Greek crisis a lesson for profligate countries

Greece, a country with rich culture and civilisation, is located in southern Europe. The country, considered the birthplace of modern civilisation in Europe, has been facing traumatic financial and debt service crisis for the last few years. The Greek debt crisis has been termed by economists as human-created painful malaise for the people of a developed and a member-country of Group 20. The country is on the verge of state financial bankruptcy due to its failure of meeting the debt service commitment to foreign creditors, especially the IMF and the European Central Bank (ECB).
According to the World Bank statistics for the year 2013-14, the economy of Greece was the 43rd largest by nominal gross domestic product at US$ 242 billion and the 52nd largest by purchasing power parity (PPP) at US$ 284 billion. Additionally, Greece was the 15th largest economy in the 27-member European Union. In terms of per capita income, Greece was ranked the 38th or 40th in the world at US$ 21,910 and US$ 25,705 in terms of  nominal GDP and PPP respectively. Greece was a developed country with high standards of living and high Human Development Index.
The Greek economy mainly encompasses the service sector (85.0 per cent) and industry (12.0 per cent), while agriculture makes up 3.0 per cent of the national economic output. Important industries include tourism; it is graded the 7th most visited country in the European Union and the 16th in the world by the United Nations World Tourism Organisation. Its merchant shipping constitutes 16.2 per cent of the world's total capacity. The Greek merchant marine is the largest in the world while the country is also a considerable agricultural producer including fisheries within the European Union.
Analysis of the Greek economy for the last few decades delineates that many factors, mainly structural inefficiencies, political patronage, high deficit budgets, excessive social services with creditors' money and low economic and productive activities, put the country in the deep debt crisis. The Greek policymakers had been following policy of financing the budget by borrowing funds for the last decade and ended up with excessive debt burden. The present debt is 179 per cent of GDP (gross domestic product) that makes the country financially shrunken. Huge fiscal imbalances developed during the six years from 2004 to 2009 where output increased in nominal terms by 40 per cent, while the central government's primary expenditures increased by 87 per cent against an increase of only 31 per cent in tax revenues. In a report, the Greek Ministry of Finance stated that the plans to restore the fiscal balance of the budget by implementing permanent real expenditure cuts could not be succeed due to ineffective tax collection system.
The government's debt level alarmingly deteriorated in 2009 due to the higher-than-expected government deficit. Since the debt-to-GDP ratio had not been reduced during the good years with strong economic growth in 2000-2007 period, there was no longer any asset left for the government to continue running large deficits in 2010, neither for the years ahead, due to the annual debt-service costs being on the rise towards an untenable level. Implementation of an urgent fiscal consolidation plan was, therefore, needed to ensure the deficit rapidly declining to a level compatible with a declining debt-to-GDP ratio but the state policy-makers failed to do that.
In 1981, Greece started to have large fiscal deficits that remained high for a decade. The decade left the country with two catastrophic problems: high public debt and low competitiveness. The current account of Greece went into deficit at the beginning of the 1980s; the deficits were initially small and were treated with devaluations. Deficits began to grow since 1996 and especially after the introduction of euro in 2001. The first period with accelerating debt-to-GDP ratios stretched from 1980 to 1996, where it increased from 21 per cent to 95 per cent with low real GDP growth, high structural deficits, high inflation, high interest rates and multiple currency devaluations.
The deep-rooted debt crisis in Greece has given  important lessons to the state policymakers of developed, developing and underdeveloped economies around the globe. There was corruption by powerful government and business interests. This meant that the government turned a blind eye to tax avoidance, corruption and other illegal activities. There were some unsustainable spending programmes by the government. Huge fund was transferred to the Swiss banks by corrupt politicians and business elites in Greece.
The same types of corruption are happening in many developing countries in South Asia and South East Asia and other regions but the governments of these countries are found to have turned a blind eye on the happenings. Some countries borrow money from banks and by selling government savings tools and spend the money extravagantly in unproductive sectors through the budget. The undemocratic and corrupt politicians spend wastefully by providing short-term benefits to the people for staying in power and place the country in deep debt and financial crisis like Greece in the long run. The debt crisis of Greece provides a warning to the state policymakers of these countries that too can anticipate a debt catastrophe in the years ahead.
There are other important lessons other countries may learn from the problems experienced by Greece. Firms have different levels of technological efficiency and countries have different levels of industrialisation. Therefore, different countries and firms will have different levels of success in regional and global markets. Countries like Greece, Spain, Ireland and Portugal face a distinct disadvantage relative to Germany and other more technologically and industrially advanced countries. Even an increase in foreign direct investment that may result in transfer of skills and technology from more advanced economies to less-developed countries has not reduced the huge gaps between these countries within the EU.
When global liquidity increased with widespread financial liberalisation during 1980s and 1990s, countries such as Greece had access to increased foreign capital. This increased capital allowed the government of Greece to increase debt rather than collect taxes that the rich were to pay. Greece's private sector had access to more foreign borrowing, which was not directed to the country's struggling industrial sector, but to consumption and speculation in financial and real estate markets. At the same time, careless global financiers treated the increasingly indebted Greek economy as if it had similar risks to those of richer countries, such as Germany. The government of Greece ended up taking responsibility for not only public debt but also high levels of private debt when debt markets were smashed.  The sovereign debt problem in Greece resulted not only from wasteful and corrupt practices on the part of the country's public sector, but also from the fact that Greece, like the US and other European governments, bailed out wasteful and corrupt private-sector financial institutions. Countries like Greece were unable to use macroeconomic policies to support and further build their industries. Further, the strength of the euro, mostly owing to the economic activities of advanced industrial countries like Germany, had a negative impact on industry in Greece. The de-industrialisation resulting from long-running structural economic imbalances within the EU has also played a role in generating the debt problems now confronted by the Greek economy. The deregulated global financial markets allowed the government of Greece and the country's private sector to continue building unsustainable levels of debt. Economic integration that causes less-advanced countries to lose economic policy sovereignty with regard to trade protection for industry and the use of macroeconomic policy and exchange rate management can lead to devastating economic consequences. Strong possibility is there that Greece will be forced into some kind of chaotic break with the rest of the Eurozone.
It's a good lesson for developing countries that follow deficit financing as the only source to meet the budget deficits. Over-borrowing, either from domestic or foreign sources, spending in unproductive sectors like administration, military and social safety nets are not fetching for long-term economic benefits to a country. Greece is a bright example. Funds raised by deficit financing must be spent in productive sectors like manufacturing, industrial infrastructure and energy generation that create congenial environment for private sector development. If the governments fail to control the illegal outflow of capital by corrupt politicians and business elites to other countries, the countries will face financial catastrophe soon. If funds raised by tax collections and by borrowing are spent to meet payroll costs of police, military and government bureaucrats of any country, the economy of that country will collapse like Greece sooner or later. The highly deficit countries around the world may take lessons from the on-going and up-coming debt service and financial crisis of Greece. Sooner the policymakers of highly deficit-financing countries take corrective steps the better is for those countries.

The writer is the CFO of a private group of companies.
[email protected]