Greece, the debt drama

Greece a nice country in the south of Europe, a tourist paradise with friendly and hospitable people. Political they had their share of problems but also the habit of spending to much. As mostly the last or next generation had better times.

A short history

Greece has accumulated since entry into the common currency, the Euro, a substantial national debt. A debt to high to be sustainable or that it ever could be repaid. Greece always had a lot of debt but the entry into the Euro offered Greece two advantages. First Greece became part of stabile area with low inflation and second their interest rates became significantly lower since the entry into the Euro.

This gave them the opportunity to lend even more and creditors had to much trust into the Greek government. Ofcourse the creditors could get a higher interest rate so making it for them more attractive to lend money to Greece. Both sides, debtors and creditors could be accused of irresponsible behavior.

The entry into the Euro-zone was only possible with the rather dubious help of one of the leading financial groups in the world, Goldman Sachs, and a lot of creative bookkeeping.

From the moment they were in the Euro zone, Greece continued to do business as usual. Spending even more, increase the size of the government, more civil servants, a generous social service system, an oversized military, to less tax revenues, an incompetent tax, internal revenue, service and to much regulations were they should not and to little legislation were they should.

In 2009 this out of control government, spending, was confronted with severe financial problem when the first financial crisis started. The debt of Greece had grown to 130% of GDP, it’s assumed that 90 to 100% of GDP is acceptable. Greece had a budget deficit of 15% and if they would continue living this way, the national debt would increase 12% per annum.

This is the major problem of Greece, spending to much in relation to the revenues which they can earn as country.

The financial crisis of 2008 saw a change in policy on the international financial markets, lending less and with more conditions. Greece had difficulties in raising enough money to service their national and international financial obligations.

In 2010 Greece received a financial support package to get their house in order, pay the bills and create economic growth. Part of the support package was the condition that the government would become more efficient and that they would start spending lesser. The first austerity package.

The 2010 support package didn’t have the results that were anticipated so Greece did get more. In 2012 Greece did get, beside an even larger support package, a debt reduction and debt restructuring. This became also necessary as to many large European banks had lend to much money and if Athens couldn’t or didn’t meet their obligations those banks would get into great difficulties.

The 2012 debt reduction meant that 107 billion Euros of debt was eliminated. Private creditors which had bonds in value of 206 billion Euros saw over half of their credits disappear. And debt to banks were in essence refinanced. The banks got their loans repaid with new debts from European governments/EU/ECB. The debts to governments, EU/ECB and IMF were at that moment not part of the debt reduction.

During this time Greece introduced a large austerity package which cut the number of civil servants, government spending, social spending etc. The result of the austerity package was that the Greek economy got a lot smaller. The economy has shrunk over 25%. With the result that the debt to GDP ratio became even worser, a rate of 175% of the GDP.

The social situation in Greece has become for a lot of people intolerable. Their incomes went down and the cost went up. There haven’t been any promising sign of all this austerity. They want a change and above all, better living conditions and a growing economy.

Greece does need however another support package, or rather the execution of the 2010/2012 support package, to meet its obligations. But to get this the EU/ECB/IMF demand austerity, social changes, more taxation and the sell off of government property/businesses.

The new elected government of the left(radical) party Syriza promised a change, no more austerity and economic growth. All negotiations about the execution of the support package have been dragged out and no agreemeent reached. Even a referendum which supported Syrizas refusal to implement more austerity could not change it.

This led us to the current situation were Greece is at the cross point of executing the harsh conditions of the support package. Which in the meantime has become better because payback deadlines have pushed forward to about 2040-2055 and the interest rates down to little to nothing. What means with an inflation rate of about 2%, in 30 to 40 years the debt will be evaporated. In the end it’s just another way of debt reduction but politically better acceptable in many countries. In the meantime the debt will remain on the books, will nominally be the same but will loose value.

Or ofcourse, default on the debt. The first default actually happened when Greece didn’t pay the IMF in the first week of July 2015. This will give them a month to pay or reach a deal with the EU/IMF.

Greece will have to deliver, accept and execute the terms of the support package. Which officially has to be renegotiated and approved by parliaments but this can be done considering the experience/knowledge of the old package.

The future of Greece

There are two options for Greece, cooperation with the EU within the Euro or default and have a new currency. You can talk about it, talk about democracy, economy and the structure of the society which should be more equal and fair. In the end it remains a debt which has to be dealt with. A debt you pay, make an agreement for conditions or even about a reduction. But it has to be arranged.

There are theories that having your own currency will have the advantage that you national bank can better act and create a situation which is beneficial for your country. The value of your currency will get less which should improve your export. Ofcourse your import will get more expensive to, so it could be a zero-sum game. If you don’t have an export oriented industry/economy and have a competitive industry, currency plays are not really beneficial.

Having an independent national bank will give you the advantage to control/manipulate the volume of the national currency and interest rate. But these powers are also limited as the value will be set by the the international markets and inflation could also have damaging effects on your economy.

The only thing which could deliver a short term advantage is closing your country to external influences. Import as little as possible, only the really necessary products will be imported. Everything has to be produced in the country. This will create economic growth and employment.

This will however violate the basic idea of the EU, free movement of people, products/services and captal. And you can do it only for the short term. If an industry can’t compete on the international market it will not survive if the market/borders will be open again. Protected industries are not really effective, efficient and innovative.

The real question is, what will happen to your debts. You can default on the debt, a country can refuse to pay them. There is very little you can do, as a creditor, about that. There are some agreements in the Club of London and the Club of Paris what to do if a government doesn’t pay but enforcement is always the problem.

The debt will remain the same if no agreement is reached with creditors. The creditors can sue a country/government in their national courts. Depends on the conditions of the bonds, likewise, what will be nominated currency, even if there is a change of currency, In this case from Euro to Drachma, or whatever the name will be of a new Greek currency.

The current debt of Greece will most likely be remain in Euros, the Greek government might decide to change them into the new currency but they still can be sued about that in foreign courts. Some creditors can be very determined in following/sueing debtors. Argentina has some nasty experiences with those companies.

The debt will become absolutely unpayable with the new currency as the new currency will depreciate in value as fast as it is introduced. The value of the new currency will 4 to 5 Drachmas to 1 Euro. A conservative estimation.

Greece wil not have a real benefit on going on its own. Default has no real advantage for Greece. The debts remain, they will be reduced by time but in the meantime, it will be very difficult for Greece to import and get the financial resources they need to service not only their financial obligations but also civil servant wages, pensions and other operating costs.

Rationally, Greece can best reach an agreement with their creditors. This offers the best opportunity to get out of this misery.

In the end all will agree, to get better, Greece will need to grow. Its economy and employment will need to increase. It’s necessary that the debts will be reduced but also that social services will be adapted, like the taxation and regulations/legislation.

Austerity is a part of the solution, expenditures on the same level as in 2000-2008 are absolutely impossible. Greece is at the moment not able to spend that much. If Greece will implement the changes recommended by the EU/ECB/IMF there will be more financial support for economic development programs. Leading to more economic growth and employment.

The only problem at the moment is that some EU governments/people lost interest to support/help Greece. Maybe, Syriza, should have accepted the last, July, offer of the EU/ECB/IMF. The advantage of Greece is that moderation has usually won at the end of the day in the EU.

Time will tell.