Canada and the World
Current Events with a Canadian Perspective
Last update
28 October 2011
Greek Debt Crisis
Greece is just one of many countries that
have borrowed too much and taxed too little
to pay for government programs
Throughout 2010 and 2011 bankers, finance ministers, and the general public watched Greece nervously. The country was deep in debt and it looked as though it would not be able repay those who had loaned it money.
Economic Mismanagement
It’s not only the monuments of Ancient Greece that lie in ruins.
The Greek economy got into a mess for several reasons. It was already teetering on the edge of collapse when it got sideswiped by the banking crisis of 2008 and the recession that followed.
As with many countries, Greece borrowed money to balance its books. As Dan Roberts reported in The Guardian (U.K.) in May 2010, “The recession has made this harder to achieve, because tax revenues are falling just as welfare payments start to rise. It doesn’t help that, in Greece, tax evasion is commonplace and pension rights are unusually generous…”
The Greek habit of having gold-
For example between 2001 and 2011 the salaries of government employees almost doubled. In his 2011 book Boomerang: Travels in the New Third World Michael Lewis writes: “The national railroad has annual revenues of 100 million euros ($140 million) against an annual wage bill of 400 million ($562 million), plus 300 million ($422) million in other expenses.”
The average salary of an employee of Greek railways is $91,500. Compare this with the average gross salary of all workers in Greece of $21,700, as reported by the Organization for Economic Cooperation and Development.
Lewis notes that former Greek Finance Minister Stefanos Manos once pointed out it would be cheaper to transport all of Greece’s railway passengers by taxi. And, he quotes Manos as saying: “We have a railroad company which is bankrupt beyond comprehension.”
Other government operations are equally as inefficient. The education system is ranked as one of the worst in Europe, yet employs four times more teachers per pupil as Finland, the highest ranked.
On top of this there is corruption on a massive scale.
According to Transparency International (TI), Greece is the most corrupt country in Europe. The German newspaper Bild noted in September 2010 that the TI report “reveals that on average every Greek paid €1,355 ($1,910) in bribes in 2009…” This was for such things as getting a driving license, planning permits, or hospital treatment.
The newspaper added that, “Corruption also exists in the private sector. Greeks pay on average €1,671 ($2,355) in bribes to lawyers, doctors, or banks, which are usually given as cash in hand.”
Level of Public Debt Concealed
In October 2009, a socialist government was elected to replace the conservative one that had held power for five years. Reuters News Agency reports (September 2011) that the “new Greek government found that its predecessor lied about its borrowings and had run up huge debts…”
This shook the confidence of investors in loaning more money to Greece unless they
were offered sky-
By the fall of 2011, Greece had to offer interest rates of up to 25 percent on its bonds (Canada Savings Bonds currently pay an interest of 1.4%). But, even this high rate failed to attract many investors willing to risk their money.
Bankruptcy or Bailout?
Cut off from the supply of new money Greece has only two options left. It can declare bankruptcy or it can go to the European Union (EU) and/or the International Monetary Fund (IMF) for a bailout.
The EU has established a European Financial Stability Facility (EFSF) to prop up weak economies such as Greece’s. Leaders of other EU nations, and perhaps even some countries outside the EU, are supposed to put one trillion euros ($1.4 trillion) into the EFSF.
But, as Eric Reguly notes in the Globe and Mail (October 2011) “the crisis-
European politicians are also knocking on China’s door and holding out their begging bowl.
Reguly comments that, “Reaching out to China is a humbling step for cash-
Setting up the EFSF rescue package has prompted some serious squabbling among European
leaders. While the all-
And, many of those voters are saying “Greece got itself into this mess; let it get itself out of it.”
Loans to Greece already Devalued
Bankruptcy would mean creditors would get back only a portion of the money they loaned Greece. That is becoming true even without going bust.
The country has debts owed to investors outside Greece amounting to more than $500
billion. BBC News notes (October 2011) that, “In July [2011 European] leaders proposed
a plan that would see private lenders to Greece writing off about 20 percent of the
money they originally lent, whereas the latest plan is expected to include a 50 percent
write-
(Some analysts suggest 90 percent of the money loaned to Greece will disappear).
That would mean banks and other investors would take a hit (it’s frequently referred to in the media as a “hair cut”) of at least $250 billion; even spread among several lenders that would mean real trouble. And, it’s already hit some players.
Dexia Group is the biggest financial institution in Belgium. It already suffered
badly in the banking crisis of 2008 and needed a bailout.
Now it’s in even deeper trouble. Dexia has loaned about $28 billion to Greece and other shaky economies and needs more government bailouts to keep it afloat. The bank is likely to be broken up into smaller units and sold off.
It’s as though the people running Dexia learned nothing from its near-
On October 6, 2011 Reuters News Agency commented that, “By rights, the bank’s executive and supervisory boards should be tarred and feathered, and prodded with sharp sticks through the centre of Brussels to the European Court of Shame.” French and German banks are also heavily exposed to Greek debt.
But, letting Dexia or another big bank fail would have knock-
Just as letting Greece go bankrupt might have the dire consequences outlined by Reuters:
Hyperinflation, a run on Greek banks, violence, economic depression, international
isolation, and investor panic spreading to Italy and Spain make up the worst-
Italy and Spain have much bigger economies than that of Greece; they also have much bigger debts. Between them they owe $3.5 trillion. So a Greek collapse might set off the dreaded domino effect.
It would cause an economic tremor that could knock over other rickety national economies. Such a tumbling of weak countries would likely gather momentum and impact the stronger ones.
While the Greek government is getting bailout money from the EFSF, the Greek people are not happy about this. The problem is what’s called austerity and it’s the price Greece has to pay for financial help.
Changes that Hurt
The Greek government has announced changes that will be very painful for ordinary citizens. First come huge tax increases:
- A property tax will be introduced by 2014;
- Excise taxes on fuel, tobacco, and alcohol have been hiked by a third;
- Sales taxes on restaurants and bars jump from 13 percent to 23 percent;
- People will now start paying income tax after earning $6,900 instead of $16,600;
- Luxury levies are to be put on swimming pools, yachts, and cars; and,
- Among other things some tax exemptions have been scrapped.
On the other side of the ledger come the cuts:
- Pensions have been cut by between 20 percent and 40 percent;
- Education spending is to be slashed by closing or merging 1,976 schools;
- Almost three billion dollars is to be taken out of health care funding by 2015;
- About 30,000 government employees have been put on partial pay of about 60 percent of their previous salaries; and,
- Thousands of other public sector workers are being fired.
The changes are biting hard. Helena Smith of The Guardian (September 2011) outlines some of the pain being felt by the Greek people:
- “The average household’s income [has dropped] by an estimated 50 percent;
- “Plummeting living standards have led to a dramatic rise in poverty;
- “By December Greece’s unemployment is on course to hit one million – nearly a quarter of the working population;” in addition, says the Financial Times,
- The Greek economy is expected “to contract by about five percent this year.”
Despite these drastic measures, the Greek government says it won’t meet the deficit-
Bailout Measures Unpopular
Not surprisingly, the Greek population is unhappy about this. The people have taken
to the streets in massive 
demonstrations that have involved violent clashes with
the police and some deaths.
Labour unions have held general strikes and the government of Prime Minister George Papandreou has become deeply unpopular.
The bailout plan has become unpopular elsewhere in Europe. Governments such as those in France and Germany are putting billions into the fund that is trying to prop up Greece. This money doesn’t just appear magically from nowhere with the wave of a wand and the sprinkling of pixie dust.
Stronger European governments have to borrow money in the commercial market to keep Greece afloat. And, the ordinary people of these countries are on the hook for these debts.
As Nicholas Kulish writes in the New York Times, there is widespread opposition “among
Germans to bailing out what they call spendthrifts to the south after years of belt-
A poll in 2010 found that only 2.7% of Germans supported helping out Greece.
But, the alternative of letting Greece crash and burn could create even worse problems for German workers.
Image credit
Antonio De Lorenzo and Marina Ventayol
Julomi
Joanna
Sources
“Greek Debt Crisis: How Did Greek Economy Get into such a Mess?” Dan Roberts, The Guardian, May 6, 2010.
“Tackling Corruption in Greece.” Transparency International, 2011.
“On Average Greeks Pay €1,355 a Year in Bribes!” Bild, September 3, 2010.
“How Did the Eurozone Get into its Debt Mess?” Reuters, September 20, 2011.
“Belatedly, Europe Finds a Quick Fix to its Financial Woes.” Eric Reguly, Globe and Mail, October 28, 2011.
“Q & A: Greek Debt Crisis.” BBC News, October 27, 2011.
“COLUMN-
“Greek Austerity: New Measures ‘Catastrophic’ Say Protesters.” Helena Smith, The Guardian, September 22, 2011.
“Opposition Grows in Germany to Bailout for Greece.” Nicholas Kulish, New York Times, February 15, 2010.
© Canada and the World, October 2011
All rights reserved
Transparency International says the underground economy in Greece “is estimated to be as much as a third of Greece’s gross national product with tax evasion costing upwards of US$20 billion a year. This limits Greece’s ability to fund the public sector adequately.”
LENDER OF
LAST RESORT
When a country can’t borrow money in the commercial marketplace by selling bonds it must turn to multinational organizations.
Greece is getting help from the European Union (EU) and the International Monetary Fund (IMF).
These organizations are funded by member countries, many of whom have to borrow money to make their contributions.
In May 2010, the Greek government asked for help from the EU and the IMF and got a package worth $110 billion. But, there are conditions attached to the loan.
The Greek government has promised to cut pensions, sell some government operations to the private sector, and reduce the size of government.
The money is to be doled out in batches, called tranches. But, before each payment is made, Greece has to show it’s making progress in getting its house in order.
However, as pointed out by The Guardian “the public sector cuts are almost certain to deepen the Greek recession, reducing tax revenues, and making it even harder to service the debts in future.”
THE GREAT MODERATION
Economics is often called the “dismal science” for reasons not related to the origin of the title.
(The Scottish writer Thomas Carlyle gave economics its unflattering label about 150 years ago because he quarrelled with the notion of supply and demand and favoured slavery as being the highest achievement of a modern society).
Today, critics say economics is not a science because it does not prove anything beyond a doubt to be true; it merely develops theories that often turn out to be inaccurate.
Take Robert Lucas who received the Nobel Prize for Economics in 1995. In 2003, he declared boldly “The central problem of depression prevention has been solved.”
He was patting his profession on the back for having created the framework for what has come to be called “The Great Moderation.”
For most of the previous decade, reports Ira Basen in the Globe and Mail (October 2011), “Western economies had been enjoying a prolonged period of moderate but fairly steady growth.”
As Basen notes, Lucas’s claim of success came “five years before the greatest economic collapse in more than half a century.”
The Greek government discovered in August 2011 that it has been paying pensions to thousands of people who are dead, with the cheques being cashed by grateful family members.
Greece’s accumulated national debt is now equivalent to 180% of the country’s entire Gross Domestic Product.
“How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money the broke economy lent to the other broke economy and shouldn’t have lent to them in the first place because the other broke economy can’t pay it back?”
The Australian satirists John Clarke and Bryan Dawe in a televised sketch in 2010
DEFINITION
Default happens when a borrower breaks the terms of a loan by, for example, missing a payment. If a borrower defaults on one debt then other lenders can demand repayment in full of their loans. But, in many cases, lenders may get nothing back from a defaulter.