Ten Questions on Greek Crisis

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Dr Ioannis P. Antoniades, Thessaloniki, Greece

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<ul><li><p>Ten hot questions on the Greek economic crisis </p><p>and the new Greek government along with </p><p>honest answers </p><p>Dr Ioannis P. Antoniades, Thessaloniki, Greece </p><p>1. Did Greece have the largest debt in the EU in the beginning of the crisis? </p><p>The Greek public sector, indeed yes. The private sector, however, no. Specifically, in 2009 the </p><p>Greek public sector debt amounted to roughly 125% of GDP, compared to 117% in Italy, 85% in </p><p>Portugal, 80% in G. Britain (see Table 1.) On the other hand, the Greek private debt (what Homes </p><p>and Businesses owed to Banks) amounted only to 123% of GDP, while in Italy the respective </p><p>number was 198%, in Portugal 238% and in G. Britain 386%! As a result, the total debt of the </p><p>Greek economy was much lower than in several other country members of the EU (Greece was </p><p>in the 9th place in terms of its total debt within the Eurozone) with a total debt of 248% of the </p><p>GDP compared to 315% in Italy, 324% in Portugal and 466% in G. Britain. On the average, a </p><p>Greek citizen owed a total of $76.8K (debt per capita). In comparison, an average German </p><p>owed $129.1K, an Italian $123.2K, a Portuguese $76.9K and a Brit $198.7K. </p><p>Table 1: Public, private and total debt as a percentage of GDP for six EU countries. </p><p>Country Total debt * Public debt * Private debt * </p><p>Greece 248 124.9 123.1 </p><p>Germany 285 76.7 208.3 </p><p>Italy 315 116.7 198.3 </p><p>France 323 82.5 240.5 </p><p>Portugal 323 84.6 238.4 </p><p>G. Britain 466 80.0 386.0 </p><p>(*) % GDP </p><p>2. Was the Greek state budget deficit in 2009 the largest in the Euro zone? </p><p>It depends on whether you believe the Greek statistics Agency (ELSTAT) under its new </p><p>Administration back in 2010 or not. In 2010, ELSTAT in cooperation with EUROSTAT revised the </p><p>deficit of the fiscal year 2009 from around 6% to 13,4% of GDP at first and a few weeks later </p><p>(curiously after Ireland announced its own deficit at 14%) revised it once more up to 15,7%. It </p><p>makes one wonder whether this blow-up was performed purposefully so that Greece is justified </p><p>in the eyes of domestic and world public opinion to be the first eurozone country to enter an IMF </p></li><li><p>support programme. The Greek opposition party (New Democracy) leader and latter pri-minister, </p><p>Antonis Samaras, certainly believed so when he argued several times in Greek parliament that </p><p>the deficit of 2009 was much lower than the number announced -definitely below 10%- but it </p><p>was artificially blown up by transferring state income budgeted in 2009 to the fiscal year 2010. </p><p>Indirect evidence to support this claim comes from the fact that the actual deficit in 2010 was </p><p>announced at about 10%, which corresponds to the enormous amount of 11 bln in yearly </p><p>public spending cuts, within a year in which every Greek knows that no serious austerity </p><p>measures were actually taken. It is interesting to mention, in comparison, that G. Britain, not in </p><p>the eurozone of course, but still in the markets, announced a state budget deficit of 17% back in </p><p>2011. </p><p>3. What about Greeces current account deficit? </p><p>The current account is the difference between total exports and total imports in goods and </p><p>services combined. Greeces current account deficit was steadily the highest in the EU since 2006 </p><p>reaching -11.2% of GDP in 2009 compared to -10.9% in Portugal, -2.3% in Ireland and -4.5% in </p><p>Spain. This means that, whereas the private sector debt in Greece was much lower than in all </p><p>these countries, the rate of increase of the debt was higher. Thus, Greek private debt was </p><p>increasing fast and this fact put Greece in a worse position than justified by the value of its </p><p>private debt in 2009. With the exception of Portugal (which had both a huge private debt as well </p><p>as a large rate of increase of that debt), Greece was a country that more urgently than any other </p><p>country of the eurozone, had to revise downwards its citizens spending habits. </p><p>4. At the bottom line, was Greek economy in the beginning of 2010 really all </p><p>that much worse than the economies of other EU countries? </p><p>On the overall, definitely no. This is the conclusion one objective reader of economic indicators </p><p>would reach by looking at the large picture. Greeces largest problem was its overspending </p><p>public sector, no doubt about it. However, it performed much better than many others </p><p>elsewhere, including the condition of its private banks, which were in a far less extent influenced </p><p>by toxic bonds coming from overseas than Irish, British, Dutch, Spanish even German banks were </p><p>in 2009. Of course, Greece was in a bad economic shape and definitely fiscal measures were </p><p>urgently needed. However, in no way can the global public media frenzy against Greece and </p><p>against the Greek people that took place in the beginning of 2010 be justified based on the its </p><p>actual economic situation. Markets also over-reacted by abruptly turning off the oxygen </p><p>supply to Greece leading it to the IMF. Greece was to a very large extent treated unjustly and </p><p>was fiercely abused by public media. </p><p>5. Did the ECB, the EC and IMF sponsored support programme applied to </p><p>Greece succeed its primary economic goals? </p><p>No, it devastatingly failed. The primary economic goals were: the Greek State to be able to meet </p><p>its obligations to its past and new creditors while at the same time to make the public debt viable </p></li><li><p>and Greek economy more trustworthy so that Greece may return to the markets. Today, five </p><p>years later, the public debt-to-GDP ratio has risen from 124% in 2009 to an enormous 175% in </p><p>2014. Greece is far from being able to go out in the markets since the spreads are still pretty </p><p>high. The Greek economy, with the exception of the touristic sector, is in a much worse state as </p><p>far as productivity is concerned (primary and secondary sectors). Despite the so called internal </p><p>depreciation, revenue from exports has only marginally risen. On the other hand, as the IMF in a </p><p>very sincere report published in mid 13 admitted, the toxic effects of the stabilization </p><p>programme to Greek GDP and unemployment rates has largely been underestimated. </p><p>Depression has reached enormous levels: GDP decreased by 25% in only four years. </p><p>Unemployment rates have reached 29% in 2013 (currently 26%), 60% in people under 25, 71% </p><p>of which are unemployed for more than a year, 42% for more than two years and 20% for more </p><p>than four years! These numbers are as horrific as the after the end of World War II and the </p><p>subsequent Greek civil war in 1949. Hundreds of thousands or SMEs have closed down. As a </p><p>result of the very abrupt and severe austerity measures, red loans sharply increased, domestic </p><p>bank savings decreased, banks almost collapsed requiring recapitalisation, cash liquidity shortage </p><p>and bank inability to issue business loans has strangled domestic investment. At a humanitarian </p><p>level, suicide rates have risen 35% in the last three years of the crisis, 36% of the population lives </p><p>under poverty line, hundreds of thousands of families have been literally destroyed, hundreds of </p><p>thousands of others cannot pay their loans and more than 1.5 million are unable to pay their </p><p>taxes. </p><p>6. Why did the financial support programme for Greece fail so miserably </p><p>whereas the respective programmes for Portugal or Ireland seem to have </p><p>gone so much better? </p><p>Roughly speaking, this is due to the fact that austerity measures and tax increases that the Troika forced </p><p>the Greek state to implement were much more abrupt and much more severe than in the other two </p><p>countries. Abrupt and severe are the two important keywords here. Back in 2009, Greece had a much </p><p>higher public debt problem than Portugal and Ireland and a high enough state budget deficit to begin </p><p>with. (Irelands public deficit was pretty high too, maybe higher, but not as a result of public spending but </p><p>mostly because of the deficit of the Irish banks). Therefore, the amount of budget cuts (salary and </p><p>pension reductions etc) that the Troika demanded from the Greek state to carry out in order to achieve </p><p>rapid nullification of deficit and creation of a surreal surplus was more massive than in the other two </p><p>countries in the same very short period of time. As a consequence, much stricter austerity measures </p><p>taken over such a short time period, inevitably triggered a domino effect within greek economy which </p><p>resulted to large depression, which in turn brought lower state revenue and thus came the need to </p><p>severely increase taxes. Higher tax rates and salary/pension cuts caused more depression on the one </p><p>hand, due to the abrupt fall of consumption, but also the closing down of businesses, the increase of </p><p>unemployment, the increase of red loans and withdrawal of bank savings, the inability to pay taxes, which </p><p>in turn resulted in less income for the state, thus, the need for more taxes and so on. This is the vicious </p><p>circle of austerity, which hit Greece much more than the other two countries because the pole for </p><p>Greece by the Troika was set too high. On the other hand, higher recession, meaning lower GDP, made </p></li><li><p>the public debt-to-GDP ratio increase sharply, even though the total debt in euro rose only by a small </p><p>amount since 2010. </p><p>The current insanely high ratio of Greek public debt to GDP of 175% is almost exclusively due to </p><p>recession, caused by the denominator of the fraction dropping, rather than the numerator rising. As a </p><p>result of the uncertainty caused by the Greek debt becoming less viable , Greece cannot yet go out in the </p><p>markets to borrow money at reasonably low interest rates and thus must still rely on EU help in order not </p><p>to go bankrupt. Thus, although Greece has managed -at a huge humanitarian cost and a huge cost to its </p><p>real economy- not only to nullify its double deficit (public and private) but to create significant primary </p><p>surpluses, its root economic problems not only remain, but have deteriorated. It is also clear that this is </p><p>not at all the Greeks fault, because they have followed the programme to the letter (unfortunately). This </p><p>is 100% due to the Troikas stringent requirements (lead by Germanys reluctance to look at the big </p><p>picture thus imposing a narrow-minded punishment programme instead of a reasonable one) to make </p><p>the most severe public primary expenditure reductions in global fiscal history in the shortest time ever </p><p>in order to satisfy Germanys non-sensical demands for surreal surpluses amidst a prolonged period of </p><p>great depression: In five years, Greece has reduced its public budget primary expenditure by an </p><p>unprecedented 34% (21 bln ) while the economy was falling by a record 25%! The equivalent of that </p><p>reduction for Germany and G. Britain would be approximately 450 bln and 476 bln in respect! </p><p>7. The Greek government has received some 240 billion in low-interest </p><p>public loans from EU countries over the past five years plus it benefited </p><p>from an extra 100 billion debt haircut back in 2012 (PSI) and another 40 </p><p>billion haircut back in 2013. Why the heck then did its debt rise up to 175% </p><p>of its GDP and the Greek government is now asking for another haircut? </p><p> First of all, the statement that Greece actually received and benefited from a massive haircut of its public </p><p>dept in 2012 and 2013 is one of the biggest lies told in the history of the Greek crisis and surprisingly </p><p>some global media are still repeating it. The truth is completely different. In both cases, Greece was </p><p>actually forced, by the IMF in particular, to apply a haircut to volunteer holders of Greek state bonds in </p><p>order to reduce its public debt. Guess who volunteered: It was the Greek private banks, Cypriot banks, </p><p>Greek public insurance organisations, other public legal entities controlled by the government such as </p><p>public hospitals and universities and finally thousands of individual micro-investors both Greek and non-</p><p>Greek. The ECB and major European or global financial institutions did not volunteer and thus bonds in </p><p>their possession were paid at their nominal value at expiration. In conclusion, the Greeks were forced by </p><p>the IMF to give a haircut almost exclusively to themselves! Because the largest burden of fiscal loss was </p><p>put on the shoulders of the already greatly troubled Greek banks, the Greek state had to borrow money </p><p>from the EU (130 bln) in order to support them in the so-called recapitalisation that took place in the </p><p>period 2012-2013. These loans were added to Greek State public debt. Thus, Greece erased 100 bln in </p><p>order to re-borrow 130 bln for its banks, money that would otherwise not be needed, had the haircut </p><p>not taken place and had the programme not been so severe that the bank liquidity would be in so much </p><p>trouble. The net result was absolutely nil! Not only Greek debt was not actually reduced by the </p><p>haircuts, but the great losses suffered by Greek public insurance agencies were put on the shoulders of </p><p>Greek workers who now receive much less benefits for larger insurances fees. </p></li><li><p>Secondly, out of the 240 bln in loans only about 11% went to cover primary needs of the Greek State. The </p><p>rest was used to cover previous creditors as well as support recapitalisation of Greek Banks. In essence, </p><p>Greece exchanged debt in the form of bonds with public two-party loans with each one of the other 17 </p><p>eurozone states. The total amount of Greek public debt did not increase (neither did it decrease due to </p><p>some supposed haircut), however it greatly increased as a percentage of its GDP due to the very large </p><p>reduction of the GDP caused by the austerity programme (see the last paragraph in question no 6). </p><p>It is very important for the people of European countries that lent money to Greece to understand that </p><p>Greece would have most probably needed less bail-out money from Europe and the IMF, had only the </p><p>programme been milder and more reasonable. By this I mean that instead of forcing upon Greece to </p><p>perform a huge decrease in public expenditure in only 4 years time, they could have required a smoother </p><p>transition to balanced (but not excessively positive) state budgets say in a 8 year time period. This would </p><p>have verifiably cost around 30 more bln in total support for the primary needs of the Greek state, but it </p><p>would have far lighter ill-effects for the Greek economy, and God forbid!- less pain for the Greek people. </p><p>In effect, this would mean less unemployment and less recession, thus a much lower debt-to-GDP ratio, </p><p>resulting in a viable debt. </p><p>Most importantly, a milder financial reform programme would have lead Greece far sooner </p><p>back to the markets and much of the 240 bln of EU bail-out loans would not have been </p><p>needed. Moreover, we would not be discussing today about the necessity for a substantial </p><p>readjustment of a debt. Greece would be able to repay it. In conclusion: </p><p>In the case of Greece, thanks to a non-sensical and detrimental economic programme imposed </p><p>mainly by Germany, European citizens spent more money in loans in order to destroy Greece </p><p>than they would have had to spend in order to actually save Greece. </p><p>8. Does the new Greek government want to stop reforms? </p><p>No. It...</p></li></ul>