GREECE DEBT CRISIS -A Greek Tragedy Amid Double-dip Recession Fears
Rama Krishna Vadlamudi February 16th, 2010
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Why do we love tragedies?
The ILIAD is one of the greatest classics of Greek civilization. The epic poem is attributed to Homer and is passed on to generations through songs and poems. It is a magnum opus which is unrivalled in the world of literature and is an epitome of Western Civilization. It transports you into a world where you inhale all the smells of war, heroism, lust, compassion and humanity. The story of Iliad revolves around the tragic events of Trojan War, leading to the killing of Hektor by Achilleus, that determines the fate of Troy.
The Iliad is a Greek tragedy and is adored by countless generations of people around the world. Why do we like tragedies? What is in it for us to feel immense pleasure from tragedies? Well, this is a difficult question to answer. These Greek tragedies centre around a hero, who is typically a nobleman of royal blood and is a victim of circumstances and who dies at the end of the tragedy. May be, we find pleasure in the fact that we are in less worse position as compared to our tragic icon in the novel. May be, it is simply a case of us finding solace in others’ suffering.
Now, we are dealing with a different kind of tragedy, an economic one in Greece which has plunged the country into a deeper and deeper mess. It is an insolvency trap for Greece; while the Government has been struggling to pull the country out of the fiscal quagmire that is caused by its own actions and inactions.
Let us examine the events surrounding this new Greek tragedy with some questions:
What are the causes of the crisis in Greece?
The country is facing a huge sovereign debt problem, which is forecast at 125 per cent of its GDP for the year 2010. Over a period of several years, Greek economy has become less competitive in relation to other Eurozone countries and this has compounded the problems for the country. Its unemployment rate is hovering around 10 per cent. Greece joined the Euro in 2001 and has benefited immensely from it. However, it went on a spending spree and as a result the government debt has mounted. Simply put, it is a case of living beyond one’s means. What has angered the most is the fact that Greece has hidden its debt woes with doctored figures.
Greece's budget deficit is at 12.7%, which is more than four times higher than Euro area rules allow. Eurozone rules stipulate that member countries shall restrict their budget deficit to three per cent of their GDP.
Ever since the Dubai Debt Crisis flared up in November 2009, the debt problem of Greece has rattled the financial markets. Read my article: www.scribd.com/doc/23330863
What does the acronym PIGS mean?
It stands for Portugal, Ireland, Greece and Spain; the countries that are plagued with high debt as compared to its GDP. The debt problems of these countries can be gauged from the fact that their gross sovereign debt as a percentage of GDP stands at 85%, 83%, 125% and 66% respectively. Almost all these countries have reported negative GDP growth or negligible growth rates last year. The problem has been exacerbated by high unemployment rates at 10.4%, 13.3%, 9.7% and 19.5% respectively for Portugal, Ireland, Greece and Spain. The high unemployment rate will put a drag on the economic recovery in the years ahead in these countries.
Now, financial markets have extended the acronym to PIIGS, including Italy in addition to these four countries. Italy is notorious for its indebtedness for several years. The Greek woes have reached the shores of other countries and there are fears of a double dip recession in the developed markets even as China, India and other emerging economies are powering ahead with a strong shift in the balance of power. The emerging countries are offering sunshine through dark clouds dispelling the fears of double dip recession in the world.
Will the European Union bail out Greece?
Last week, EU leaders met at Brussels and discussed the developments in Greece. The European leaders at the meeting have pledged full support for Greece, but no details of the action plan were divulged.
Today, the Eurozone finance ministers, after meeting in Brussels, have told Greece to do more cuts in public expenditure and public sector wages or face economic sanctions. It is clear from the statements of the EU leaders that other member nations of Euro area are not prepared to pay for Greece’s blunders. They have given Greece time up to March 16th to clear its financial mess.
It’s too much to expect that Greece’s problems will be blown away by pronouncements from European/EU leaders. Strong countries in Euro area, like, Germany and France, are reluctant to bail out directly and they want a strong commitment from Greece to keep its house in order.
Will Greeks tolerate any economic sanctions that may be imposed by the Greece’s government as part of the bail-out package from the EU?
If Greece has to come out of its fiscal problems, it has to raise tax rates, cut public expenditure, reduce public sector wages, raise fuel prices and undertake other austerity measures. The country has already taken some of these measures. However, these measures are definitely going to anger the public sentiment in the country. May be, they do not have a choice except swallowing the bitter pill if at all they have to come out the debt trap.
What is the impact of this Greek insolvency trap?
The Euro currency has been severely battered against the US dollar in the last one month leading to a currency crisis in Europe. After reaching a low of 1.3550 against the US dollar on Friday (after the announcement of a 0.1 per cent GDP growth in the Euro area for the fourth quarter of 2009), the Euro has rallied a little and is now quoting on Tuesday at around 1.3750. There are fears that the problems in Greece may spill over to the remaining 15 countries in the Eurozone. As the Eurozone countries have a common currency, the impact will be felt more in the Eurozone area. As Eurozone is the second largest economic bloc after the US, this may have ramifications for the rest of world in terms of lesser trade and fewer economic opportunities.
The Greek imbroglio has put a big question mark on the sovereign debt of several countries. Some analysts aver that the risk premium for government debt has gone up substantially in the aftermath of this Greek debt trap. This has complicated matters for the monetary policy of European Central Bank.
The stock markets around the world have given up their gains to an extent of five to 10 per cent in the last two weeks or so. The participants are still approaching the stock markets gingerly.
Who are finding pleasure in this Greek financial tragedy?
The traders from Chicago Mercantile Exchange to Hong Kong stock market! They have exploited the fears in the currency markets and started shorting the Euro currency heavily. The Euro has fallen heavily against both the US dollar and Pound Sterling. In the process, the traders made heavy profits from the Euro currency crisis. The same is the case with stock markets around the world, which were affected negatively to an extent of up to 10 per cent.
All is not lost with a weaker Euro. A weaker Euro will push up exports from the Euro area significantly. Higher export revenues will push up investments and which in turn may lead to more jobs in these economies. Especially, German exports will get a strong boost as its economy is in a much better shape as compared to the other countries that use Euro as their currency.
Germany’s budget deficit is only 3.5% of its GDP while that of the UK, Greece, Spain and Ireland stands in the range of 11% to 13% of their GDP, according to a 2009 forecast.
Whether the Eurozone will break up?
The biggest fear that is staring at the face of financial markets is whether Greece will come out of Euro leading to the break-up of Eurozone. At this point of time, the idea may be a bit far-fetched. The stronger member nations in the Eurozone area may ultimately rescue Greece by imposing harsher conditionalities on the fledgling Greece. As such, at this point of time, the chances of a break-up are remote unless something dramatic happens in Greece politically.
What is the outlook for the Greek economy?
Greece has to decrease its budget deficit by 4% (or 400 basis points) of its GDP this year. Greece needs to undertake serious economic reforms to come out of this tragedy, which is own making. As mentioned above, it has undertaken certain austerity measures already. The role of European Central Bank and International Monetary Fund needs to be watched closely.
Meanwhile, growth in the Eurozone has remained sluggish in 2009. During the fourth quarter of 2009, the Eurozone economy has shown a growth of only 0.1 per cent. Germany’s economy too remained sluggish. For the whole year 2009, the Eurozone economy has contracted by a massive four per cent.
EU leaders pledged support to Greece at their Brussels Summit a few days ago. But the Eurozone finance ministers have given a deadline of March 16th for Greece to shore up its internal finances at their meeting on Tuesday. Germany, the largest economy and an industrial powerhouse in Europe, is reluctant to offer a lifeline to Greece. Germany is known for its fiscal discipline with fiscal deficit under full control. They are not the type of people to live beyond their means. Germany’s internal domestic demand may be a booster for Greece.
It is interesting to note what the respected economist Paul Krugman had to tell on all this in an article: "The real story behind Europe's troubles lies not in the deficit but in the policy elites, who pushed the Continent into adopting a single currency well before the Continent was ready for such an experiment."
This is not the end of woes for Greece. As they say, all the Greek dramas end up as tragedies and it would be better if we brace ourselves for some more volatility.
To know more about Eurozone, ECB and the Euro…
To know more about Eurozone, ECB and the Euro, read my article “ECB and its key policy interest rates.” To read it, JUST CLICK: www.scribd.com/doc/20134025
PS: The buzz is that it’s not Great Britain, but Greek Britain!
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