The Greek debt crisis of 2009, which has extended well over the year 2015 is not just a regional issue, or a national issue but an international one with ramifications comparable to the great US depression of 1929. Let’s understand the underlying aspects to see if there is a ‘sustainable’ solution in the foreseeable future.
(a) What is a Debt Crisis?
Debt Crisis, simply means the inability to pay off a debt. In case of a country,a debt crisis is better understood through its budget deficit, which can be defined as the state in which a country’s expenditure is greater than its revenue. Accrued budget deficit over a period of time is referred to as National Debt. The inability of a country to pay this debt off is termed as National Debt Crisis. To be very clear, not everydeficit is bad. Most developed countries such as the U.S.A. work with a healthy deficit, this is because, their ability to pay off the debt is not in question due to their perceived guarantee in the market. But when the budget deficit reaches a critical level and the country can no longer clear its debt, then it becomes a case of National or Sovereign Debt Crisis.
(b) Greek Debt Crisis – Why did it happen?
In the year 1992, the Maastricht Treaty was signed and has been subsequently amended by the treaties of Amsterdam, Nice and Lisbon. Twenty-eight European countries became part of the European Union (EU). The idea behind it was to facilitate the trade which would boost the economic growth and it sure did. A new currency ‘Euro’ was accepted by the participatory nations and a system of Unified Monetary Policies was established.
There are two significant contributors to the Greek Debt Crisis.
- The United Monetary vs. Individual Fiscal Policies:
This means that the amount of money (Euro) to be produced was decided by the European Central Bank (ECB) and the amount of money to be spent and collected in tax is to be decided by the individual nation’s government. Becoming a part of Eurozone provided smaller countries like Greece with an easy access to low-interest loans. This provided Greece, the luxury of extensive spending. Since the spending was controlled by the nation and not by the ECB, it didn’t take long for Greece to accumulate large budget deficit which soon became unsustainable. Even though the allowed budget deficit for the EU nations was set at 3%, yet Greece’s budget deficit rose to a staggering 13%.
- Greek government kept lying about its budget deficit up until 2008-09:
The numbers were announced by the new government elected in late 2008, which was when the alarm bells started to ring. They did this to havean access to the loans. If the world would have known that they were in a financial crunch, they would no longer have further access to this cheap loans. The budget deficit kept accumulating, veiled from the world.
To understand the significance of this crisis, we should take into the consideration a famous rule of economics.
“For a rich person to become poor, one has to make quite a foolish decision. For a poor person to become rich, one has to make numerous smart decisions.”
The essence of it is that, it is easier to remain rich then to rise to riches from poverty. This is applicable to countries as well. In truth, Developed Nations enjoy an easier access to the cheap debt from market and investors, in comparison to Developing or Poor Nations. This is because their strong economies are understood to be capable of paying off that debt. This assumption fell face-first after the public acknowledgment of a budget deficit of Greece in 2009. Suddenly, the market realized that even though, Greece was supported by Euro, it might not be able to pay off its debts.
(c) What is done by Greece to resolve this crisis and the role of IMF, ECB, and EC?
The IMF, ECB, and European Commission came together and supplied a bailout package of 110 billion Euro. These three organizations, together came to be known as TROIKA. But this bailout package was a loan, not a gift. What is significant to note is the fact that the majority of the bailout package was financed by German and French banks. This means that Greece was using fresh debt–majorly from Germany–to pay off its earlier debts to German banks. In exchange, Greece agreed to austerity measures. It decreased its citizen’s benefits such as pensions and increased taxes. Thus, from 2009 to 2011, Greece decreased its budget deficit from 25.9 billion Euro to 5.3 billion Euro. The efficacy of these austerity measures is debatable. This is so, because of such severe measure the Greece economy shrank exponentially and the tax return of the Government dried up. Therefore, even in 2011, Greece didn’t have a sustainable economy. In 2012, TROIKA again loaned Greece a bailout package of 13 billion Euro. Even though things started to look up for Greece superficially, it still faced tremendous problems such as 25% unemployment and 30% people living below poverty line. In rest of the Europe, the situation was relatively better. The entire European banking system had recovered more significantly and owned far less Greece debt, thus insulated from a complete breakdown of Greek economy or Greece’s exit from EU, if that be the case.
(d) Greek Debt Crisis – What are its effects on the world economy?
As the Euro started losing its credibility in the market, the interest rates on the new debt started skyrocketing, not only for Greece but for other EU countries such as Spain and Italy. This was a significant moment in the historical context of this issue. This could have been a catastrophic tipping point for the world economy. Many rich countries, which up till now were basing their growth on the controlled deficit of cheap debt could face a similar fate as Greece in the absence of the cheap loans.
The impacts on the world are numerous, such as:
- Possible Global Recession:
We have just come out of the U.S. housing crisis recession. This might very well Â driveus back into a greater recession period. Euro losing its credibility in the market would be the start of a domino effect, where major countries could lose their market standing.
- World Financial Systems:
World Financial Systems and banks around the world have been investing in the government debt of the Eurozone countries. The effect of failed Euro currency would be catastrophic on such institutions.
(e) Greek Debt Crisis – What are the consequences in the Indian context?
Indian Economy is not directly linked or too exposed to that of Greek. But, the effects of Greece defaulting its debt could reach India indirectly through Europe. Sectors such as Technology and Engineering Exports might face the heat as the European countries have been by large, the biggest consumer of these services. Also, as indicated by the Finance Secretary Rajiv Mehrishi, the debt crisis may lead to ‘firming-up’ of interest rates in Europe which may lead to capital outflow from the country. Apart from these, any global incident of this magnitude always has an effect over the investor’s sentiments in the country and we have already experienced major ‘Bear’ market swings.
(f) Greek Debt Crisis – What is the present status of the crisis?
By the end of 2014, a new leftist government was elected in Greece, on the promise of ‘no more austerity’. Their argument was that austerity doesn’t really work and the economy shrinks as fast as at least the budget deficit. In response to this declaration, TROIKA stopped sending them the bailout payments, after the people’s referendum that supported the government’s decision. A serious liquidity problem was created because of this. Money became a rare commodity and was limited to have been close to 500 million Euros, i.e. 45 Euros per person. A country facing such a shortage of currency would just print more money, but Greece being a part of EU does not have the Fiscal authority to do so. The only option in front of Greece was to accept the terms of TROIKA or leave the EU and adopt a new currency. This was termed as the infamous ‘GREXIT’. No one has any idea of the possible results from such a move. Recently, the Greece government under the Prime Minister Tsipras accepted modified terms for the bailout package. Even though, Euro looks healthier than it was few years ago, the Greek Debt Crisis is far from over.
Will Greece be able to maintain a sustainable economy? Only time will tell.
What do you think?