WHY WHAT HOW OF GREECE - ETHMOS PERSPECTIVE - PART I

Greece - the epicenter of present world problems as every one might be thinking! We at Ethmos thought about giving our readers a series of articles on Greece as to the present situation and the reasons as to why it has happened, the lessons we can learn from it, and most importantly, what can be done to improve the situation.  

First of all please recall these things from your history lessons - The mighty Greece had once propounded the theories of republic and freedom; it is the cradle of heroes like Alexander the Great.

However before we begin our article we would like to quote Winston Churchill

"Hence we will not say Greeks fight like heroes, heroes fight like Greeks"

Greece is currently fighting one of the worst financial crisis faced by a country in the past decade. a referendum has been passed by the people of the Greece against any help in the form of restoration package from the European union.

Analysis

What went wrong ?

Here is a layman's perspective: Just think, if you make a man sit and eat for say 10 to 15 years totally FREE without any work and suddenly after 15 years, you tell him that if you want further food, you need to work - what will happen? Even though the man wants to work, he will not be able to since he would be very busy in his own inertia of getting free food, his skills would have rusted during all these years of inaction, and what not. And second question - What happens if you lend a huge amount (huge means more than double his repaying capacity, which is anyways zero!) to this same man and tell him to repay the same after 15 years? He will literally use the funds to enjoy more luxurious food and at the end of 15 years, instead of working to repay the debt, will ask for more debt to pay the earlier debt! This, in nutshell, is what has happened to Greece. Here is the more technical aspect of the story for our "thinking" audience.

Greece is considered to be an advanced high income  economy - developed economy with a GDP ( gross domestic product ) at $238 billions. At the same time country is enjoying a rank of 29th  on human development index. If we compare both the figures on paper, the Greece is supposed to be a nation where citizens are happy and at the same time country is doing well financially and economically. Greece became the part of European union in 1981. The European Union nations proposed the new currency for development of the business and easy access of markets for member nations. In 2001 Greece adopted Euro as its currency in place of Drachma. All the existing Drachma (currency) have been replaced by the Euro. In year 2009 majority of the nations faced the worst economic crisis of the millennium. This resulted in the global melt down of 2009 and many developing as well as developed nations are still struggling to make the ends meet because of this. This crisis created havoc among investors and employees as job cuts were frequent and inflation was high.  

The merchant navy [maritime shipping industry] is one of the major exports of the country. Global slowdown had drastic effect on this service industry. This results in lower exports of Greece.

Healthcare, education and pensions are the most important expenses for the Government of Greece .In the current economic scenario, high inflation, reduced exports and frequent job cuts resulted in large amount of unemployment which is a burden on the government exchequer.

All these issue resulted in very high govt debt positions. As the pension and healthcare payments have been made generously at the cost of government exchequer. This resulted in high govt debt.  As the pension and healthcare payments have been made generously at the cost of government exchequer. This resulted in further worsening of the situation resulting in higher government debt.

Since 2009 there has been a declining trend in GDP of Greece.

Year	GDP growth
2009	-3.1 %
2010	-4.9%
2011	-7.1%
2012	-7.0%
2013	-3.9%

Rating outlook of various Agencies on Greece

Agency	Outlook
FITCH	CC
Moody	Caa3   Negative
Standard & Poor	CCC-AAA  Negative

Furthermore, Greece invested heavily in the infrastructure for Athens Olympics calculating unreasonable future gains, which did not materialize and the invested money ultimately became "dead money." And since 2009 there has been a declining trend in the GDP of Greece.

As the government debt is high investors were willing to grant loan only on higher rate of interest because the chances of bankruptcy were high. At the same time, majority of the rating agencies reduced the rating of Greece to junk due to which the Greece was unable to generate cash as investors were skeptical about their investment in government debt instruments / treasury bonds. In order to have fresh investments, Greece offered higher returns on the treasury bonds and other government-backed securities to generate enough cash. The efforts of Greece again went in vain as the country was unable to find suitable investors.

A country requires the cash for two reasons. Firstly cash required to run the show because major facilities like pension and healthcare is on the house (i.e. on the government exchequer). Secondly the money of the investors needs to be repaid as rating of country is already junk and if the country is unable to pay its investors, they will further reduce the investment in the country which will result in major out flow of FDI [Foreign Direct Investment, which is nothing but the money invested by foreigners in the form of the much needed foreign currency like dollars and euros).

  

In order avoid this catch 22 situation Greece approached two financial powerhouses - IMF (International Monetary Fund) and European Union. These two agencies after analyzing the issue came up with the bailout package to help Greece. European union is primarily dominated by Germany and France. IMF and EU sanctioned the bailout package for Greece but they came up with strict austerity measures to check the government spending.  (For our layman readers, austerity is nothing but reduction in unnecessary expenses and spending).

  

Greece failed to meet the repayment of their financial assistance sanctioned by EU and IMF. Even though Greece showed some growth in year 2014 but again went in recession in year 2015.  In order to avoid bankruptcy, IMF and EU were planning for a restructuring package which could have come with its share of austerity and restrictions.

People of Greece passed a referendum against this government debt restricting – i.e., the bail out package [or the B Package as we would like to call it].  Now the major issue is, who will finance this huge govt debt>  European union is keenly following all the developments.  They very well know that if Greece falls, then other economies of the Europe such as Italy, Spain, and Balkan countries will also fall.

Repayment issue

Major hurdle in the path of the Greece was that interest rates are governed by the European Central Bank and the rates were high. This bailout came up with a number of terms and conditions, especially austerity that was expected from the people and the government of Greece, which Greece was not able to comply with and resulted in the default of the loan.  However due to global meltdown in shipping industry they were unable to generate enough cash to finance the government debt and repayment of the B package.

Now citizens of Greece are actually thinking that if they pass this referendum and change the currency back to Drachma then they will be able to control rising interest rate to be paid on loan / investments. The Central Bank of Greece will have say in the policy formation and interest rate structure.  But the European markets are inter linked and it is highly unlikely that it will not affect Greece. Even if the investors want to invest they will probably expect higher rate of interest as Greece is already fighting bankruptcy and the risk & cost of investment is pretty high.

Ray of hope is the perseverance and dexterity of the People of Greece - the Greeks. They have to think about their glorious past and try to preserve the same in modern times.

In next series of article we will be discussing the about how to implement this B-package effectively.

Happy Ethmos!