As a young child this writer was taught all about the grandeur of ancient Greece, its “Golden Age”, a great civilization with magnificent architecture, great philosophers, Olympic greatness and more. But sad as it, this is not the Greece of today. Simply put, modern Greece by ignoring or violating all of the basic principles of national finance, has become a Greek tragedy. A tragedy of tear gas, riot police, fire bombs, and violence in Greek streets.
The country has fallen into a financial crisis as its credit rating has declined to “junk” status. Greece’s financial demise was primarily driven by three things. First, Greece’s problems began when the country exchanged the Drachma for the Euro. Greece like some of the other smaller European countries was now in possession of assets valued in a currency seen as much more stable and reliable than its old one. The Greek government was able to enjoy the credit worthiness previously owned only by the Germans and other large nations backing the Euro and was now able to raise enormous sums by issuing government bonds at low interest rates. However, rather than use the loans to expand the economy by building up the infrastructure like factories and offices, they spent it on very elaborate social programs and expanding their public payrolls. It was no secret that the main political parties used this borrowed money to bribe the Greek votes.
Secondly, Greece’s system of early retirement contributed to the country’s out-of-control state spending. Years of government programs like pension programs that allowed early retirement finally came to a head. Greece promised early retirement to about 700,000 employees, or 14% of its work force, giving it an average retirement age of 60, one of the lowest in Europe. The Greek government also identified at least 600 job categories deemed to be hazardous enough to merit retiring early — at age 50 for women and 55 for men. The country had not set aside enough to cover all those costs, which made it even harder for Greece to borrow at a reasonable rate to fund these obligations.
Thirdly, Greece had a massive tax evasion problem. The country had an enormous problem collecting taxes. There is as underground economy in Greece that is almost one-third of the size of the official economy – the equivalent of $5 trillion a year in the United States. Moreover, while many the civil servants and working people were having their taxes deducted from their paychecks, millionaire ship-owners, corporate executives, doctors, lawyers, and other highly-paid professionals paid very little or no taxes at all. Sounds familiar – but I digress.
Lastly, Greece had been hiding the severity of its mounting debt problems with manipulated economic and financial statistics. This was until the country was faced with so much debt coming due that the government was forced to come clean. Greece’s national debt was reported at $415 billion or 115% of GDP.
In May 2010, Greece received a package of 110 billion Euros, or $152.6 billion, agreed to by its richer European neighbors while it sorted out its economy. The Greek government agreed to a series of austerity measures meant to cut its bloated deficit and restore investor confidence. It cut the pay of its public workers — a quarter of the work forces — by 10% but continued to miss deficit targets as its economy sank deeper into recession. Investors continued to demand ever higher interest rates for Greek borrowing – 70%- 80% interest rates- as the market appeared to conclude that some sort of default was inevitable.
Social unrest followed with mass demonstrations turning violent as Parliament passed additional austerity measures including additional wage and pension cuts, public sector layoffs and changes to collective bargaining rules. Meanwhile, the Greek economy fell deeper into a deeper recession, with the recession projected to shrink by 6% versus 3% as previously forecast. That news led the European leaders of the European Central Bank to push the holders of the Greek bonds to take a far bigger “haircut’’ on their loans than the 20% that previously agreed on in July — perhaps as much as the 60% haircut (discount) – after all, the ECB was lending Greece the money to repay the bondholders.
After difficult bargaining, German Chancellor Angela Merkel and French President Nicolas Sarkozy announced yesterday that they succeeded in forcing the banks to accept a 50% haircut on the face value of the debt voluntarily, thereby reducing Greece’s debt load without triggering a default. The deal would safeguard the bank lenders from default, shield Italy from the contagion and prevent unforeseen consequences across the global economy (besides even at a 50% discount, many of the bond holders that picked up the debt at 20 cents on the dollar made out). The agreed to 50% discount on the face value of their Greek debt would bring Greek debt down by 2020 to 120% of that nation’s gross domestic product, a figure still enormous but more sustainable for an economy that would have to now take on strict austerity measures.
Over the last decade, Greece went on a debt binge made worse by massive tax evasion that came crashing to an end in late 2009, provoking an economic crisis that threatened both Europe’s recovery and the future of the euro. The hope is that Greece will eventually get their house in order and return to the splendor and greatness that was once Greece. It’s that or an economic tsunami awaiting the country that floats in the Aegean and other countries that have their lifeboats tied to it.
On Tuesday, Greek Prime Minister George Papandreou told an audience of German business leaders in Berlin, “I promise you we Greeks will soon fight our way back to growth and prosperity!” For this writer of proud Greek heritage and for the younger generation of Greek citizens, I hope he’s right.