Greece – An Economy In Shambles

Greece, fondly known as Hellas in Greek, is the land of democracy, western philosophy, literature, mathematics, sculpture, dramatic tragedies, and the birth place of Olympics. The revenue streams of Greece comprise the tourism sector and merchant shipping which is its cash cow, followed by agriculture. Currently, the economy is in a very bad shape and there’s little or no hope for improvement in its condition any time soon. Let us therefore delve into details of the catastrophe that has hit this Mediterranean nation.

In the late 90s, the performance of the Greek economy was appalling as lower levels of economic development, government spending and industrialisation affected the standard of living of the common man along with unemployment and low wage rate being the chief bottlenecks. This affected consumer spending and led to a double-digit inflation rate hovering closer to 20-25 per cent along with anemic real growth rates and large fiscal and external imbalances. This prompted the political parties to support its integration with the European Union and to achieve this, the then-government of Greece fudged up its budget deficit to meet the qualification bar that was set to enter the European Union.

On June 19, 2000 Greece passed the final stages and became a part of the economic and monetary merger of the European Union, also giving up its struggling Greek drachma to the euro. This hallmark entry of Greece into the euro area seemed to mark a transformation in the country’s economic performance as its credibility increased due to the association. A major drop was seen in interest rate spreads between 10-year Greek and German sovereigns to 10-50 basis points, from over 600 basis points in the late 90s.

There was a dramatic fall in the inflation rate with rising capital inflows owing to improved business confidence, taking advantage of which the general public of Greece took huge amounts of loans that led to a surge in consumer credit. Furthermore, the government was in a fix as about 49 per cent of the population evaded tax payments and decline in public sector saving forced them to depend upon the borrowed money to balance its trade books. At the onset of 2009, the newly elected government disclosed that their budget deficits were running more than 5 per cent of the GDP than its previously stated below 3 per cent. This invited a lot of questions on the European Union statistical agency’s capability to check financial data declared by governments, also shutting out Greece from borrowing in the financial markets.

The soaring of Greek sovereign 10-year bond yields caused bond holders huge losses. These bonds were later forced out of the global financial markets and Athens had to rely on emergency liquidity assistance from its central bank i.e. Bank of Greece, thereby turning its liquidity problem into a solvency problem, which threatened to set off a new financial crisis.  By 2010-11, the publicly known troika i.e. European Commission, European Central Bank and International Monetary Fund came out with two international bailouts for Greece which totalled more than Euro 240 billion on a condition to implement strict austerity measures. Unfortunately, this bailout money was used to pay off Greece’s international loans instead of investing in the economy and correct the government’s staggering debt load, thereby pushing debt to GDP to higher levels.

The structural program prescribed by the troika caused the Mediterranean nation to face immense employment problems (25 per cent unemployment rate) since there was no freedom in its economy work style. During May 2010 to June 2011, the ECB started buying Euro 78 billion bonds, out of which Euro 45 billion was from the Greece government so as to reduce bond spread and increase the confidence of investors. When it came to repayment of the loan, the debt-ridden country faced innumerable problems as the government handsomely paid pension to individuals, thereby leaving them with less monetary resources to use for their restructuring program. Due to political instability in Greece, the euro zone finance ministers extended their bailout in December 2014 for two months. The newly elected Greek Prime Minister Alexis Tsipras got a further four-month extension in February 2015 in return for dropping key anti-austerity measures and undertaking euro zone’s prescribed reform programme.

Finally, on May 12, 2015, Greece, that owed approximately Euro 324 billion to its creditors, made a payment of Euro 750 million to the IMF by drawing on its cash reserves through pension cuts and labour reforms so as to keep the country afloat. Both the parties discussed upon the budget proposals to avert an imminent debt default. The creditors wanted Athens to have a budget surplus of 1 per cent of annual GDP by the end of the 2015 in the hope of achieving a 2 per cent target in 2016 and 3 per cent in 2017.

To achieve this, the troika came out with strict reforms like increase in corporate taxes from its current 26 per cent rate, cut in military spending by Euro 400 million accompanied with tighter rules on provision for pensions. Since the Greek PM wanted to keep the Greeks’ faith in him intact, he rejected those proposals which led to the debt-ridden country default on its Euro 1.5 billion payment on June 30, 2015. Moreover, the ECB froze its emergency lending to Greek banks which prompted Greek officials to keep their banks closed till July 5 (referendum) so as to impose strict capital controls. As a latest development, the Greek prime minister has written a letter to the nation’s creditors and appeared to make concessions. However, it’s important to note that key differences over the level of sales tax on Greek islands and pension reforms remain.

So, Grexit still remains a possibility which will not only be gloom-ridden for Greece but also for the entire euro zone as huge money is involved. To counter this problem, either the euro zone must make concessions to Greece or stand firm and allow it to leave the euro zone or force it to accept the demands. The choices seem sharply delineated but the truth is that all routes may ultimately lead to the destruction of the European single currency.