Introduction
In the last ten years, Greece has used heavy borrowings from the capital markets (international) so as to fund its deficits (current accounts and government budget). This is indeed what analysts believe was the onset of the credit crisis that has had a number of negative impacts on the Greece economy in terms of lowered investor confidence which has gone ahead to aggravate the already bad situation. In this text, I concern myself with the credit crisis in Greece. Most importantly, I shall look at what caused the debt crisis as well as what its consequences were. I shall also discuss the various reasons why Greece got affected by the international credit crisis.
A background of the crisis: The foundation of the crisis
According to Wonders (2010), the most significant drop in investor confidence was in October 2009 when there was a government (newly elected) decision to revise the budget deficit to 12.7% of the Gross domestic Product up from 6.7% of the GDP. This was later revised upwards by the statistical agency of the EU, Eurostat, whose estimates projected the actual deficit to stand at 13.6% of the Gross Domestic Product. This combined with a constellation of other factors made investors overly jittery considering that the ability of Greece to repay its Debts was largely compromised by the happenings.
For the year 2010, the debt obligations (maturing) were estimated to stand at 72 billion US dollars. It was not until the 23rd of April that the International Monetary Fund as well as a number of European Countries were formally requested by the Greek government to assist it financially so as to enable it meet its obligations as they matured. However, what many analysts have over time sought to understand is the actual onset of the Greek financial crisis. Hopefully, the building blocks of the whole crisis can be accessed from a overview of previous events. According to Baldwin, Gros & Laeven (2010), “the effects of the credit crisis in Greece have been felt only in the recent months, but the seeds of the credit crisis have been planted slowly by slowly over the last one decade.”
Greece joins the euro
In the year 2001, Greece joined the euro and in that regard, became the 12th member to do so. This move which was branded a rare achievement by the government was as a result of the country’s concerted efforts to rein in on increasing interest rates as well as inflation figures. Though, this was seen by the Greek government as a rare achievement and a move that was projected to enhance prosperity as well as stability of the country, analysts warned that if the country failed to put its house in order, the move could eventually impact negatively not only on the Euro but also on the country.
It was not until later that the effects of joining the euro were demonstrated by the erosion of the purchasing power of the Greek populace. Indeed, Wim Duisenberg who was then the European Central Bank president was quoted as saying that for Greece to improve the economy, it had to keep working hard. He also added that inclusion of European nations which were weaker could affect the euro in the long term. It was not until later, the year 2004, when Greece admitted that it had understated its budget deficit so as to join the Euro. As per the provisions of Eurozone States, the required deficit of states must be below 3% of the GDP. However, in the case of Greece, data (revised) showed that the set limit had been exceeded by the country from as early as 1999.
The austerity budget
In the 29th of March 2005, measures aimed at bringing down the deficit of Greece as well as enhance the public finances were undertaken by the imposition of an austerity budget. This was essentially after the effects of high costs Greece encountered after hosting the Olympics in 2004. The measures in this case included a 1% increase in the VAT as well as tobacco and alcohol tax hikes.
In some quarters, this was seen as a further assault on the public which has seen its purchasing power noose dice after the introduction of the euro four years earlier. Despite its effects of eroding the purchasing power of the populace even further, the move to hike taxes was supported by the government as the only measure which could be taken so as to avert a situation where the government would have to enforce or implement health sector cuts as well as reduce spending in other critical areas like education.
False signs of rebound
In 2006 (spring), there were signs that the Greece economy was firmly back on the recovery path. This was one year after the implementation of the austerity budget and to underscore the recovery signs, the first three months of 2006 were informed by a 4.1% increase in Gross Domestic Product. Further, the country was able to increase its revenues by up to 6.9%. This was also the period that witnessed the 31.5 % increase in the value of exports. In other words, Greece seemed to be on a definite path to economic prosperity and even the European commission was of the opinion that Greek no longer needed close monitoring.
According to Wonders (2010), the economic revival in this case was largely believed o be spurred by Tourism which made the greatest contribution to the GDP of the country standing at 19%. However, it is important to note that the path to economic recovery was made bumpier by a government that was labeled pro-business. This was due to the government’s inability to increase wages, loosen finances as well as avert the imminent closure of companies in the public sector. Further, the economic recovery streak was further frustrated by the tendency of Greece to favor bureaucracy.
It is also important to note that during this period, the country was unable to rein in on corruption as well as the tax system which was largely considered to be unwieldy. Matters were also complicated by the low direct foreign investment which did not mirror the trends of the other EU member countries. The economic growth in this case also failed to enhance employment with unemployment levels estimated to be close to 10% at the time. All these problems are perhaps what motivated Chorafas (2010) statement that “Greece seemed to be on the path to economic recovery on the surface but deep under, unresolved issues abounded…..”
Snap elections
On the 4th of October 2009, the Phanhellenic Socialist Movement came into power after the calls for a snap election by the New Democracy. The campaigns were informed by insistence of the need to ensure that the looming financial crisis was settled and taken care of. This was on the onset of increasing national debt which at the time was compounded by a contacting economy. On assuming power as the new PM, George Papandreou who was emphatic that the new stimulus package which was underway would act as a jab in he arm for the economy. However, as it was soon to emerge, the Papandreou administration rode to power on the back of “politics of hope,” something that inhibited visible results going forward.
Causes and progression of the credit crisis
According to Baldwin, Gros & Laeven (2010), real fears of the debt crisis the country was staring on in the face were confirmed later on in 2009 when Papandreou admitted that the economy of Greece was indeed deep in the woods. In this section, I will first concern myself with the progression of the crisis and then look in detail at all the possible causes of the credit crisis. The progression part will concern itself with the initial debt fears, the downgrading of the credit rating by Fitch, the unveiling of radical reforms and lastly, the negative effects of the unrest. The possible causes section shall concern itself with two things, that is, the domestic factors and secondly, the international factors which contributed towards Greece’s credit crisis.
The progression
It was in November 30th 2009 that the Greek prime minister admitted that the economy of the country was in “intensive care.” These comments were further confirmed by the apparent discomfort the debt of the country was causing the European finance ministers.
Initial debt fears
As already noted above, it was in the last quarter of 2009 that the European finance ministers expressed their reservations about Greece’s debt size. Indeed, it was now apparent that the country could not rein on its loans as they fell due after periods of ever increasing public debt as well as the effects of the Olympic Games which ended to be too costly for the country.Indeed, according to Saleh (2010) it is during the last quarter of 2009 that international investors started pondering on the then unlikely scenario of a member of the EU being unable to settle its debts. The deficit in the public sector was in the region of 12.5% of the Gross domestic Product and to underline the seriousness of the matter, this exceeded the recommended EU amount by up to four times.
It is at this time that the gravity of the issue started to finally sing amongst the populace as the Socialist government accepted it was indeed backed into a corner with a public-sector deficit recorded during its rein (i.e. 12.5%) being two times what its predecessor had encountered. Indeed, all the indications showed that the Greece national debt was set to rise going forward. This was a depressing scenario considering that at that moment, Greece had the highest national debt amongst all the European Union member countries.
Credit rating downgraded by Fitch
On the 8th of December, Fitch downgraded the credit rating of Greece to BBB+, down from A- despite earlier indications that credit rating firms would not be quick to downgrade Greece. Less than a month earlier, Standard and Poor’s which; a credit rating agency had indicated that it was still too early to downgrade the credit rating of the country from A-. The downgrade from Fitch, though generally expected came as a shocker to many given the fact that it was the first time in ten years that the country failed to display an A- credit rating. The immediate effect of this was an increase in the borrowing costs for the country.
The reason for the downgrade was simple and clear and it relayed fears that the country was headed to turbulent economic as well as financial times. Fitch gave the reason for the downgrade as decreasing fiscal institutions credibility further worsened by existing doubts over the country’s ability to undertake economic recovery that was sustainable. Once the move by the rating agency became apparent, effects were felt immediately at the Stock Market which recorded a 6% decrease in turnover rates. Most market analysts braced for a downgrade by the other credit rating agencies including but not in any way limited Standard and Poor’s as well as Moody’s.
Radical reforms unveiled
With the national debt of the country seemingly getting out of hand, the Papandreou administration announced a move to stem the deficit through embracing radical reforms. Analysts believed that the move to adopt radical reforms was motivated by amongst other factors that ECB pressure as well as the mounting pressure on the government to get its house in order after the Fitch downgrades as well as concerns over the legitimacy of membership of Greece in the Eurozone.
The main highlights of the radical reforms were the ambitious plan to bring down the deficit by at least 4%. The government planned to trim the public sector which was relatively bloated, reduce consumption costs as well as operating expenses in a move to make savings.It is at this time that the international credibility of Greece was significantly threatened and hence the radical reforms was a move by EU to redeem itself as well as show its EU partners that it was doing everything in its order to stem the crisis.
Unrest complicates matters
By the end of 2009, the Greek debt crisis was worsening and according to Chorafas (2010), the measures by the Papandreou administration to embrace cutbacks were what motivated thousands of workers to resort to civil unrest. The situation was worsened more by the decision by Standard and Poor’s to follow in the footsteps of Fitch and downgraded the credit rating of Greece from an A- to a BBB+. According to communist organizations, the measures which were being advanced to rein over debt were retrogressive and would end hurting the common man.
However, the government still maintained that the failure to adopt the measures would eventually “sink” the country. With Greece making a distinction as the most indebted member of the Eurozone, there was an immediate need to rein on the crisis which was costing thousands of people their jobs with the stocks continuing to reel under the pressure of the crisis. The problem in this case was the implementation of the proposed measures.
While various credit rating agencies as well as fellow EU members were advising Greece to follow in the footsteps of Ireland so as to rein in on the crisis, the ability on the Communist Organizations to mobilize people against such extreme measures came into the equation and further complicated matters. Ireland, which was facing problems similar those Greece was facing had to slice pay in the public sector as well as welfare benefits to rein in on its huge public sector deficit.
The possible causes of the credit crisis
According to Chorafas (2010), the credit crisis in Greece was informed not by a single factor but by a constellation of international as well as domestic factors. On the domestic fr4omt, high spending but the government is one of the chief culprits. Others include but are not in any way limited to corruption, tax evasion, structural rigidities etc. On the international front, some of the major culprits have been the euro adoption as well as EU regulations which have been branded lax especially when it comes to the Greece debt accumulation.
Domestic factors
Insufficient government revenues and high government spending
According to Saleh (2010), for the last half a decade, the revenues of Greece have grown by 31% while its expenditure has grown by close to 87%. This is indeed what according to analysts informed the deficits in the budget which was way above the threshold of EU’s 3%. The inconsistence in expenditure and revenues growth was informed by a number of things including tax evasion instances, a regime of public administration that was largely inefficient, pensions that were relatively costly and lastly the lack of concern at the political class especially when it came to fiscal discipline maintenance.
Though we have had laudable efforts by successive Greece governments to rein on tax evasion as well as consolidate public administration, analysts are of the opinion that the public sector continues to be unproductive essentially because of lack of skill amongst office holders as well as the instances of overstaffing.According to Chorafas (2010), with tax evasion being one of the main reasons why Greece did not enhance its earning capacity in line with its spending capacity, successive governments have largely been ignorant of this fact. Hence one of the main contributors to the credit crisis in Greece was the inability of the country to enhance its earning capacity through effective tax collection mechanisms that would minimize evasion.
Structural policies and a noose diving international competitiveness
Another key issue which can be blamed on the credit crisis in Greece is the noose diving international competitiveness of the country. This is as a result of low productivity coupled with wages that are relatively high. According to Saleh (2010), since the adoption of the Euro by the country back in 2001, Greece has sustained 5% wage increase rates per annum. This is Eurozone’s wages increase rate doubled. Looking at its trade with its major partners, Greek exports registered a modest 3.8% increase which is not in consistence with what member countries of EU recorded.
It is important to note that significant measures were not taken so as to ensure that the international competitiveness of the country was enhanced which could have gone ahead to decease the account deficit of the country. Some of the obvious measures which Baldwin, Gros & Laeven (2010) believe were not taken earlier enough include the enhancement of productivity as well as savings and significant slices in wages. Further, successive Greek governments have not been able to take measures aimed at bettering the tourism industry which according to Wonders (2010) is one of the most significant sectors to the Greece economy.
International factors
Enhanced access to capital at low interest rates
As earlier observed in the earlier sections of this paper, most analysts believe that the foundations of the credit crisis were laid about a decade ago starting with the adoption of the euro as the national currency of the country. This is indeed what according to Saleh (2010) informed debt buildup. It is important to note that over time, investors have been receptive towards member countries of the EU mainly as a result of the anchorage of the euro currency by countries like France and Germany which are considered economic heavyweights.
Further, euro member countries have the European Central Bank manage their monetary policy conservatively and in that regard, investors as well as lenders increasingly view these countries with a lot of confidence. By Greece joining the euro member countries, it essentially meat that it could borrow at interest rates which were in one way or the other lower and hence it was much easier for the country to ensure that its state budget as well as debts were serviced.
According to Mercier & Papadia (2011), as a euro member, Greece could access artificially cheap credit and this it did with reckless abandon until it ended up accumulating record high debt levels. economic observers are of the opinion that if Greece’s wanton borrowing had been curtailed early enough, the urgency of reform as well as austerity could have been realized much earlier with less dire consequences that what Greece had had to undergo under the credit crisis.
Issues revolving around the enforcement of EU rules
According to Lynn (2010) another contributing factor to the high level of debt in Greece is the observed laxity when it came to the Growth and Stability Pact enforcement. The Stability and Growth pact was adopted by the EU members sometimes in 1997 and once of its key highlights was the need for strengthening surveillance as well as enforcement of a number of rules in public finance as outlined in the EMU’s convergence criteria. The rules dictate that when it comes to the debt and GDP, the former should not exceed or go beyond 60% of the latter. On the other hand, when it comes to GDP and budget deficit, the rules stipulate that the later should not exceed or go beyond 3% of the later.
Failure to comply with European Commission and the Council of the European Union directions as well as well as stipulations as to the corrective actions to be taken to rein in on deficits could result in sanctions mostly inform of fines up to a given GDP percentage.In is important to note that since the year 2003, the EU has done very little to enforce these provisions instead relying on member states reprimands other that the imposition of actual fines against those who have violated its provisions. This lack of actual sanctions could have been the reason why high debt levels were maintained by countries like Greece.
The Greek debt crisis and socialism: the dissenting views
In IMF (2009) opinion, EU member states have had to be bold enough to institute working measures aimed at containing ye economic crisis. However, what is certain is that the taxpayers will end up footing the bill of the rescue packages that were undertaken to save the member countries from imminent collapse. The issues in Greece forced the EU finance ministers to certify the need to ensure that the budget of Greece remained under constant scrutiny. It is also important to note that no other country (EU member) has had to be subjected to scrutiny of such magnitude before.
Those who object to the constant scrutiny by the European Central Bank and the Brussels Commission are of the opinion that that is akin to delegating the functions of elected officials to non-elected officials. Indeed, this is the argument that has been pursued by the Communist Organizations.Those who argued against the austerity measures proposed by EU member states to deal with the crisis were of the opinion that the austerity measures were to be adopted at a cost to the ordinary citizenry of Greece.
Issues of contention in this regard included but are not in any way limited to spending cuts as well as enhanced regressive VAT. Concerns are also being raised as to the effects the measures shall have on the population’s living standards. This is especially a scary prospect given that the credit crisis has already lowered the living standards of a majority of those who live in Greece. In addition to the lowered living standards, analysts argue that increases in tax are ill timed. According to Chorafas (2010), whet the Greece government should have done was to adopt measures tailored to reduce instances of tax evasion. Thus the premise according to this argument is that Greece is using the wrong measures to treat existing issues and stimulate the economy.
The consequences of the debt crisis
As the crisis progressed, the Greek government had to offer for sale bonds so as to so as to come up with the funds that were much needed. The government also had to reel under a number of policy implications which were informed by the credit crisis. Analysts fear that Greece’s crisis could end up pouring to over to Spain, Italy as well as Ireland and Portugal. Though the implications of the debt crisis are dire and far reaching, the crisis has gone a long way to raise issues as well as queries in regard to Eurozone imbalances.
Analysts are increasingly questioning the sustainability of Eurozone’s monetary policy which is largely common whereas policies at the national level remain independent and hence in one way or the other independent.It is also important to note that the credit crisis in Greece has had an impact far beyond its borders. For instance, the euro could be weakened further and this could go a long way towards informing a widening trade deficit in the United States. It is also imperative to note that the economy of the United States could be affected by EU’s instability. This is essentially because of the EU/US strong economic ties.
When it comes to the effects on the economy of Greece, the effects of the same spilled over to worsen the unemployment situation. As a result of this, Greece has experienced relatively sharp economic downturns within a relatively short period of time. The government has also had to do with insufficient revenue streams at a time when the deficit gap is said to be widening. As a result of the Greece government defaulting on its debt, the country shall have to submit a majority of its economic decisions to the European Central Bank and the Brussels Commission for approval.
In regard to Stocks, the downgrading of the credit worthiness of Greece informed the plummeting of stocks as investors adjusted their positions to avoid losses. Indeed, according to Baldwin, Gros & Laeven (2010), the effect of the move first by Fitch and secondly by the global credit rating agency Standard and Poor’s to downgrade the country from an A- to a BBB+ was translated by investors to mean that the country was venturing deeper into the woods and in that regard, they had to rush for liquidity and ensure that hedged against risks.
When it comes to commodities, the credit crisis informed one of the worst inflationary periods Greece has experienced in recent times. The skyrocketing prices were informed by a number of things including but not limited to political instability as well as unrest which was brought about by the snap elections and the subsequent civil unrest as a result of the proposed measures to enhance the country’s prosperity.
As it has been noted in the earlier sections of this text, the credit crisis in Greece has brought about a relatively high unemployment level which stands at just under 10% percent. This is indeed the countries lowest unemployment level in the last one decade and analysts are of the opinion that some of the proposed austerity measures may go a long way towards worsening an already worse scenario.
Conclusion
In conclusion, analysts have over time argued that there is an existing need for countries in Southern Europe to enhance their savings as they seek to bring down their debt levels. What this essentially means is that countries like Greece should ensure that their run current account surpluses. It is also important to note that how Eurozone handles the imbalances shall inform much of the discussions on the integration of the EU member countries going forward.
References
Baldwin, R., Gros, D. & Laeven, L. (2010). Completing the Eurozone Rescue: What More Needs to Be Done? CEPR
Chorafas, D.N. (2010). The Business of Europe Is Politics: Business Opportunity, Economic Nationalism and the Decaying Atlantic Alliance. Gower Publishing, Ltd
IMF (2009). Global Financial Stability Report: 40095. International Monetary Fund
Lynn, M. (2010). Bust: Greece, the Euro and the Sovereign Debt Crisis. John Wiley and Sons
Mercier, P. & Papadia, F. (2011). The Concrete Euro: Implementing Monetary Policy in the Euro Area. Oxford University Press
Saleh, N. (2010). An Anatomy of the Financial Crisis: Blowing Tumbleweed. Anthem Press
Wonders, G. (2010). The Imminent Crisis: Greek Debt and the Collapse of the European Monetary Union. CreateSpace
