Many people would like to know what the problem with Greece is. The answer is overspending and from overspending to indebtedness to defaulting. Creditors found the Greek government a willing buyer of their credits, sold credits without looking genuinely whether Greece would be able to repay. Who were these creditors or sellers of loans? The European Union Commission, the European Central Bank and the IMF.
Every time the Greek government faced problems in balancing its budget, it looked up to other members of the European Union, especially to Germany and France, and got support. The creditors called it bailout and the predecessor of the present government availed of two more bailouts before its third. In fact, bailout is nothing but selling additional credit to the old buyer --here the Greek government to pay the creditors the old overdue loan. The creditors lay the terms and conditions of bailout and if the buyer of credit agrees then the creditors sell credit under a newly negotiated bailout programme. But the irony is by subjecting itself to bailout programmes the indebted country finds more difficulty in paying the future payments and in some cases defaults. This has exactly happened in case of Greece. Bailout warrants reforms in the economy of the indebted country and the reforms include cutting the size of the government, the percentage of pension payment and other social safety networks and above all, raising more taxes from citizens. In other words, the concerned government is asked to spend less, save more money to pay old debts. These reforms at times become indigestible for the indebted country. The so-called austerity measures turn out to be too costly for its citizens.
Citizens who lived so long on liberal government welfare supports cannot suddenly become ready to accept austerity in their lives. They start protesting against everything their government wants to do on the economic front in the name of austerity. In that situation, no political leader can win an election preaching less spending. In Greece over the years so-called leftists or left-leaning politicians who spoke, at least outwardly, against the austerity won the election. For restructuring economy, leaders of this type of government hardly have any better option than accepting what the creditors offer under the so-called bailout programmes. For Greece, the best of the options would have been getting written off of the old debt by its creditors and start a new economic relation. But creditors are not ready to forgive or willing to write off the old debt, they are only ready to re-schedule the credit again under a bailout programme. If it is adopted, the living standard of the Greeks will go down drastically, at least in the next few years. The other option for Greece was to have an exit from the Euro Zone, but that would not automatically free the Greek government from the debt obligation. In that situation, things would be worse both for Greece and the creditors. Exiting from the Euro zone will also have political risks. Russia will court Greece and other indebted countries like Spain and Portugal may follow the Greek's way in the future.
Though the Greeks voted against austerity, the creditors will not easily let Greece go away from the Euro Zone, because that will make the debt payment by Greece more uncertain. A huge refinancing of the debt payment will simply worsen the whole situation. A country which could not accept the conditions of previous two bailouts happily, how come it will accept the conditions of the third bailout easily, specially when people there opted against everything the creditors were wanting. Greece is not the only party to be blamed for default, rather, creditors should be blamed more for the mess Greece is now in. Why creditors sold so much of debts to Greece when Greece should have been left on its own in financing its own expenditure ? When creditors turn up with easy credits, borrowers feel tempted to spend more. Had Greece been left alone from the beginning the situation would have been different by now. Most likely there would be high inflation and more deficit financing by its government to finance old debt. But foreign payment obligation would have been much less. A government which is already spending more with the easy credit from foreign creditors simply goes for spending more. Now Greece got sunk under a huge burden of foreign debt and creditors seem to be more worried about their credit than the Greek government itself. One question should be asked, whether people of a country spend more or go beyond their earning in spending when its government spends more or goes for big deficit financing ? The answer is, yes.
This is why in Economic science there is a saying, cut your coat according to your cloth and not the otherwise. This is true both for a state and an individual. Many individuals go bankrupt simply because they could not pay debt, they lost everything what they had, banks or creditors sold off his assets in auction markets. Greek's assets would have to be sold in auction market to foreigners but that selling would be given a gentle name like privatising the state enterprises. Our advice to the Greek people would be, try to remain with the rich creditors as partners, departing them will make you only poorer, eventually rich creditors would have to write off or forgive a substantial portion of the old debt. In the meantime Greece shall have time to chart a new path to restructure its economy. If Greece wants to remain in Euro Zone, it shall have to do the same on the economic front as other members do -- it must give up its old habit of having an extended welfare state.
Professor of Economics University of Dhaka.
abuahmedecon@yahoo.com
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