‘The Crisis’ that burst the Greek bubble

When the housing market in the United States collapsed, it became the harbinger of the greatest recession of the twenty-first century. The earthquake of bankruptcy that crippled the Lehman Brothers, caused a ripple-effect in the East — ensnaring Europe into a debt crisis and Iceland into a financial one.

The European debt crisis had its roots in Greece, with deficits arising in late 2009. Such was the spectrum of its degrading economy, that it came to be widely acknowledged as ‘The Crisis’.

Such “momentous” events often deserve flashbacks.

The seeds were sown with Greece’s entry into the Eurozone in 2001. Adoption of the euro made it easy for the nation to increase its borrowings, and despite its shaky credit history, the country suddenly became a safe-haven for investments. The real GDP growth averaged around 3.9% between 2001–2008 (these figures made it the second fastest growing economy in the Eurozone).

Nevertheless, the perks of publicity often come bearing the pursuit of truth. In 2004, the Greece government openly admitted to have doctored its debt figures to meet the conditions of the Maastricht Treaty. So much for a seat at the big boys’ table. Finance Minister George Alogoskoufis blamed the previous government for this ‘creative accounting’.

“The problem would not be so serious if it had happened only one year. But the fiscal derailment is due to actions and omissions by the previous government, and we cannot hide behind our little finger anymore.”

But before I could thank this government for being Greece’s ‘knight in shining armour’, the digits blew me away. Greece’s budget deficits were 4.1% to the GDP compared to EU’s margin of 3%. The revised debt was 114%, which overwhelmingly exceeded the 60% cut-off. What came as an additional shock was the involvement of the US based investment bank Goldman Sachs in helping Greece to conceal its debt through complex credit swap transactions.

How did the EU deal with this defiance? Why were no sanctions imposed?

To begin with, a huge deal of uncertainty encircled the expulsion of Greece and what sanctions should be applied. It was conveniently concluded that doing so, would do more harm to the euro than save their honour. The EU wanted to strengthen the euro and grease it up in the international currency markets — an influence, which would convince countries like UK, Sweden and Denmark to adopt it. However, a more hypocritical factor was the fact that France and Germany too were spending above the limit with no astringency at play. There simply was no way of doing a good deed without unmasking that veil.

Consequently, the 2007–08 financial crisis opened the Pandora’s box for Greece.

Banks had approved loans for 100% or more than the home’s value. When the low credibility of many homeowners came to light and the dereliction began, the economic situation in Greece worsened. The country had borrowed and spent billions of dollars in the Athens Olympic Games (2004) but post its revered ‘admission of guilt’, the European Commission put it under financial monitoring.

Regardless, the situation slipped out of their hands with the same agility as investors and creditors lost faith in colossal sovereign debt loads from Europe. With possibilities of default on the rise, they demanded higher yields on sovereign debt issued by the PIIGS (Portugal, Italy, Ireland, Greece, Spain). As 2009 approached, newly-elected Prime Minister George A. Papandreou delivered a death blow by announcing that the fiscal deficit was 12.7% more than the last year, officially marking the commencement of the crisis.

Austerity measures and the bailout program

As the dust settled and desperate times called for desperate measures, Greece started introducing a series of ‘Economic Adjustment Programs’. These were undertaken with the hopes of getting a bailout from the EU and the IMF and reduce the budget deficit.

· 2010- The austerity measures brought freeze and cuts in bonuses and salaries of the public and private sector employees. VAT and other taxes were subsequently increased, when the ‘First Bailout’ was sanctioned. It was an amount of €110 billion and was largely contributed by the EU (mostly Germany) and partly by the IMF. Substantial government debugging occurred as the public sector was reformed and shrunk. Other pension, tax and labour market reforms were implemented.

· 2011- As further austerity measure built up, property taxes and guidelines to limit state expenditures were introduced. Surveys show that these mostly affected the civil servants and retirees.

Amidst the cacophony of strikes, protests and riots, the Greek government underwent a metamorphosis. Papandreou resigned with an amiable announcement, making way for the formation of a national unity government in 2012, headed by Lucas Papademos.

· 2012- The sixth austerity package came as a quid-pro-quo where a ‘haircut’ (debt write-off for private debtors) of 50% through PSI (Private Sector Involvement) and a ‘Second Bailout’ of €130 billion was graced upon for further reductions in government spending.

A seventh package was introduced to foster negotiations between Greece and its creditors, who called for new economic programs. In light of that, a multi-bill was introduced concerning privatisations, and included labour market reforms and budgetary changes like abolition of the 13th and 14th month salaries.

· 2013- Amplifying the prevalent rise in unemployment, two successive multi-bills were passed, which laid off around 15,000 public employees.

· 2014–2015- With supplementary cuts in expenses and implementation of taxes, the ninth and tenth austerity packages brought forward the ‘Third Bailout’ of €86 billion.

But the drama of democracy had just began as Prime Minister Alexis Tsipras had been sworn in on January on an anti-austerity platform. To justify his sudden U-turn, he conducted a referendum (first since 1974), where the bailout conditions were rejected by 61% of the population. However, Tsipras’ unexpected debate in the Parliament favouring the measures and his banking upon the opposition festered the angry masses. With his party’s MPs rebelling against him, he resigned — only to be voted back in power during the September 2015 snap election. It almost sounded like another Theresa May blunder but with a better fate.

What the populace had probably failed to observe was that PM Tsipras’ bending to EU creditors about ‘stricter measures’ narrowly averted Greece’s exit from the Eurozone. On June 30th, Greece had become the first developed country to miss its deadline for €1.5 billion payment to the IMF and was officially declared ‘in arrears’. Additional loans had been initially declined, but it was the stitch in time that Tsipras’ government sewed that saved the country and paved the way for a third bailout.

After implementing three more austerity packages in 2015, 2016, 2017, Greece exited the bailout program in 2018.

Collapse of the Greek bond market

As aforesaid, after its entry in the Eurozone, the Greek bond market flourished with new-found confidence. Structural deficiencies, excessive borrowing tendencies and a shaky credit history — factors which had compelled Greece manipulate its debt records were, to fulfill its expectations, suddenly swept under the carpet. Backed by the ECB (European Central Bank), the investors became gullible to Greece’s cooked-up deficit figures until the 2008 crisis delivered the final curve-ball. Fear of default widened the 10-year bond spread and brought Greece to its unavoidable fate. By and by, the ability to finance further debt repayments declined and the CDS spreads of European nations, especially Greece, Spain and Portugal expanded.

According to the Bank of Greece report, dated March 2011:

· The interest rates of the 10-year Greek government bonds had decreased to 3.5% by 2005, after entry to the Eurozone in 2001.

· After the financial crisis, the interest rates soared to 12% by 2010.

· The sharp reduction in these rates in the past had not reflected ‘the growing, unsuitable fiscal and external imbalances.’ (sic)

In 2010, the stock markets in Europe plunged after Standard & Poor’s reduced Greece’s credit rating to junk status.

But what were these structural weaknesses and how did the reformed policies correct them?

Greece faced a lack of monetary and fiscal policy due to its membership in the Eurozone. The introduction of the austerity measures and their objectives, which determined the philosophy of economic-political intervention, not only adhered to the traditional IMF prescription but also adapted to the institutional and actual limitations imposed by the Eurozone. But isn’t that a good thing?

It would have, had their member states possessed the means for implementing expansionary policies designed to support demand and investment through Keynesian policies. But with this confinement in place, Greece couldn’t help but favour neo-liberalism and supporting the supply-side economic philosophy. Albeit at a cost, it had its own bright sides:

· Anticipated reduction in taxation, leading to increases in consumer demand. Concurrently, growth in investment and decrease in consumption, which lead to growth of total savings.

· Attraction of FDI. The business environment improved through privatisations and liberalisation and deregulation of the markets for the factors of production.

[Source: Intereconomics, Volume 52, 2017]

When the crisis reached the plebeians, especially after the third or fourth austerity package, it incited a small-scale humanitarian crisis. Those measures contributed to the upliftment of the economy but yet the public refused to comply. This was because it came at the cost of reforming the public pensions scheme in Greece.

For decades, pensions in Greece were known to be among the most generous in the European Union. It fueled low productivity, the urge to work overtime and eroded competition, further allowing many pensioners to retire earlier than ones in their neighbouring nations. This placed a heavy burden on Greece’s public finances, which (coupled with an aging workforce) made the Greek state increasingly vulnerable to external economic shocks, and dragged it into a recession it had hitherto avoided.

Dr Jens Bastian, researcher at Hellenic Foundation for European & Foreign Policy (ELIAMEP), says,

“This is the case especially in the public sector where some professions can retire only after 35 years of service, and this has devastating social and fiscal effects.” He further adds, “Many of these retirees continue to work after their retirement, and often their employment is unrecorded. So they get a very generous pension and block entry to young people to the work market at the same time.”

Silver Lining? The austerity packages and other economic reforms corrected this tradition.

An article by an American macroeconomics professor deftly represented that Greece’s problems had their roots in ‘lack of revenue’. Hence, it would have been ignorant of me to forego the situation of large-scale tax evasion and unreported revenue in Greece.

Because the data was appalling (and figures mean I’ll have to write less), I took the liberty to simplify them (tentatively) as following-

· Personal income tax evasion- 1.9% to 4.7% of the annual GDP.

· 3.5% of the GDP was found to be lost due to VAT fraud.

Consequently, the scale of tax evasion in Greece could be safely estimated at somewhat 6%-9% of GDP, which relatively amounted to €11 to €16 billion a year.

[Kindly note that the overhead data is a result of averages made from umpteen survey figures and debating them would be tedious].

Where the surveys estimated Greece’s revenue to be around €50 billion (including social security payments, insurance revenues, loans from EU, etc.), 88% of this came from taxation. This revenue covered the government’s operating costs, repayment of the country’s loans, salaries, etc. Around €20 billion came from direct taxes and €24 billion from indirect taxes. Since 2010, with decrease in income, the indirect tax revenue also followed the falling graph. Through the first few years of the crisis, it was generally the rich who were bearing the country’s tax burden. As promising as the stats go, 8% of taxpayers paid 69% of the personal income tax and 0.4% of businesses paid 61% of the legal entity income tax.

But who are these riches and why did they become the fall guys?

In their own majority, these people were the highly-paid salaried worker or large businesses. Like in every developing nation maimed with this problem, it was the self-employed, small businesses and freelancers who were the real culprits. Unlike the “riches”, they are able to hide their income because the likelihood of detection is very low and the incentive to issues invoices and to declare every penny they make is smaller. Yet, what actually intensified this problem was the mere fact that the percentage of self-employed in Greece is twice as high as the European average. As a result, they tend to hide around 57–58.6% of their income.

Deduced from the austerity measures and sudden reforms, the humanitarian crisis saw an incessant decrease in social expenditure.

Youth and long-term employment plummeted all time low with poverty, pay cuts and reduction in health expenditures building up. In 2011, Greece was below the EU average of 24.9% in social expenditure (23.5%). This led to hundreds of well-educated folks leaving the country. As the predicament proceeded, it widened the social and economic structures and trapped the nation in a quicksand of delirium.

Crisis averted or postponed?

More than €200 billion had been received as bailouts, out of which, Greece has repaid €41.6 billion and scheduled debt payments beyond 2060. With the nation healing at a slow pace and steady restoration of social cohesion measures, EU’s second lowest economy has made sacrifices of its own. Starting from defaulting on IMF loans, successive closing of banks due to failed talks of a third bailout to malignant negative stereotyping by the media, the Greeks have a long journey to recovery awaiting.

The nation’s sovereign debt (as of 2019) stands at 369.35% of GDP, afflicted by an 18% unemployment rate and 0.52% inflation rate. With a GDP of only $214 billion, it accounts for only 11.4% of the EU’s nominal GDP (as of 2019). While the crisis provided opportunities for ‘economic reconstruction’, isn’t it only a matter of time before the nation is likely to succumb to this pandemic-induced recession? As reports anticipate, it will undergo a sizable contraction due to a considerable dependency on tourism and transportation receipts. After being at war with its economy for so many years, it’ll have to, once again, much like its Mediterranean neighbours, accept the fate hovering in the yet dubious future.

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