Christmas, Easter and leave of absence bonuses, a further 12% cut in public bonuses, a 7% cut in the salaries of public and private employees, a rise of VAT from 4.5% to 5%, from 9% to 10% and from 19% to 21%, a rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported cars of up to 10%?30%, among others.On 23 April 2010, after realizing the second austerity package failed to improve the country's economic position, the Greek government requested that the EU/International Monetary Fund (IMF) bailout package be activated. Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. The IMF had said it was "prepared to move expeditiously on this request".
Shortly after the European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan. The Troika was led by Servaas Deroose, from the European Commission, and included also Poul Thomsen (IMF) and Klaus Masuch (ECB) as junior partners. In return the Greek government agreed to implement further measures.
Third austerity package ? May 2010
On 1 May 2010, Prime Minister George Papandreou announced a new round of austerity measures, which have been described as "unprecedented". The proposed changes, which aim to save through 2012, represent the biggest government overhaul in a generation. The bill was submitted to Parliament on 4 May and approved on separate votes on 29 and 30 June. It was met with a nationwide general strike and massive protests the following day, with three people being killed, dozens injured, and 107 arrested.The measures include:
On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and the International Monetary Fund. The deal consisted of an immediate in loans to be provided in 2010, with more funds available later. The first installment covered of Greek bonds that became due for repayment.
In total, have been agreed on. The interest for the eurozone loans is 5%, considered to be a rather high level for any bailout loan. The European Monetary Union loans will be pari passu and not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. The loans should cover Greece's funding needs for the next three years (estimated at ?30�billion for the rest of 2010 and ?40�billion each for 2011 and 2012). According to EU officials, France and Germany demanded that their military dealings with Greece be a condition of their participation in the financial rescue.
, the deficit was down 40% from the previous year.
Fourth austerity package (Mid-term plan) ? June 2011
Further austerity was introduced in 2011. In the midst of public discontent, massive protests and a 24-hour-strike throughout Greece, the parliament debated on whether or not to pass a new austerity bill, known in Greece as the "mesoprothesmo" (the mid-term [plan]). The government's intent to pass further austerity measures was met with discontent from within the government and parliament as well, but was eventually passed with 155 votes in favor (a marginal 5-seat majority). Horst Reichenbach headed up the task force overseeing Greek implementation of austerity and structural adjustment.The new measures included:
On 11 August 2011 the government introduced more taxes, this time targeted at people owning immovable property. The new tax, which is to be paid through the owner's electricity bill, will affect 7.5�million Public Power Corporation accounts and ranges from 3 to 20 euro per square meter. The tax will apply for 2011?2012 and is expected to raise ?4�billion in revenue.
On 19 August 2011 the Greek Minister of Finance, Evangelos Venizelos, said that new austerity measures "should not be necessary". On 20 August 2011 it was revealed that the government's economic measures were still out of track; government revenue went down by ?1.9�billion while spending went up by ?2.7�billion.
On a meeting with representatives of the country's economic sectors on 30 August 2011, the Prime Minister and the Minister of Finance acknowledged that some of the austerity measures were irrational, such as the high VAT, and that they were forced to take them with a gun to the head.
Negotiations about a fifth austerity package (October 2011 ? January 2012)
In October, Greek Prime Minister George Papandreou got parliamentary backing for further austerity measures. These new measures would allow Greece to get an extra installment of international loans that would prevent a sovereign default and they would make possible the partial write-off of Greek debt, the so called Private Sector Involvement (PSI). As a result of this backing, Greece was granted by the EU a quid pro quo of further austerity for a ?100bn loan and a 50% debt reduction through PSI. Within a week, Papandreou, backed unanimously by his cabinet, announced a referendum on the deal, sending shockwaves through the financial markets. This resulted in Germany's chancellor Angela Merkel and France's prime minister Nicolas Sarkozy issuing an ultimatum declaring that, unless the referendum resulted in the approval of the new measures, they would withhold an overdue ?6bn loan payment to Athens, money that Greece needed by mid-December. Papandreou cancelled the referendum the next day after the New Democracy Party, leaders of the opposition, agreed to back the agreement.On 10 November Papandreou resigned as prime minister following an agreement with the New Democracy party and the Popular Orthodox Rally to appoint a new prime minister of common acceptance promulgate laws associated with implementing the new measures that were agreed with the EU. The person chosen for this task was non-MP technocrat Lucas Papademos, former Governor of the Bank of Greece and former Vice President of the European Central Bank; his appointment was criticised by left-wing parties and branded "unconstitutional". By contrast, three separate polls taken when Papademos assumed office revealed that around 75% of Greeks thought that temporary, emergency technocratic rule was "positive".
The EU insisted that whichever government was elected after Papademos in 2012, it must be bound to honour the agreed upon EU-IMF austerity strategy. It thus demanded that Greek party-political leaders sign legally-binding letters to this effect, as well as to any additional measures that might be required in future as part of the second rescue-package. Papademos argued in favour of signing, even in the face of opposition from major pro-austerity factions in his government. Such letters would bind Greek governments to austerity and structural adjustment through to 2020. It was announced that the general election to replace Papademos' technocratic administration was to be delayed until April, or even May, 2012 because more time was needed to finalise plans for austerity and structural adjustment, as well as to complete negotiations over the Greek debt reduction.
Finalising the deal on the 50% PSI debt write-off, required by the troika as a condition for extending more aid, proved difficult in early 2012, with hedge funds being the most difficult to persuade. In an interview with The New York Times, Papademos said that if his country did not receive unanimous agreement from its bondholders to voluntarily write down ?100bn of Greek's ?340bn debt, he would consider legislating to force bondholder losses, and that if things went well, Greeks could expect "an end to austerity" in 2013. Others believed that even the proposed 50% would not be enough to prevent a sovereign default.
Fifth austerity package ? February 2012
In February 2012, facing sovereign default, Greece was in need of more funds from the IMF and EU by 20 March 2012, and was negotiating over the next lending package, worth ?130 billion. On 10 February 2012, the Greek cabinet approved the draft bill of a new austerity plan, which has been calculated to improve the 2012 budget deficit with ?3.3 billion (and a further ?10 billion improvement scheduled for 2013 and 2014). The austerity plan includes:The latest round of austerity measures means Greece will likely face at least another year of recession, presaging another round of business closures, before the economy will start to grow again, and foreign observers were shocked by the cold-heartedness of German negotiators.
Showing position of disagreement, the transport minister Makis Voridis from the Popular Orthodox Rally party, along with five deputy ministers from various ministries, decided to resign. On 11 February, caretaker prime minister Lucas Papademos warned of "social explosion and chaos" if the parliament would not approve the deal the next day. Speaking to members of Parliament before their vote, Papademos stated that if the majority of them chose to vote against the austerity measures there would be several onerous consequences, including that the government would not be able to pay the salaries of its employees. On 13 February, the Greek Parliament subsequently approved this latest round of austerity measures by a vote of 199 to 74. During the period of parliamentary debate, massive protests were witnessed in Athens that left stores looted and burned and more than 120 people injured. The riot was one of the worst since 2010.
Despite being one of the ruling parties, the Popular Orthodox Rally voted against the plan and withdrew itself from the government. Forty-three MPs from the other two ruling parties (socialist PASOK and conservative New Democracy) also voted against the plan and were immediately expelled from their parties. This reduced the combined power of these two parties from 236 to 193 seats, which is still majority for the 300-seat parliament of Greece. The vote was a major precondition for the EU and IMF to jointly release the funds, which are supposed to cover all financial needs in 2012 and 2013, with the hope that Greece can start lending again at the private capital markets in 2014.
The determination of the leaders of Greek ruling parties to implement the new austerity package was however doubted. For example, Antonis Samaras (leader of New Democracy) talked about renegotiating the deal, despite voting for the austerity package. Because of such uncertainty, the Eurozone finance ministers demanded Greek main politicians to sign a written assurance for their continued support to implement the austerity package, both before and after any elections.
After passing the new austerity package on 13 February, there still remained four other hurdles for Greece, to receive the new ?130 billion bailout loan:
As of 19 February, Greece had managed to pass the first two hurdles. The debt restructure agreement and the result of the debt sustainability report was however still pending. Some of the newest calculations suggested that Greece would now need an enhanced bailout at ?136 billion, and they were still likely to exceed the 120% debt level in 2020. It is now up to the Troika to decide if this can be accepted under the previous terms. Alternatively, the slightly worse outlook for the debt numbers can also be counterfeited, by some further debt restructuring and/or demands for additional austerity measures.
Fight against corruption and tax evasion
OECD estimated in August 2009, the size of the Greek black market to be around ?65bn (equal to 25% of GDP), resulting each year in ?20bn of unpaid taxes. This is a European record in relative terms, and in comparison almost twice as big as the German black market (estimated to 15% of GDP). Several successive Greek governments had in the past attempted to improve the situation, but all failed. A rapid increase in government revenues through implementing a more effective tax collecting system has been recommended. Implementing the proper reforms, is however estimated to be a slow process, requiring at least two legislative periods before they start to work.Transparency International, an independent corruption monitoring NGO, found that 13% of Greeks paid fakelaki (bribery in the form of envelopes with cash donations) in 2009, which was estimated to account for ?787 million in yearly corruption payments. At the same time it was estimated that roughly ?1 billion was paid by companies in bribes to public institutions for avoiding bureaucratic rules or to get other benefits. When calculating all sorts of corruption in Greece, the total amount is estimated to be roughly ?3.5 billion per year (equal to 1.75% of the Greek GDP). Compared with corruption levels measured by Transparency International for 160 other countries, Greece ranked at 49th in 2004, was down at 57th in 2008, and slumped to 71st in 2009. The government elected in October 2009 had on its agenda to increase the fight against fakelaki and other forms of corruption.
;Anticorruption measures The Inspector General of Public Administration has started an online census of civil servants. In connection with this census he has uncovered a number criminal offenses, including an entire non-existent health authority.
;Tax collection improvements In 2010 the government has implemented a tax reform. The year 2012 saw the introduction of a duty of non-cash payments for amounts over 1,500 Euros.
The Greek police have established a special unit, which deals exclusively with tax offenses. Germany has offered experts from its financial management and tax investigation office to help build a more efficient tax administration. However, months later it was not clear whether Greek officials would accept the offer.
In November 2011, the new Greek finance minister Evangelos Venizelos called upon all persons who owe the state more than ?150,000 to pay their outstanding taxes until 24 November or find their names on a black list published on the Internet. The government later revealed the list, which also includes a number of prominent Greeks, including pop stars and sportsmen.
Measures taken by the EU and IMF
First rescue package (May 2010)
Having had the credit rating agencies further downgraded Greece's ability to achieve and the risk premiums on long-term Greek government bonds first record levels, the Greek government requested on 23 April 2010 official financial assistance.The European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) agreed on 1?2 May 2010 with the Greek government to a three-year financial aid program (loan commitments) totaling ?110 billion. The Greek debt in exchange for household should be consolidated within three years, so that the budget deficit should be reduced by 2014 to below 3 percent.
Of the ?110 billion promised by the IMF took ?30bn, the Eurozone ?80bn (as bilateral loan commitments). Instrumental in determining the rates of the individual euro area countries in the ?80bn of the Eurozone was the respective equity interest in the capital of the ECB, which in turn is determined every five years after the prorated share of a country in the total population and economic output in the EU. The German share of the ?80bn was 28%, or about ?22.4bn in three years while France paid ?16.8bn.
In May 2010 Greece received the first tranche of the bailout money totaling ?20bn. Of this total, 5.5 billion came from the IMF and 14.5 billion of Euro states.
On 13 September the second tranche of ?6.5bn was disbursed. The 3rd tranche of the same amount was paid on 19 January 2011. On 16 March, 4th tranche in the amount of ?10.9 billion was paid out, followed by the 5th installment on 2 July. The 6th tranche of ?8bn was paid out after months of delay in early December. Of this amount, the IMF took over ?2.2bn.
Second rescue package (July 2011 - February 2012)
;Early version - July 2011 Since the first rescue package proved insufficient, the 17 leaders of Euro countries approved a (preliminary) second rescue package at an EU summit on 21 July 2011. It was agreed that the aid package has a volume of ?100 billion, provided by the newly created European Financial Stability Facility. The repayment period was extended from seven to 15 years and the interest rate was lowered to 3.5%.For the first time, this also included a private sector involvement, meaning that the private financial sector accepted a voluntary cut. It was agreed that the net contribution of banks and insurance companies to support Greece would include an additional ?37 billion in 2014. The planned purchase of Greek bonds from private creditors by the euro rescue fund at their face value will burden the private sector with at least another ?12.6 billion.
It was also announced at the EU summit, a reconstruction plan for Greece in order to promote economic growth. The European Commission established a "Task Force for Greece".
;EU summit - 26 October 2011 On the night of 26 to 27 October at the EU summit, the politicians made two important decisions to reduce the risk of a possible contagion to other countries, in the case of a Greek default. The first decision was to require all European banks to achieve 9% capitalization, to make them strong enough to withstand those financial losses that potentially could erupt from a Greek default. The second decision was to leverage the EFSF from ?500bn to ?1�trillion, as a firewall to protect financial stability in other Eurozone countries with a looming debt crisis. The leverage had previously been criticized from many sides, because it is something taxpayers ultimately risk to pay for, due to the significantly increased risks assumed by the EFSF.
Furthermore, the Euro countries agreed on a plan to cut the debt of Greece from today's 160% to 120% of GDP by 2020. As part of that plan, it was proposed that all owners of Greek governmental bonds should "voluntarily" accept a 50% haircut of their bonds (resulting in a debt reduction worth ?100bn), and moreover accept interest rates being reduced to only 3.5%. At the time of the summit, this was at first formally accepted by the government banks in Europe. The task to negotiate a final deal, also including the private creditors, was handed over to the Greek politicians.
In view of the uncertainty of the domestic political development in Greece, the first disbursement was suspended after Prime Minister George Papandreou announced on 1 November 2011 that he wanted to hold a referendum on the decisions of the Euro summit. After two days of intense pressure, particularly from Germany and France, he finally gave up on the idea. On 11 November 2011 he was succeeded as prime minister by Loukas Papadimos, who leads a new transitional government. The most important task of this interim government was to finalize the "haircut deal" for Greek governmental bonds and pass a new austerity package, to comply with the Troika requirements for receiving the second bailout loan worth ?130bn (enhanced from the previously offered amount at ?109bn).
;Final agreement - February 2012 The Troika behind the second bailout package defined three requirements for Greece to comply with in order to receive the money. The first requirement was to finalize an agreement whereby all private holders of governmental bonds would accept a 50% haircut with yields reduced to 3.5%, thus facilitating a ?100bn debt reduction for Greece. The second requirement was that Greece needed to implement another demanding austerity package in order to bring its budget deficit into sustainable territory. The third and final requirement was that a majority of the Greek politicians should sign an agreement guaranteeing their continued support for the new austerity package, even after the elections in April 2012.
On 21 February 2012, the Euro Group finalized the second bailout package. In a thirteen-hour marathon meeting in Brussels, EU Member States agreed to a new ?100 billion loan and a retroactive lowering of the bailout interest rates to a level of just 150 basis points above the Euribor. The IMF will provide "a significant contribution" to that loan but will only decide in the second week of March how much that will be. EU Member States will also pass on to Greece all profits which their central banks made by buying Greek bonds at a debased rate until 2020. Private investors accepted a slightly bigger haircut of 53.5% of the face value of Greek governmental bonds, the equivalent to an overall loss of around 75%.
It is the world's biggest debt restructuring deal, affecting some ?206bn of bonds. The creditors are invited to swap their current Greek bonds into new bonds with a maturity of between 11 and 30 years and lower average yields of 3.65% (2% for the first three years, 3% for the next five years, and 4.2% thereafter), thus facilitating a ?100bn debt reduction for Greece. Euro-area Member States have pledged to contribute ?30bn for private sector participation. In case not enough bondholders agree to a voluntary bond swap, the Greek government has threatened to retroactively introduce a collective action clause to enforce participation.
The cash will be handed over after it is clear that private-sector bondholders do indeed join in the haircut, and after Greece gives evidence of the legal framework that it will put in place to implement dozens of "prior actions" - from sacking underperforming tax collectors to passing legislation to liberalise the country's closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June. In return for the bailout money Greece accepts "an enhanced and permanent presence on the ground" of European monitors. It will also have to service its debts from a special, separate escrow account, depositing sums in advance to meet payments that fall due in the following three months. This operation will be supervised by the troika: the International Monetary Fund, the European Union and the European Central Bank.
On 3 March 2012, The Institute of International Finance said twelve of its steering committee would swap their bonds and accept a loss of up to 75%. When all acceptances had been counted at March 9, and after the Greek parliament subsequently had decided to activate a collective action clause for the bonds covered by Greek law, the overall share of Greek government bonds to face a debt swap had reached 95.7% (equal to ). The remaining 4.3% of bond holders covered by foreign law and refusing the debt swap (equal to ), were given two weeks of extra time to reconsider and volountarily join the swap.
When the swap is executed, the bond holders will receive a cash payment on 15% of their original holding, and become issued with new Greek bonds worth 31.5% of their old bonds (covered by 24 new securities). Combined this will result in a 53.5% haircut of the face value, so that the Greek debt pile overall will decrease from its current level at , to a more sustainable level around .
Speculation about a third rescue package
A Financial Times editorial on 22 February 2012 argued leaders had "proved themselves unable to settle on a solution that will not need to be revisited yet again", that at best the deal could only hope to remedy one part of the Greek disaster, namely the country's debilitated public finances, though it would not likely even do that. The eurozone's latest plan did, at least, evince consistency with the currency block's previous behaviour: }} The German finance minister Wolfgang Sch�uble and Euro Group president Jean-Claude Juncker shared the scepticism, and did not rule out a third bailout. According to a leaked official report from the European Commission, European Central Bank and the International Monetary Fund, Greece may need another ?50 billion ($66bn) from 2015 to 2020. The second bailout's programme began veering off course before it even began. A Financial Times review of the bailout report noted an assumption that Greece's economy shrank by 6.9% during 2011, but Athens duly announced the shrinkage had actually been 7.5%. "It wouldn't be the first time a Greek bailout failed to live up to optimistic expectations", concluded the newspaper.In mid-May 2012 the crisis and impossibility to form a new coalition government after elections led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as "Grexit" and started to affect international market behaviour.
Economic and social effects of austerity measures
In exchange for European funding Greece was forced to impose strict fiscal austerity. As early as 2010 some economists expressed fears that the negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. In a 2003 study that analyzed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth.US economist Joseph Stiglitz has also criticised the EU for being too slow to help Greece, insufficiently supportive of the new government, lacking the will power to set up sufficient "solidarity and stabilisation framework" to support countries experiencing economic difficulty, and too deferential to bond rating agencies.
Overall the increase in the share of the population living at "risk of poverty or social exclusion" was not significant during the first 2 year of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (and only slightly worse than the EU27-average at 23.4%), but for 2011 the estimated figure rose sharply above 33%. According to an IMF official, austerity measures have helped Greece bring down its primary deficit before interest payments, from ?24.7bn (10.6% of GDP) in 2009 to just ?5.2bn (2.4% of GDP) in 2011, but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.
Overall the Greek GDP had its worst decline in 2011 with -6.9%, a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005, and with 111,000 Greek companies going bankrupt (27% higher than in 2010). As a result, the seasonal adjusted unemployment rate also grew from 7.5% in September 2008 to a record high of 19.9% in November 2011, while the Youth unemployment rate during the same time rose from 22.0% to as high as 48.1%."[F]ood aid, in a western European capital?" remarked one appalled BBC journalist, before observing: "You do not measure a people's ability to survive in percentages of Gross Domestic Product." Another BBC reporter wrote: "As you walk around the streets of Athens and beyond you can see the social fabric tearing." The social effects of the austerity measures on the Greek population have been severe, as well as on poor and needy foreign immigrants, with some Greek citizens turning to NGOs for healthcare treatment and having to give up children for adoption. The suicide rate in Greece used to be the lowest in Europe, but by March 2012 it had increased by 40%; Dimitris Christoulas, a 77-year-old pensioner, shot himself outside the Greek parliament in April because the austerity measures had "annihilated all traces for my survival". Patients with chronic conditions attending treatment at state hospitals in Athens are told to bring their own prescription drugs.
In June the previous year, at the time of the Greek parliaments approval of the fourth austerity package, an independent United Nations official had cautioned that this additional package of austerity in Greece could potentially pose a violation of human rights, if it were implemented without careful consideration to the population's need for "food, water, adequate housing and work under fair and equitable conditions". On 17 October 2011 Minister of Finance Evangelos Venizelos announced that the government would establish a new fund, aimed at helping those who were hit the hardest from the government's austerity measures. The money for this agency will come from the proceeds made by tackling tax evasion.
In February 2012, it was reported that 20,000 Greeks had been made homeless during the preceding year, and that 20 per cent of shops in the historic city centre of Athens were empty. The same month, Poul Thomsen, a Danish IMF official overseeing the Greek austerity programme, warned that ordinary Greeks were at the "limit" of their toleration of austerity, and he called for a higher International recognition of "the fact that Greece has already done a lot fiscal consolidation, at a great cost to the population"; and moreover cautioned that although further spending cuts were certainly still needed, they should not be implemented rapidly, as it was crucial first to give some more time for the implemented economic reforms to start to work. Estimates in mid-March 2012 were that an astonishing one in 11 residents of greater Athens?some 400,000 people?were visiting a soup kitchen daily.
Prominent UK economist Roger Bootle summarised the state of play at the end of February 2012: }}
Criticism of Germany's role
Germany has played a major role in every discussion to do with the Greek debt crisis. This is not surprising, given that the country was Greece's biggest creditor going into the maelstrom, but the Germans have come under heavy fire for perceived hypocrisy and for the austerity and debt-relief programme they have helped impose on Greece, a programme that has led to accusations of Germany engaging in a "naked pursuit" of its own national interests rather than attempting to solve the crisis and make the adjustments necessary for the Mediterranean country to recover.Charges of hypocrisy
Hypocrisy has been alleged on multiple bases. "Germany is coming across like a know-it-all in the debate over aid for Greece", commented Der Spiegel, though German economic historian Albrecht Ritschl describes his country as "king when it comes to debt. Calculated based on the amount of losses compared to economic performance, Germany was the biggest debt transgressor of the 20th century." Despite calling for the Greeks to adhere to fiscal responsibility, and although Germany's tax revenues are at a record high, with the interest it has to pay on new debt at close to zero, Germany still missed its own cost-cutting targets in 2011 and is also falling behind on its goals for 2012. There have been widespread accusations that Greeks are lazy, but analysis of OECD data shows that the average Greek worker puts in 50% more hours per year than a typical German counterpart, and the average retirement age of a Greek is, at 61.7 years, older than that of a German. US economist Mark Weisbrot has also noted that while the eurozone giant's post-crisis recovery has been touted as an example of an economy of a country that "made the short-term sacrifices necessary for long-term success", Germany did not apply to its economy the harsh pro-cyclical austerity measures that are being imposed on countries like Greece, In addition, he noted that Germany did not lay off hundreds of thousands of its workers despite a decline in output in its economy but reduced the number of working hours to keep them employed, at the same time as Greece and other countries were pressured to adopt measures to make it easier for employers to lay off workers. Weisbrot concludes that the German recovery provides no evidence that the problems created by the use of a single currency in the eurozone can be solved by imposing "self-destructive" pro-cyclical policies as has been done in Greece and elsewhere. Arms sales are another fountainhead for allegations of hypocrisy. Greek MP Dimitris Papadimoulis: }}Thus more allegations of hypocrisy stem not from the fact of the arms sales, but from the way in which they conducted: Germany complains of Greek corruption, yet the murky arms sales meant that the trade with Greece became synonymous with high-level bribery and corruption; former defence minister Akis Tsochadzopoulos was gaoled in April 2012 ahead of his trial on charges of accepting an ?8m bribe from Germany company Ferrostaal.Alleged pursuit of national self-interest
Since the euro came into circulation in 2002?a time when the country was suffering slow growth and high unemployment?Germany's export performance, coupled with sustained pressure for moderate wage increases (German wages increased more slowly than those of any other eurozone nation) and rapidly rising wage increases elsewhere, provided its exporters with a competitive advantage that resulted in German domination of trade and capital flows within the currency bloc. Germany's total export trade value nearly tripled between 2000 and 2007, and though a significant proportion of this is accounted for by trade with China, its trade surplus with the rest of the EU grew from ?46.4 bn to ?126.5 bn during those seven years. Germany's bilateral trade surpluses with the Mediterranean countries are especially revealing: between 2000 and 2007, Greece's annual trade deficit with Germany grew from ?3 bn to ?5.5 bn; Italy's doubled, from ?9.6 bn to ?19.6 bn; Spain's almost tripled, from ?11 bn to ?27.2 bn; and Portugal's quadrupled, from ?1 bn to ?4.2 bn.Nobel laureate Paul Krugman remarked: "Listen to many European leaders?especially, but by no means only, the Germans?and you'd think that their continent's troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they're paying the price, and fiscal austerity is the only answer." Germans see their government finances and trade competitiveness as an example to be followed by Greece, Portugal and other troubled countries in Europe, but the problem is more than simply a question of southern European countries emulating Germany. Dealing with debt via domestic austerity and a move toward trade surpluses is very difficult without the option of devaluing your currency, and Greece cannot devalue because it is chained to the euro. Roberto Perotti of Bocconi University has also shown that on the rare occasions when austerity and expansion coincide, the coincidence is almost always attributable to rising exports associated with currency depreciation. As can be seen from the case of China and the US, however, where China has had the yuan pegged to the dollar, it is possible to have an effective devaluation in situations where formal devaluation cannot occur, and that is by having the inflation rates of two countries diverge. If German inflation rises faster than that of Greece and other strugglers, then the real effective exchange rate will move in the strugglers' favour despite the shared currency. Trade between the two can then rebalance, aiding recovery, as Greece's products become cheaper. Dean Baker therefore argued that the problem is Germany continuing to shut off just such an adjustment mechanism, meaning its "position on the heavily indebted southern countries is absurd. It wants to maintain its huge trade surplus with these countries, while still insisting that they make good on their debts. This is like a store owner insisting that his customers keep buying more from him, while still paying off their debts." "The counterpart to Germany living within its means is that others are living beyond their means", agreed Philip Whyte, senior research fellow at the Centre for European Reform. "So if Germany is worried about the fact that other countries are sinking further into debt, it should be worried about the size of its trade surpluses, but it isn't." Germany, though not the worst offender, has even been ringing up arms sales to Greece in the order of tens of millions of euros, and has "recruited thousands of the Continent's best and brightest .�.�. a migration of highly qualified young job-seekers that could set back Europe's stragglers even more, while giving Germany a further leg up."
OECD projections of relative export prices?a measure of competitiveness?showed Germany beating all euro zone members except for crisis-hit Spain and Ireland for 2012, with the lead only widening in subsequent years. In March 2012, Bernhard Speyer of Deutsche Bank reiterated: "If the eurozone is to adjust, southern countries must be able to run trade surpluses, and that means somebody else must run deficits. One way to do that is to allow higher inflation in Germany but I don't see any willingness in the German government to tolerate that, or to accept a current account deficit." A research paper by Credit Suisse concurred: "Solving the periphery economic imbalances does not only rest on the periphery countries' shoulders even if these countries have been asked to bear most of the burden. Part of the effort to re-balance Europe also has to been borne by Germany via its current account." At the end of May 2012, the European Commission warned that an "orderly unwinding of intra-euro area macroeconomic imbalances is crucial for sustainable growth and stability in the euro area," and prodded Germany to "contribute to rebalancing by removing unnecessary regulatory and other constraints on domestic demand". Even with such policies, Greece and other countries would face years of hard times, but at least there would be some hope of recovery. By May 2012, there were signs that the status quo, and "it's tough to overstate just how fantastic the status quo has been for Germany", was beginning to change as even France began to challenge German policy.
As if to emphasise the root problem, when downgrading France and other eurozone countries in January 2012, S&P gave one of its reasons as "divergences in competitiveness between the eurozone's core and the so-called 'periphery. The Germans "wear their anti-inflation obsession as a badge of honour", but Krugman again warned that "price stability for Germany .�.�. [means] catastrophe for the euro." He estimates that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent to become competitive again: Germany insists that it is ready to do "everything" to guarantee the eurozone. "Yet, for all the rhetoric, little has changed. The austerity strategy imposed by Berlin on Europe's 'Arc of Depression'?against the better judgement of the European Commission, the OECD, International Monetary Fund, and informed economic opinion across the globe?has not been modified in the slightest even though economic contraction has proved deeper than expected in every single victim country." The version of adjustment offered by Germany and its allies is that austerity will lead to an internal devaluation, i.e. deflation, which would enable Greece gradually to regain competitiveness. "Yet this proposed solution is a complete non-starter", noted one UK economist. "If austerity succeeds in delivering deflation, then the growth of nominal GDP will be depressed; most likely it will turn negative. In that case, the burden of debt will increase." Strictly in terms of reducing wages relative to Germany, Greece has made 'progress': private-sector wages fell 5.4% in the third quarter of 2011 from a year earlier and 12% since their peak in the first quarter of 2010. A leaked European Commission report called for nominal wages in the business economy to be reduced by a further 15% during 2012?2014.
The question then is whether Germany would accept the price of inflation for the benefit of keeping the eurozone together. On the upside, inflation, at least to start with, would make Germans happy as their wages rose in keeping with inflation. Regardless of these positives, as soon as the monetary policy of the ECB?which has been catering to German desires for low inflation?began to look like it might stoke inflation in Germany, Merkel moved to counteract, cementing the impossibility of a recovery for struggling countries. With eurozone adjustment locked out by Germany, economic hardship elsewhere in the currency block actually suits its export-oriented economy, because it causes the euro to depreciate, making German exports cheaper and so more competitive. Germany's unemployment continued its downward trend to record lows in March 2012, and yields on its government bonds government bonds fell to repeat record lows in the first half of 2012 (though real interest rates are actually negative).
German and other financial institutions have scooped a huge chunk of the rescue package: "more than 80 percent of the rescue package is going to creditors?that is to say, to banks outside of Greece and to the ECB. The billions of taxpayer euros are not saving Greece. They're saving the banks." The shift in liabilities from European banks to European taxpayers has been staggering: one study found that the public debt of Greece to foreign governments, including debt to the EU/IMF loan facility and debt through the eurosystem, increased by ?130 bn, from ?47.8 bn to ?180.5 billion, between January 2010 and September 2011. The combined exposure of foreign banks to Greek entities?public and private?was around 80bn euros by mid-February 2012. In 2009 they were in for well over 200bn. The director of LSE's Hellenic Observatory mused: "Who is rescued by the bailouts of the European debt crisis? The question won't go away. .�.�. The Greek banks?vital to the provision of new investment in an economy facing a sixth year of continuous recession?have certainly not been 'rescued' .�.�. [and] face large-scale nationalisation. .�.�. Athenians might well turn the aphorism around and warn their partners in Lisbon: 'Beware of Europeans bearing gifts.
All of this has resulted in increased anti-German sentiment within peripheral countries like Greece and Spain, the situation perhaps inflamed by the fact that "during much of the 20th century, the situation was radically different: after the first world war and again after the second world war, Germany was the world's largest debtor, and in both cases owed its economic recovery to large-scale debt relief." When Horst Reichenbach arrived in Athens towards the end of 2011 to head a new European Union task force, the Greek media instantly dubbed him "Third Reichenbach"; in Spain in May 2012, businessmen made unflattering comparisons with Berlin's domination of Europe in WWII, and top officials "mutter about how today's European Union consists of a 'German Union plus the rest. The German Foreign Ministry has advised its citizens in Greece to avoid "demonstrations and large gatherings". Almost four million German tourists?more than any other EU country?visit Greece annually, but they comprised most of the 50,000 cancelled bookings in the ten days after the 6 May 2012 Greek elections, a figure The Observer called "extraordinary". The Association of Greek Tourism Enterprises estimates that German visits for 2012 will decrease by about 25%.
Hedge funds
Though it was largely foreign banks, represented in the various talks by the Institute of International Finance, who originally held Greek government bonds they had so recklessly bought, by the time of the February 2012 negotiations they had sold on perhaps half their holdings, largely to hedge funds and other investors not represented at the talks. In February, hedge funds were thought to control 25?30% of Greek bonds, and are widely believed to be unwilling to participate in any voluntary debt reduction, complicating any deal. Their reluctance to take losses stems from their reckoned investment strategy, which would bring profit from a formal default on Greek bonds via a pay-out from the bond insurance. To neuter the hedge-fund veto on negotiations, the Greek government was expected to, and did, pass retroactive legal provisions to allow it to force a restructuring on bondholders. An imposed deal, however, would apparently trigger CDS payments, the Greek case might be more complicated than Argentina, putting some investors off. One hedge fund that had earlier told Reuters it was considering legal options said it had now decided to agree to the swap, even though that would mean a small loss."For much of the past 18 months, investing in or against eurozone bonds has been a fool?s errand for the world?s $2tn hedge fund industry. A regime of political vacillation and punishing volatility left few fund managers who sought to play the crisis-stricken market with anything to show for their efforts."
Analysis of the restructuring
The obsession with the Greek minimum wage, and the insistence on slashing it, is incomprehensible. In March, Nouriel Roubini ruminated: "A myth is developing that private creditors have accepted significant losses in the restructuring of Greece's debt, while the official sector gets off scot free. .�.�. The reality is that most of the gains in good times .�.�. were privatised while most of the losses have been now socialised. Taxpayers of Greece's official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece's past, current and future insolvency."}} One estimate is that Greece actually subscribed to ?156bn worth of new debt in order to get ?206bn worth of old debt to be written off, meaning the trumpeted write-down of ?110bn by the banks and others is more than double the true figure of ?50bn that was truly written off. Taxpayers are now liable for more than 80% of Greece's debt. According to Robert Reich, in the background of the Greek bailouts and debt restructuring lurks Wall Street. While US banks are owed only about ?5bn by Greece, they have more significant exposure to the situation via German and French banks, who were significantly exposed to Greek debt. Massively reducing the liabilities of German and French banks with regards to Greece thus also serves to protect US banks.Greek public opinion
According to a poll by Public Issue and SKAI Channel, PASOK?who won the national elections of 2009 with 43.92% of the vote?has seen its approval rating decimated to a mere 8%, placing it fifth after right-wing New Democracy (31%), left-wing Democratic Left (18%), left-wing Communist Party of Greece (KKE) (12.5%) and left-wing SYRIZA (12%). The same poll suggested that Papanderou is the least popular political leader with a 9% approval rating, while 71% of Greeks do not trust Papademos as prime minister.In a poll published on 18 May 2011, 62% of the people questioned felt the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Giorgos Papakonstantinou, to handle the crisis. Evangelos Venizelos replaced Mr. Papakonstantinou on 17 June. 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece's economy. 64% felt that the possibility of sovereign default is likely. When asked about their fears for the near future, Greeks highlighted unemployment (97%), poverty (93%) and the closure of businesses (92%).
Polls have shown that, despite the awful sitution, the vast majority of Greeks are not in favour of leaving the eurozone, a fact attributed by some to there having been "so much propaganda over the years about the merits of the euro and the perils of being outside it that both expert and popular opinion can barely see straight. It is true that default and a euro exit could endanger Greece's continued membership of the EU. More importantly, though, there is a strong element of national pride. For Greece to leave the euro would seem like a national humiliation. Mind you, quite how agreeing to decades of misery under German subjugation allows Greeks to hold their heads high defeats me."
Call for debt audit commission
In the documentary Debtocracy made by a group of Greek journalists, it is argued that Greece should create an audit commission, and force bondholders to suffer from losses, like Ecuador did.Speculation about Euro exit
"The euro should now be recognized as an experiment that failed", wrote Martin Feldstein in 2012. Economists, mostly from outside Europe, and associated with Modern Monetary Theory and other post-Keynesian schools condemned the design of the Euro currency system from the beginning and have since been advocating that Greece (and the other debtor nations) unilaterally leave the eurozone, which would allow Greece to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate.Economists who favor this radical approach to solve the Greek debt crisis typically argue that an orderly default is unavoidable for Greece at the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just wind up hurting EU lenders and neighboring European countries even more. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.
However, German Chancellor Angela Merkel and former French President Nicolas Sarkozy have said on numerous occasions that they would not allow the eurozone to disintegrate and have linked the survival of the Euro with that of the entire European Union. In September 2011, EU commissioner Joaqu�n Almunia shared this view, saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration".
See also
Analogous:
Notes
References
Source: http://article.wn.com/view/2012/06/23/Greek_Coalition_Outlines_Plan_to_Renegotiate_Loan_Deal/
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