This week Peta looks at why Greece is the word.
Greece is the Word
Greece: a picturesque country with an ancient history full of human achievements. However, currently Greece is showing the world how not to manage your finances. Greece is causing all sorts of headaches for European leaders, which is surprising when we consider the relatively small size of the country. Greece is home to only 11 million of the EU’s 500 million citizens, and only produces $240 billion of the $16 trillion EU’s economic output. However, after years of gross financial mismanagement, the Greek Government is heavily burdened by debt. During the GFC Greece, together with other PIIGS countries, threatened to significantly impair the EU.
European Countries Debt to GDP Ratios
The 2009 crises forced the Greek Government to seek significant bailouts in 2010 and again in 2011. These bailouts came with strict austerity measures including new taxes, cuts to public sector salaries, pension freezes and large privatisation programs. The IMF, ECB and EU Members provided the funds for the bailouts. In addition to providing extra funds to Greece, these bodies also purchased large amounts of privately held Greek debt at a 50% discount. These bodies then set up a representative body known as the troika. The troika is responsible for providing communication between the Greek Government and its debtors as well as ensuring that Greece is undertaking the financial reforms required under the bailouts terms.
The conditions imposed included a one-time levy on personal income ranging from 1 to 5% depending on income. Lowering the tax-free threshold from 12,000 euros to 8,000 euros. An annual levy of 300 euros was imposed on the self-employed. A massive privatisation program was agreed to, as well as large cuts to spending on things such as public sector wages and pensions. However, the reform process has been quite difficult in Greece. GDP is down from $350 billion in 2009 to around $240 billion this past year. Greece has experienced stubbornly high unemployment currently at around 26% with youth unemployment at a staggering 50%. These facts have lead to large social problems in Greece with increases in prostitution, suicides and crime.
As a result a relatively new and radical left wing party Syriza swept to power in January this year on an anti-austerity platform. Their goal was to write off most of Greece’s $364 billion debt (currently around 160% of GDP) and free the country from the terms of the bailouts imposed on them by the troika. They used the write off of half of Germany’s post war debts as a historical precedent for their demands. Syriza promised to seek a moratorium on debt payments until unemployment figures improve, link debt repayments to economic growth and to lower the budget surplus target from 4.5%. They also promised to increase wages, increase public sector jobs, halt the privatisation program and remove property taxes. Syriza is also asking the ECB to purchase Greek Government bonds under its newly announced quantitative easing program. It promised to pay for these changes by cracking down on loopholes for early retirement, prevent smuggling of fuel and cigarettes and crackdown on tax evasion.
However, this extensive list is likely unachievable. Despite wanting to free Greece of the bailouts, Syriza has been forced to seek a 6 month extension, as Greece’s current funding expired on the 28th of February. However, they were only able to negotiate a 4 month extension that came with terms, some of which are not consistent with Syriza’s election promises. The terms include:
The posturing by Syriza and Greece’s creditors has had a detrimental effect on Greece’s financial market with the European Central Bank reporting that 12 billion Euros left Greek banks in January alone. This has reduced deposits to the low levels seen in 2012. With banks shares tanking there is a real possibility that Greece may once again need to seek international funds to support itself.
It is becoming increasingly apparent that Syriza will not be able to fully realise its election platform. This loan extension only puts off the inevitable showdown between Greece and its creditors. However the unanswered question is how far the new Government is willing to go to ‘free’ itself of its debts and avoid difficult but necessary reforms.
Whilst Europe and the rest of the world waits, Greece is the word.
Expect turbulent times.
