Diving into the Greek Debt Crisis

12 Oct, 2011

From Spanish Conquistadors in the 16th century to the British Colonizers in the 19th and 20th century, Europe has undoubtedly been the super power of the world for the past half millennium or so. However, as economist Dambisa Moyo (How The West Was Lost) sheds light on how a host of shortsighted policy decisions have left the economic seesaw poised to tip away from the Western industrialized economies and toward the emerging world, it is clear that Europe is no longer the great power that it once was. Since 2000, the average growth rates of China and India, 9.8% and 7.4% respectively, have far exceeded Japan’s 1.6%, Germany’s 0.9% or the United States’ 2.8%. By the end of the century, the majority of the world will be developed – The era of western economic supremacy is over… or at least they say. And nothing is more indicative of this statement than the European sovereign debt crisis that started in the last few months of 2009.

The situation became particularly tense in early 2011 as the sovereign debt crisis, which was initially most pronounced in a few eurozone countries, developed into a perceived problem for the European Union as a whole. The one economy that was in distinct spotlight for the majority of this summer is the “Hellenic Republic” of Greece.

Since its inception in the first few weeks of 2010, the anxiety regarding excessive national debt has only developed at an exponential rate. And rightly so, as not only have sovereign credit default swaps seen extreme growth, but also Greek national debt and budget deficit have worsened at an unprecedented level. Currently, gross external debt is an estimated US$ 532.9 billion, an alarming 151.4% of Greece’s nominal GDP. As previously highlighted, this is a eurozone-wide issue. Gross external debt is at 83.2% of nominal GDP in Portugal, 64.8% in Ireland, 118.1% in  Greece, and 63.4% in Spain. Collectively, these nations are sometimes referred to as PIIGS, an acronym coined by international bond analysts, academics, and the economic press – often in regards to matters relating to their poor performing economies.

What truly caught the attention of the press, politicians and public alike occurred in January 2010, when Greek Finance Minister, George Papaconstantinou, admitted that Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. A German newspaper stated that “at some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit” – This is happening now.

However, all is not lost yet. Over the last two years, Greece has revised countless macroeconomic policies and adopted strict austerity measures and packages. Further austerity measures have also been implemented since June 2011, when S&P lowered the Greek sovereign debt to a CCC rating, the lowest in the world, following the findings of a bilateral EU-IMF audit.

In recent development (29th September), German Chancellor  Angela Merkel, who was initially seemingly against providing any further bailout funds for Greece, has now approved an expanded EU bailout fund.  By a large majority, Germany’s parliament had voted in favour of supporting a more powerful fund to bail-out troubled Eurozone economies.

As Europe’s largest economy, Germany has agreed to raise its financial commitment to this bailout from €123 billion to €211 billion. Although this 71.5% rise is seemingly large, it is already being dismissed as inadequate in the light of the worsening Greek crisis and similar crises being faced by other European nations.

A large number of analysts believe that these austerity measures and bailout plans are, in reality, pushing Greece’s paralyzed economy deeper into recession and choking any chance of real growth. Currently, the Greek prime minister, George Papandreou, is in talks with many other EU leaders on a new bailout “tranche” Greece needs to avoid bankruptcy in October. But the question really is whether the other troubled European nations will continue to fuel these futile bailouts or would it be better for the greater European economy for Greece to just default on its debt.

Arguably, this is the first eurozone crisis since its creation in 1999. Managing Director of TRUST Investment Bank, Jason Manolopoulos, conclusively pointed out that the eurozone is far from an optimum currency area. Niall Ferguson, in 2010, wrote that “the sovereign debt crisis that is unfolding [...] is a fiscal crisis of the western world”. Ben Rooney (CNNMoney), in a May 2011 article, argued “Greece can continue to cut spending and raise taxes in a painful attempt to convince creditors that it can change its ways. Or, the country can admit defeat, default on its debts, and hope for the best.” Perhaps, Europe’s economic future is uncertain, but then again, uncertainty is inevitable in any financial market.

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