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The Greek Debt Crisis and the Road Ahead

 8 min read / 

The main causes of the Greek debt crisis came down to restrictions of the Eurozone, which do not allow Greece to take monetary control into their own hands and therefore were forced into a one-size-fits-all approach. A predominant issue was having a bigger budget deficit than the EU were previously aware of as the criteria for entry was to have a budget deficit less than 3% which Greece had amended in order to gain EU access. In reality Greece’s true budget deficit was varying between 3.38-6.44% during the 3 years in which the country was being monitored for euro eligibility. Another criterion for entry was the country’s debt being less than 60% of their GDP or at least heading towards it at a satisfactory pace, whereas Greece’s debt was 94% of GDP and still rising. Greece had arranged a currency swap with Goldman Sachs in order to change 2.8bn euros of their debt into dollars and yen which essentially pushed the liabilities into the future and off their balance sheets during their time attempting to meet the EU Maastricht criteria.

Since then Greek debt has been rising as a percentage of GDP up to an all time high of 177% in 2014.

PIIGS debt

A major issue within Greece is tax evasion, as well as in some cases just not being collected in the first place, despite it being an important source of revenue for their economy. Data from 2012 suggested that the black market had become approximately 25% of GDP. The value of the tax that goes uncollected each year is in the range of €10bn and €20bn as despite many professions have their tax deducted before their pay is received, other professions working on a contractor basis can get away with not stating the true value of their operations resulting in uncollected tax that isn’t chased up.

According to the Corruption Perception Index, Greece is perceived as the most corrupt country in the EU as monitored by ‘Transparency International’. Greece was given a score of 43 which was on par with that of Italy. This system of scoring is measured between the values of 0 to 100 with 0 being most corrupt and 100 being clean. There have been many reports of bribing public servants as well as private companies which is known as ‘Fakelaki’ meaning little envelope, which are used in order to expedite services as well as for private companies to avoid red tape and bureaucracy, therefore making it easier to carry out actions or obtain permits. Transparency International claimed that 8.6% of households reported corruption incidents in 2012 which is almost 1 in 10 reporting the witnessing of a form of ‘Fakelaki’ taking place.

Another issue is the lack of a proper land ownership system as the precise area of land being referred to within the documents is often not clearly defined. According to a report from the Times

“Most of Greece’s land transaction records are still handwritten in ledgers, logged in by last names. No lot numbers. No clarity on boundaries or zoning. No obvious way to tell whether two people, or 10, have registered ownership of the same property.”

This therefore makes it very difficult to efficiently collect property tax which is another lost source of revenue as well as dissuading foreign investors who want to buy property within Greece due to the lack of reliable land ownership data.

During the economic crisis of 2008 Greece was affected more than other Eurozone countries leading to the requirement of a bailout loan in 2010 from other members of the Eurozone. This however was not enough as later on in 2012 another bailout loan was required which meant the total amount borrowed was now 246 billion euros alongside the conditions of stricter tax collection as well as austerity measures to correct the deficit.

On June 30th, a payment of 1.6 billion Euros was due to the IMF in which Greece failed to pay shortly after their request of a bailout extension was declined by Eurozone ministers. Shortly after on July 6th the Greek finance minister Yanis Varoufakis resigned after being advised to step down by president Tspiras, as he said that this action would be “potentially helpful to him in reaching an agreement” with Eurozone leaders which was just before the referendum results came in the following day with 61% voting no, meaning the new austerity measures were not to be accepted in exchange for a further bailout and that exit from the Eurozone was one step closer to becoming a reality.

On July 10th the final bailout decision is to be made and Tspiras is now giving in to its creditor’s demands of more extreme austerity measures and other cuts in various areas of its economy. The only problem with this is that the reforms that Tspiras is to accept are almost exactly the same as the public voted against during the referendum just several days prior.

Debt creditors exposure

unemployment rate

The unemployment rate has been on an increasing trajectory up to 27% in 2013 despite there being a slight decrease in the following year; however youth unemployment rates are on the rise reaching a staggering 58% in 2013. GDP per capita has also taken a plunge from its peak of €22,500 in 2007 down to €17,000 in 2014 which was a decline of 24%. Greece’s economy has shrunk by a quarter since 2010.

With the potential for Grexit becoming ever more likely, a new currency may be in order such as reverting back to the drachma. In an interview with the former finance minister Yanis Varoufakis, he spoke about the scenario of changing currency, and said

“One of the things we had to do was get rid of all our printing presses…[which was done in order to assert that]…this monetary union is irreversible”.

Greek exit from the euro has both benefits in the short and long run in regards to tourism due to causing uncertainty in the euro area putting downward pressure on the value of the euro. This will therefore make holidays in the euro area cheaper in the time leading up to the currency change and cause an increase in demand for holidays to places such as Greece at the present time while the uncertainty increases the value of other currencies relative to the euro. Tourism plays a key role as a source of revenue within economies such as Greece meaning that these current events can prove somewhat beneficial.

A new currency would bring back the monetary control that Greece requires in order to solve issues such as enabling them to print more money to solve its debt problems as well as pay pensions etc. By printing more money they will effectively be devaluing the currency however this is unavoidable. There would also be a sharp rise in the inflation rate which would make everyday goods more expensive and require an increase in wages to bring back spending power. Although an advantage of this is that it would lower the value of the currency and therefore make Greek exports cheaper improving their competitiveness, hence increasing their demand and creating a source of revenue to help with their deficit.

The situation then came down to how Tspiras handled the third bailout proposal followed up by a meeting with all 28 members of the European Union in order to decide the future of Greece and its fate regarding Eurozone membership. Tspiras then proceeded to surrender to Eurozone demands which included tax rises, pension reforms and spending cuts. A vote took place in Greek parliament on whether to accept the terms of which there was a clear overall vote of ‘Yes’ however around half of the ‘No’ votes were from the Syriza party themselves including ex finance minister Varoufakis which some have labelled as a mutiny of his party. Many Greeks protested outside parliament and it became violent shortly before the vote was finalised.

The future for Greece is looking rather bleak as these new reforms are going to have a significant impact on the Greek population and reduce the standard of living. The Greek people feel betrayed as the referendum they so decisively voted ‘No’ on has been brushed to the side as well as the party which they voted into power in the first place to fight for their cause has accepted a deal for the very same cause they have been arguing against. Tspiras has capitulated to creditor demands and now the people will have to pay the price of staying in the Eurozone.

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