The self-inflicted woes of Greece
Saturday, 13 March 2010
Tahera Ahsan
GREECE and its woes have been in the forefront of business news in recent times. Greece reported a huge budget deficit as 12.7% of GDP (the EU limit being 3.0%), and an enormous debt as 112.6% of GDP (300 bn Euro). While many may view this as just a country-centric problem, it has much wider implications for Europe and the global economy.
During Greece's induction in the European Union (EU) in 1981 and its adoption of the euro in 2002, the country had reportedly been already carrying considerable debt. However, as they became part of the EU their perceived creditworthiness improved, as many judged the creditworthiness of the sovereign through the other nations with which it shared its currency. Barclays estimated that about 95 per cent of Greece's debts are held by banks operating in the euro zone. This means that the problem has been brewing right under the nose of the EU watchdogs, who chose to not pay attention to it, leading to the current catastrophe which is threatening the entire structure of the union. Greece entered complicated financial derivative deals with Wall Street hot-shot Goldman-Sachs, which in effect hid the size of their debt, albeit marginally.
While all these borrowings enabled the country to go on a spending spree making its economy look like a 'turn-around story', no attention was paid to the less than adequate revenue being generated in return, mainly low tax revenues through notorious Greek tax evasion. Greeks also tempered with their own national accounts; Eurostat found that they barely recorded any expenditure on military equipment for years, routinely overestimated tax collections, didn't record hospital costs in the state health system and counted EU subsidies to private entities in Greece as government revenue. The fear plaguing the global economy now is the chance of a sovereign debt default by Greece.
Harvard professor Kenneth Rogoff, former chief economist at the IMF said that Greece was "a serial defaulter". Since the modern Greek state was founded in 1830, the country has, on average, been in sovereign default every other year and had been through five big defaults in less than 200 years. "Greece has been worse than any Latin American country," he adds. This indicates that the fears of the investors demanding high premiums for their risks from Greek bonds are hardly unfounded. However, strong proclamations by the French President stress otherwise, saying the eurozone will be backing Greece which many an investor are interpreting as a bail-out in the making.
The solutions prescribed by the European Commission (EC) were austerity measure aimed at bringing down the deficit to 8.7% by 2010, through public sector salary freeze, high fuel taxes and raising the retirement age in the public sector. Recent cuts in fiscal spending worth 4.8b euros and issuance of 5.0b euros in bonds have also been undertaken. There have been talks regarding a possible EU bail-out. However, bail-outs are not allowed under EU rules, so it may be that any form of 'help' may just be packaged differently.
Countries with heavy exposure to Greece's debts like Germany and France, are perhaps hoping that the bail-out will become imperative in order to salvage the dwindling value of the euro which has declined to a 10-month-low. This debt problem of the country is also shared by other countries like Spain, Portugal, Italy as well as the UK and so there are increased fears of contagion. A crisis declaration in all these countries may be a huge blow to the EU, the Euro and the global economy. The Greek bank shares have fallen in value and the country's main stock index has already declined by 14.6% this year.
There have been talks of Germany buying up even more Greek bonds. This would really be a counterproductive move, considering Germany's overexposure to Greek debt may in fact undermine the credit worthiness of the former, given that rating agencies like Moody's and S&P have already downgraded the latter's debt securities. Such bonds are quite risky given the premium on Greek bonds have gone up by more than 3.0% already. Besides, most countries are still trying to boost their own economy and job markets, directing funds to save Greece from its own mistakes is actually putting their own fragile economies on hold. Such moves may also encourage similar behaviour amongst EU nations as they would assume that they would be 'rescued'.
Critics are persistently pointing out the supposedly inherent weakness in the monetary union that is the lack of a centralised budgetary mechanism. Gerard Lyons, chief economist at Standard Chartered, says: "For monetary union to survive, it has to become a political union. If it doesn't there is likely to be some sort of implosion and a move towards a two-speed Europe." Such opinions are, therefore, raising questions on the very structure and viability of the currency union, all having been bought to head due to this crisis.
Simultaneous to all this, hedge funds, mainly in the US are making huge profits by selling costly insurance to EU banks exposed to risky Greek bonds. They are perhaps cashing on the unlikely event of a sovereign debt default, which means that almost all that they receive for the risk they are taking can be termed as profits. This has most probably contributed to the panic and the fall of the euro.
It is imperative that the crisis in Greece be tackled soon as the shaky recovery of the global economy and the slow rise in consumer confidence can dip sharply otherwise. Markets in Asia and US have already dipped due to this and the European market and their currency is in disarray. The world is apprehensive about what happens next, and where the global economy will land next resultantly.
E-mail:
tahera_ahsan@hotmail.com. The writer is working in the research department of an
asset-management company
GREECE and its woes have been in the forefront of business news in recent times. Greece reported a huge budget deficit as 12.7% of GDP (the EU limit being 3.0%), and an enormous debt as 112.6% of GDP (300 bn Euro). While many may view this as just a country-centric problem, it has much wider implications for Europe and the global economy.
During Greece's induction in the European Union (EU) in 1981 and its adoption of the euro in 2002, the country had reportedly been already carrying considerable debt. However, as they became part of the EU their perceived creditworthiness improved, as many judged the creditworthiness of the sovereign through the other nations with which it shared its currency. Barclays estimated that about 95 per cent of Greece's debts are held by banks operating in the euro zone. This means that the problem has been brewing right under the nose of the EU watchdogs, who chose to not pay attention to it, leading to the current catastrophe which is threatening the entire structure of the union. Greece entered complicated financial derivative deals with Wall Street hot-shot Goldman-Sachs, which in effect hid the size of their debt, albeit marginally.
While all these borrowings enabled the country to go on a spending spree making its economy look like a 'turn-around story', no attention was paid to the less than adequate revenue being generated in return, mainly low tax revenues through notorious Greek tax evasion. Greeks also tempered with their own national accounts; Eurostat found that they barely recorded any expenditure on military equipment for years, routinely overestimated tax collections, didn't record hospital costs in the state health system and counted EU subsidies to private entities in Greece as government revenue. The fear plaguing the global economy now is the chance of a sovereign debt default by Greece.
Harvard professor Kenneth Rogoff, former chief economist at the IMF said that Greece was "a serial defaulter". Since the modern Greek state was founded in 1830, the country has, on average, been in sovereign default every other year and had been through five big defaults in less than 200 years. "Greece has been worse than any Latin American country," he adds. This indicates that the fears of the investors demanding high premiums for their risks from Greek bonds are hardly unfounded. However, strong proclamations by the French President stress otherwise, saying the eurozone will be backing Greece which many an investor are interpreting as a bail-out in the making.
The solutions prescribed by the European Commission (EC) were austerity measure aimed at bringing down the deficit to 8.7% by 2010, through public sector salary freeze, high fuel taxes and raising the retirement age in the public sector. Recent cuts in fiscal spending worth 4.8b euros and issuance of 5.0b euros in bonds have also been undertaken. There have been talks regarding a possible EU bail-out. However, bail-outs are not allowed under EU rules, so it may be that any form of 'help' may just be packaged differently.
Countries with heavy exposure to Greece's debts like Germany and France, are perhaps hoping that the bail-out will become imperative in order to salvage the dwindling value of the euro which has declined to a 10-month-low. This debt problem of the country is also shared by other countries like Spain, Portugal, Italy as well as the UK and so there are increased fears of contagion. A crisis declaration in all these countries may be a huge blow to the EU, the Euro and the global economy. The Greek bank shares have fallen in value and the country's main stock index has already declined by 14.6% this year.
There have been talks of Germany buying up even more Greek bonds. This would really be a counterproductive move, considering Germany's overexposure to Greek debt may in fact undermine the credit worthiness of the former, given that rating agencies like Moody's and S&P have already downgraded the latter's debt securities. Such bonds are quite risky given the premium on Greek bonds have gone up by more than 3.0% already. Besides, most countries are still trying to boost their own economy and job markets, directing funds to save Greece from its own mistakes is actually putting their own fragile economies on hold. Such moves may also encourage similar behaviour amongst EU nations as they would assume that they would be 'rescued'.
Critics are persistently pointing out the supposedly inherent weakness in the monetary union that is the lack of a centralised budgetary mechanism. Gerard Lyons, chief economist at Standard Chartered, says: "For monetary union to survive, it has to become a political union. If it doesn't there is likely to be some sort of implosion and a move towards a two-speed Europe." Such opinions are, therefore, raising questions on the very structure and viability of the currency union, all having been bought to head due to this crisis.
Simultaneous to all this, hedge funds, mainly in the US are making huge profits by selling costly insurance to EU banks exposed to risky Greek bonds. They are perhaps cashing on the unlikely event of a sovereign debt default, which means that almost all that they receive for the risk they are taking can be termed as profits. This has most probably contributed to the panic and the fall of the euro.
It is imperative that the crisis in Greece be tackled soon as the shaky recovery of the global economy and the slow rise in consumer confidence can dip sharply otherwise. Markets in Asia and US have already dipped due to this and the European market and their currency is in disarray. The world is apprehensive about what happens next, and where the global economy will land next resultantly.
E-mail:
tahera_ahsan@hotmail.com. The writer is working in the research department of an
asset-management company