|Greek debt crisis|
The Greek government-debt crisis is one of a number of current European sovereign-debt crises, which was triggered by the arrival of the global economic recession in October 2008, and is believed to have been directly caused by a combination of structural weaknesses of the Greek economy along with a decade long pre-existence of overly high structural deficits and debt-to-GDP levels on public accounts. In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations, due to a reported strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany.
The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets were practically no longer available for Greece as a funding source. On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points:
- Implementation of austerity measures, to restore the fiscal balance.
- Privatisation of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable.
- Implementation of outlined structural reforms, to improve competitiveness and growth prospects.
The payment of the bailout was scheduled to happen in several disbursements from May 2010 until June 2013. Due to a worsened recession and the fact that Greece had worked slower than expected to comply with point 2 and 3 above, there was a need one year later to offer Greece both more time and money in the attempt to restore the economy. In October 2011, Eurozone leaders consequently agreed to offer a second €130 billion bailout loan for Greece, conditional not only the implementation of another austerity package (combined with the continued demands for privatisation and structural reforms outlined in the first programme), but also that all private creditors holding Greek government bonds should sign a deal accepting lower interest rates and a 53.5% face value loss.
This proposed restructure of all Greek public debt held by private creditors, which at that point of time constituted a 58% share of the total Greek public debt, would according to the bailout plan reduce the overall public debt burden with roughly €110 billion. A debt relief equal to a lowering of the debt-to-GDP ratio from a forecast 198% in 2012 down to roughly 160% in 2012, with the lower interest payments in subsequent years combined with the agreed fiscal consolidation of the public budget and significant financial funding from a privatization program, expected to give a further debt decline to a more sustainable level at 120.5% of GDP by 2020.
The second bailout deal was finally ratified by all parties in February 2012, and became active one month later, after the last condition regarding a successful debt restructure of all Greek government bonds had also been met. The second bailout plan was designed with appointment of the Troika (the EU, ECB and IMF) to cover all Greek financial needs from 2012-14 through a transfer of some regular disbursements; and aimed for Greece to resume using the private capital markets for debt refinance and as a source to partly cover its future financial needs, already in 2015. In the first five years from 2015-2020, the return to use the markets was however only evaluated as realistic to the extent, where roughly half of the yearly funds needed to patch the continued budget deficits and ordinary debt refinance should be covered by the market; while the other half of the funds should be covered by extraordinary income from the privatization program of Greek government assets.
In mid-May 2012 the crisis and impossibility to form a new coalition government after elections, led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as "Grexit" and started to affect international market behavior. A second election in mid-June, ended with the formation of a new government supporting a continued adherence to the main principles outlined by the signed bailout plan. The new government however immediately asked its creditors, due to a delayed reform schedule and a worsened economic recession, to be granted an extended deadline from 2015 to 2017 before being required to restore the budget into a self-financed situation; which in effect was equal to a request for the Troika to pay two more years of additional funds in the form of a third bailout package for 2015-16 (or alternatively asking private creditors to accept writing off new additional amounts of debt). In July 2012, the Troika started to examine this request in the light of an updated and recalculated sustainability analysis of the Greek economy, and were at first expected already to publish a report with their findings by the end of August 2012.
As initial findings indicated the bailout program was widely off track, the Troika decided to withhold the scheduled €31.5bn bailout disbursement for August 2012; with the message that the transfer awaited reassurance by the "surveillance report" that Greece had managed to put the bailout plan back on track and still were committed to follow the agreed path to restore and reform the economy. The subsequent three months were used by the Greek government to negotiate with the Troika about the exact content of the conditional "Labor market reform" and "Midterm fiscal plan 2013-16", in order to put the bailout plan back on track. The two major bills featured all together austerity measures worth €18.8bn, of which the first €9.3bn were scheduled for 2013. In return, the Troika indicated a willingness to accept paying a third bailout loan on €30bn to finance the two-year extension of the bailout programme, while also looking into solutions for reducing the Greek debt into a sustainable size (i.e. through additional payment for a debt-buy-back programme and/or offering lower interest rates combined with prolonged debt maturities).
On 7 November 2012, facing the alternative of a default by the end of November if not passing the negotiated Troika package, the Greek parliament passed the conditional "Labor market reform" and "Midterm fiscal plan 2013-16" with 153 out of 300 MPs voting yes, and the parliament late on 11 November finally also passed the "Fiscal budget for 2013" with the support by 167 out of 300 MPs. The conclusion of the long awaited Troika surveillance report, had for a long also pended the outcome of the Greek parliament's pass of the mentioned bills. As all three bills were passed as planned, the Troika report few minutes later on 11 November was printed and distributed to the Eurogroup in its first complete draft version. The report has mapped the results and state for the Greek economy, reforms, privatisation programme and debt sustainability. Among other things it shows, that the 2-year extension of the bailout programme will cost €32.6bn of extra loans from the Troika (€15bn in 2013-14 and €17.6bn in 2015-16). In December 2012, the Eurogroup decided not to transfer a third bailout loan, but offered instead Greece a set of debt relief measures for the already granted EFSF debt pile (lower interest rate, longer maturity), effectively closing the entire fiscal financing gap for 2013-16. A debt buyback by the Greek government of roughly 50% of the remaining PSI bonds, also helped to lower the debt-to-GDP ratio with 10.6 benchmark points, helping the country to obtain a sustainable debt outlook for 2020.
In January 2010 the Greek Ministry of Finance highlighted in their Stability and Growth Program 2010 these five main causes for the significantly deteriorated economic results recorded in 2009 (compared to the published budget figures ahead of the year):
- GDP growth rates: After 2008, GDP growth rates were lower than the Greek national statistical agency had anticipated. In the official report, the Greek ministry of finance reports the need for implementing economic reforms to improve competitiveness, among others by reducing salaries and bureaucracy, and the need to redirect much of its current governmental spending from non-growth sectors (e.g. military) into growth stimulating sectors.
- Government deficit: Huge fiscal imbalances developed during the past six years from 2004 to 2009, where "the output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues." In the report the Greek Ministry of Finance states the aim to restore the fiscal balance of the public budget, by implementing permanent real expenditure cuts (meaning expenditures are only allowed to grow 3.8% from 2009 to 2013, which is below the expected inflation at 6.9%), and with overall revenues planned to grow 31.5% from 2009 to 2013, secured not only by new/higher taxes but also by a major reform of the ineffective Tax Collection System.
- Government debt-level: Since it had not been reduced during the good years with strong economic growth, there was no room for the government to continue running large deficits in 2010, neither for the years ahead. Therefore, it was not enough for the government just to implement the needed long term economic reforms, as the debt then rapidly would develop into an unsustainable size, before the results of such reforms were achieved. The report highlights the urgency to implement both permanent and temporary austerity measures that - in combination with an expected return of positive GDP growth rates in 2011 - would result in the baseline deficit decreasing from €30.6 billion in 2009 to only €5.7 billion in 2013, finally making it possible to stabilize the debt-level relative to GDP at 120% in 2010 and 2011, followed by a downward trend in 2012 and 2013.
- Budget compliance: Budget compliance was acknowledged to be in strong need of future improvement, and for 2009 it was even found to be "A lot worse than normal, due to economic control being more lax in a year with political elections". In order to improve the level of budget compliance for upcoming years, the Greek government wanted to implement a new reform to strengthen the monitoring system in 2010, making it possible to keep better track on the future developments of revenues and expenses, both at the governmental and local level.
- Statistical credibility: Problems with unreliable data had existed ever since Greece applied for membership of the Euro in 1999. In the five years from 2005–2009, Eurostat each year noted a reservation about the fiscal statistical numbers for Greece, and too often previously reported figures got revised to a somewhat worse figure, after a couple of years. In regards of 2009 the flawed statistics made it impossible to predict accurate numbers for GDP growth, budget deficit and the public debt; which by the end of the year all turned out to be worse than originally anticipated. Problems with statistical credibility were also evident in several other countries, however, in the case of Greece, the maginitude of the 2009 revisions and its connection to the crisis added pressure to the need for immediate improvement. In 2010, the Greek ministry of finance reported the need to restore the trust among financial investors, and to correct previous statistical methodological issues, "by making the National Statistics Service an independent legal entity and phasing in, during the first quarter of 2010, all the necessary checks and balances that will improve the accuracy and reporting of fiscal statistics".
The current account of Greece went into deficit at the beginning of 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.
In 1981, Greece started to have large fiscal deficits that remained so for a decade. The decade bequeathed the country with two significant problems: high public debt and low competitiveness.
The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007; during this period it grew at an annual rate of 4.2%, as foreign capital flooded the country. Despite that, the country continued to record high budget deficits each year.
Financial statistics reveal solid budget surpluses existed in 1960-73 for the Greek general government, but since then only budget deficits were recorded. In 1974-80 the general government had an era with moderate and acceptable budget deficits (below 3% of GDP). Unfortunately this was followed by a long period with very high and unsustainable budget deficits in 1981-2013 (above 3% of GDP).
According to an editorial published by the Greek conservative newspaper Kathimerini, large public deficits were indeed one of the features that have marked the Greek social model since the restoration of democracy in 1974. After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance enormous military expenditure, public sector jobs, pensions and other social benefits. Greece is the second-biggest defense spender  among the 27 NATO countries after the United States, according to NATO statistics. The US is the major beneficiary of Greek military expenditure, with the Americans supplying 42 per cent of its arms. In second and third place are Germany, with 22.7 per cent, and then France, with 12.5 per cent.
The long period with high yearly budget deficits caused a situation where, from 1993, the debt-to-GDP ratio was always found to be in unhealthy territory above 94%. In the turmoil of the global financial crisis the situation became unsustainable (causing the capital markets to freeze in April 2010), as the downturn had caused the debt level rapidly to grow above the maximum sustainable level for Greece (defined by IMF economists to be 120%). According to "The Economic Adjustment Programme for Greece" published by the EU Commission in October 2011, the debt level was even expected further to worsen into a highly unsustainable level of 198% in 2012, if the proposed debt restructure agreement was not implemented.
Initially, currency devaluation helped finance the borrowing for the Greek government. After the introduction of the euro in January 2001, the devaluation tool disappeared. Throughout the next 8 years, Greece was however able to continue its high level of borrowing, due to the lower interest rates government bonds in euro could command, in combination with a long series of strong GDP growth rates. Problems however started to occur when the global financial crisis peaked, with negative repercussions hitting all national economies in September 2008. The global financial crisis had a particularly large negative impact on GDP growth rates in Greece. Two of the country's largest earners are tourism and shipping, and both were badly affected by the downturn, with revenues falling 15% in 2009.
Tax evasion and corruptionEdit
Another consistent problem Greece has suffered from in recent decades is the government's tax income. Each year it is several times below the expected level. In 2010, the estimated tax evasion costs for the Greek government amounted to well over $20 billion per year. The latest figures from 2013, also show that the State only collected less than half of the revenues due 2012, with the remaining tax owings being accepted to be paid by a delayed payment schedule.
Data for 2012 place the Greek "black market" at 24.3% of GDP, compared with 28.6% for Estonia, 26.5% for Latvia, 21.6% for Italy, 17.1% for Belgium and 13.5% for Germany (partly in correlation with the percentage of Greek population that is self-employed i.e., 31.9% in Greece vs. 15% EU average, as several studies  have shown the clear correlation between tax evasion and self-employment).
In early 2010, it was revealed that through the assistance of Goldman Sachs, JPMorgan Chase and numerous other banks, financial products were developed which enabled the governments of Greece, Italy and many other European countries to hide their borrowing. Dozens of similar agreements were concluded across Europe whereby banks supplied cash in advance in exchange for future payments by the governments involved; in turn, the liabilities of the involved countries were "kept off the books".
According to Der Spiegel credits given to European governments were disguised as "swaps" and consequently did not get registered as debt because Eurostat at the time ignored statistics involving financial derivatives. A German derivatives dealer had commented to Der Spiegel that "The Maastricht rules can be circumvented quite legally through swaps," and "In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank." These conditions had enabled Greek as well as many other European governments to spend beyond their means, while meeting the deficit targets of the European Union. In May 2010, the Greek government deficit was again revised and estimated to be 13.6% which was the second highest in the world relative to GDP with Iceland in first place at 15.7% and Great Britain third with 12.6%. Public debt was forecast, according to some estimates, to hit 120% of GDP during 2010.
To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics as did many other European governments. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing. Most notable is a cross currency swap, where billions worth of Greek debts and loans were converted into Yen and Dollars at a fictitious exchange rate by Goldman Sachs, thus hiding the true extent of Greek loans.
The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU, which, at the time, was a common practice amongst many European governments. The revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Eurozone stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and with the debt level significantly above the recommended limit of 60% of GDP.
Debt levels revealed (2010)Edit
The European statistics agency, Eurostat, had at regular intervals ever since 2004, sent 10 delegations to Athens with a view to improve reliability of the statistical figures related to the Greek national account, but apparently to no avail. In January 2010, it issued a damning report which contained accusations of falsified data and political interference.
In February 2010, the new government of George Papandreou (elected in October 2009), admitted a flawed statistical procedure previously had existed, before the new government had been elected, and revised the 2009 deficit from a previously estimated 6%-8% to an alarming 12.7% of GDP. In April 2010, the reported 2009 deficit was further increased to 13.6%, and at the time of the final revised calculation by Eurostat's standardized method had been performed, it ended at 15.7% of GDP, which proved to be the highest deficit for any EU country in 2009. A former employee at the Greek statistics office subsequently argued in January 2013, that it caused "incorrect results" to use the same standardized Eurostat methodology, as all other EU member states currently use. After the complaint had been investigated by financial prosecutors, it was however concluded, that the decision to replace the old incompliant Greek calculation method by Eurostat's standard method, had been fully correct.
The figure for Greek government debt at the end of 2009, was also increased from its first November estimate at €269.3 billion (113% of GDP), to a revised €299.7 billion (130% of GDP). The need for a major and sudden upward revision of both the deficit and debt level for 2009, only being realized at a very late point, arose due to Greek authoraties previously having published flawed estimates and statistics in 2009. To sort out all Greek statistical issues once and for all, Eurostat then decided to perform their own in depth Financial Audit of the fiscal years 2006-09. After having conducted the financial audit, Eurostat noted in November 2010, that all "methodological issues" now had been fixed, and that the new revised figures for 2006-2009 finally were considered to be reliable.
Despite the crisis, the Greek government's bond auction in January 2010 had the offered amount of €8bn 5-year bonds over-subscribed by four times. At the next auction in March, the Financial Times again reported: "Athens sold €5bn in 10-year bonds and received orders for three times that amount". The continued successful auction and sale of bonds, was however only possible at the cost of increased yields, which in return caused a further worsening of the Greek public deficit. As a result, the rating agencies downgraded the Greek economy to junk status in late April 2010. In practical terms this caused the private capital market to freeze, so that all the Greek financial needs instead had to be covered by international bailout loans, in order to avoid a sovereign default. In April 2010, it was estimated that up to 70% of Greek government bonds were held by foreign investors (primarily banks). The subsequent bailout loans paid to Greece were mainly used to pay for the maturing bonds, but also to finance the continued yearly budget deficits.
Unsustainable and accelerating debt-to-GDP ratiosEdit
The table below display all relevant historical and forecasted data for the Greek government budget deficit, inflation, GDP growth and debt-to-GDP ratio.
The first period with accelerating debt-to-GDP ratios stretched from 1980-1996, where it increased from 22% to 100% due to some years characterized by: low GDP growth, high structural deficits, high inflation, high interest rates and multiple currency devaluations. In 1996-1999, the solution that brought the Greek economy back on a sustainable track was the combination of enforcing a "hard drachma policy", and some consistent yearly reductions of the structural deficits through implementing austerity measures. This in turn caused inflation and interest rates to decline, which created the foundation for significant GDP growth and at the same time put a halt to the accelerating trend for the debt-to-GDP ratio. The statistics reveal 1999 (which was the year Greece managed to qualify for the later euro adoption on 1 January 2001), to be the most "sustainable year" since 1980. Yet the lowering of the budget deficit to 3.1% and the related structural deficit to 3.6%, was still slightly above the limits required by the Stability and Growth Pact, and only good enough to stabilize the problem with the accelerating debt-to-GDP ratio for as long as strong GDP growth (in combination with funding access to low interest rates) continued in the subsequent years.
The second period with accelerating debt-to-GDP ratios was in 2008-13, where the ratio grew from 107% ultimo 2007 to 176% ultimo 2013; and in fact would have been up at a record high 217% ultimo 2013, if the debt haircut and debt buybuck towards private holders of Greek Government bonds had not been performed in 2012. The accelerating trend in the ratio, was this time triggered by the onset of the global recession in 2008, also known as the Great Recession, which caused some related high budget deficits in 2008-13. The root cause behind the problem with accelerating debt-to-GDP ratios, was however that Greece had failed to reduce the debt-to-GDP ratio during the good years with strong economic growth in 2000-07, and instead had opted to continue on a path of running high structural deficits. The first problem for Greece was a too high and increasing debt level, creating the so-called negative spiral of "interest rate death", which occurs if a country suffers from a constantly increasing debt that exceeds the sustainable level, which will mean the financial markets will start to ask higher and higher interest rates to cover the increasing risk for default. Higher interest rates will cause an even more unsustainable debt-level, that will result in still higher interest rates; and the speed of this self-sustaining negative trend will likely keep accelerating. The second part of the problem, also needing to be solved, was the underlying fundamental problem that the country still suffered from a high structural imbalance in the national account. Only starting from 2010, significant efforts and results were achieved in minimizing the structural deficits, through implementation of yearly packages with significant austerity measures. Fortunately the pain of this fiscal consolidation, which as a negative side-effect on the short term caused a worsened recession, has now also paid off for Greece, as the forecasts for 2013 now reveal the country is set to achieve a structural surplus, which will be the first time since 1973. Achieving and maintaining a structural surplus is important, as it provides the foundation for the debt-to-GDP ratio gradually to decline down towards more sustainable levels, from the very moment when GDP growth will return to the country. The reappearance of the long aspired GDP growth is currently expected to happen in early 2014, provided that Greece will stick to the implementation of all the needed structural reforms + privatisations + targeted investments, as has been required and outlined by the current bailout programme.
Besides the restoring of the structural balance in order to build the foundation for debt-to-GDP ratios to decline back to sustainable levels, it was also needed to implement a debt restructure in March 2012. This debt restructure not only converted "high rate bonds with short maturity" to "low rate bonds with long maturity" (which significantly lowered the debt costs), but also introduced a direct 53.5% haircut to the nominal value of all government debt held by private bond owners. The haircut alone, lowered the government debt pile by €106.5bn (equal to a debt-to-GDP ratio decline of 55.0 percentage points), but as Greek banks at the same time were holding almost 1/3 of the restructured debt, this also created the need for the Troika and Greek government to pay for a €48.2bn bank recapitalisation in 2012, which added back an additional 24.9 percentage points to the debt-to-GDP ratio. So all in all the net impact of the debt restructure in March 2012, was that it lowered the debt-to-GDP ratio with 30.1 percentage points. In addition, the Greek government in December 2012 also completed a debt buyback of 50% of the remaining PSI bonds, where the issuance of €11.3bn EFSF bonds financed the buying of PSI bonds representing a nominal debt of €31.9bn, thus resulting in a €20.6bn net decline of debt (equal to a debt-to-GDP ratio decline of 10.6 percentage points). Overall the two debt restructuring measures accounted for a 40.7 percentage point debt-to-GDP decline, so that it only ended at 156.9% ultimo 2012, down from the 197.6% it would have ended on if no debt restructure measures had been performed.
|Greek national account||1970||1980||1990||1995||1996||1997||1998||1999||2000||2001a||2002||2003||2004||2005||2006||2007||2008||2009||2010||2011||2012||2013b||2014b||2015b||2016c|
|Public revenued (% of GDP)||N/A||N/A||31.0||37.0||37.8||39.3||40.9||41.8||43.4||41.3||40.6||39.4||38.4||39.0||39.2||40.7||40.7||38.4||40.6||42.4||44.6||44.6||45.1||44.0||TBA|
|Public expenditured (% of GDP)||N/A||N/A||45.2||46.2||44.5||45.3||44.7||44.8||47.1||45.8||45.4||45.1||46.0||44.4||45.0||47.2||50.5||54.0||51.3||51.9||53.6||58.2||47.1||45.1||TBA|
|Budget balanced (% of GDP)||N/A||N/A||-14.2||-9.1||-6.7||-5.9||-3.9||-3.1||-3.7||-4.5||-4.8||-5.7||-7.6||-5.5||-5.7||-6.5||-9.8||-15.7||-10.7||-9.5||-9.0||-13.5||-2.0||-1.1||TBA|
|Structural balancee (% of GDP)||N/A||N/A||-14.9f||-9.4f||-6.9f||-6.3f||-4.4f||-3.6f||-4.2f||-4.9f||-4.5f||-5.7||-7.7||-5.2||-7.2||-7.8||-9.7||-14.8||-8.9||-5.8||-1.0||1.2||1.0||-0.1||TBA|
|HICP inflation (annual %)||N/A||N/A||N/A||8.9||7.9||5.4||4.5||2.1||2.9||3.7||3.9||3.4||3.0||3.5||3.3||3.0||4.2||1.3||4.7||3.1||1.0||-0.8||-0.4||0.3||1.1|
|GDP deflatorg (annual %)||3.8||19.3||20.7||9.8||7.3||6.8||5.2||3.0||3.4||3.1||3.4||3.9||2.9||2.8||2.4||3.3||4.7||2.3||1.1||1.0||-0.8||-1.7||-0.5||0.4||1.8|
|Real GDP growthh (%)||8.9||0.7||0.0||2.1||2.4||3.6||3.4||3.4||4.5||4.2||3.4||5.9||4.4||2.3||5.5||3.5||−0.2||−3.1||−4.9||−7.1||−6.4||-4.0||0.6||2.9||3.7|
|Public debti (billion €)||0.2||1.5||31.1||86.9||97.8||105.2||111.9||118.6||141.0||151.9||159.2||168.0||183.2||212.4||224.9||239.5||263.3||299.7||329.5||355.1||303.9||322.2||322.0||323.2||322.0|
|Nominal GDPi (billion €)||1.1||6.8||43.4||88.7||97.5||107.9||117.3||125.0||135.0||145.1||155.2||170.9||183.6||193.0||208.6||223.2||233.2||231.1||222.2||208.5||193.7||182.8||183.0||189.1||199.5|
|Debt-to-GDP ratio (%)
|Notes: a Year of entry into the Eurozone. b Forecasts by EC pr 5 Nov 2013. c Forecasts by the July 2013 bailout plan. d Calculated by EDP method.
e Structural balance = "Cyclically-adjusted balance" minus impact from "one-off and temporary measures".
f Structural balance data from 1990-2002, are so far only "Cyclically-adjusted balance" data.
g Calculated as yoy %-change of the GDP deflator index in National Currency.
h Calculated as yoy %-change of 2005 constant GDP in National Currency.
i Figures prior of 2000 were all converted retrospectively from drachma to euro by the fixed euro exchange rate in 2000.
The yearly change in the debt-to-GDP ratio is found by adding the "budget deficit in percentage of GDP" with the "stock-flow adjustment" and the calculated "impact of nominal GDP growth". Any positive nominal GDP growth will help to diminish the debt-to-GDP ratio through an increase of the denominator in the equation. While the "budget deficit" and "stock-flow adjustment" together comprise the governments yearly change to the amount of borrowed "public debt". Stock-flow adjustments occur whenever the government change the amount of cash liquidity on public accounts, or sale/buy some public financial assets (comparable to the amount of cash involved in the transaction). In example the bailout plan for Greece feature a stock-flow adjustment contribution, where a significant privatization of public assets worth €50 billion, will help to lower the amount of public debt in 2012-20, after also having financed some "cash adjustments" in the form of extra liquidity set aside on public accounts. Besides of being related to changes in the governments amount of "liquidity" and "financial assets", the yearly stock-flow adjustment can occasionally also be related to technical changes in the amount of nominal debt; which in example could be caused by the monetary devaluation Greece had in 1998 (reducing the "drachma debt" measured in euro; without having any impact on the debt-to-GDP ratio) or the debt restructure implemented by Greece in 2012 with a nominal haircut of all privately held government bonds (reducing both the debt and debt-to-GDP ratio).
After implementation of the two debt restructure measures in 2012, as part of the new Second Economic Adjustment Programme for Greece, this meant that the debt-to-GDP ratio by the end of 2012, overall fell from 198% to 157%. The signed deal however further stipulates, that in order to make Greece capable in 2020 to fully cover its future financial needs by using the private capital markets, they need to lower the nation’s debt-to-GDP ratio further down to maximum 124% in 2020. And this significant lowering of the ratio can only be achieved, by a continued compliance with the strict targets set in the bailout plan for the key areas: Fiscal consolidation, economic reforms, labor market reforms and a privatization of public assets worth €50 billion (including €16bn from the Hellenic Financial Stability Fund's expected selling of its bank recapitalization shares during 2013-17). If Greece fail on any of these targets, or if the real GDP growth will not improve to the expected levels, such disappointments will call for the Troika (EU, ECB and IMF) either to assist Greece with a third bailout loan, or alternatively to somehow increase the amount of offered debt relief.
In December 2012, because of having noted some further delays for both the economic GDP recovery, reform implementation, and privatization programme, during the course of 2012, the Troika indeed decided to give Greece some additional "debt relief" (through a lowering of the debt maintaining costs - by lowering the interest rates on all government debt held by the Troika), conditional of no further delays in their reform and privatization programme. In addition, the Troika also accepted to lower the requirement for how much the Greek government should self-finance their fiscal gaps through privatization of public assets during the course of 2011-2020, adjusting it down from €50bn to only €24.2bn. On top of this privatization figure will however also still come, some extra debt lowering stockflow adjustments, through the Hellenic Financial Stability Fund's expected selling of its bank recapitalization shares during 2013-17.
- Details about the sale of bank recapitalization shares
The Hellenic Financial Stability Fund (HFSF) managed to complete a €48.2bn bank recapitalization in June 2013, of which the first €24.4bn were injected into the four biggest Greek banks. In return it received a number of shares in those banks, which it can now sell again during the upcoming years (a sale that per March 2012 was expected to generate €16bn of extra "privatization income" for the Greek government, to be realized during 2013-2020). For three out of the four big Greek banks (NBG, Alpha and Piraeus), where there was an additional private investor capital contribution at minimum 10% of the conducted recapitalization, HFSF has offered them warrants to buy back all HFSF bank shares in semi-annual exercise periods up to December 2017, at some predefined strike prices. During the first warrant period, the shareholders in Alpha bank bought back the first 2.4% of the issued HFSF shares; while the shareholders in Piraeus Bank only bought back the first 0.07% of the issued HFSF shares, and finally the shareholders in National Bank (NBG) only bought back the first 0.01% of the issued HFSF shares, because the market share price was actually cheaper than the strike price. This mean, that HFSF can not be certain to sell all their bank shares, through the warrants program. In case some of the shares has not been sold by the end of December 2017, then HFSF is allowed to sell them to other alternative investors in 2018 or beyond. For the fourth bank (Eurobank), with no private investor participation in the recapitalization program, HFSF will aim to sell its acquired bank shares to other alternative investors, within a short/midterm horizon. The published semi-annual bailout programme reviews by the Troika, will keep stock on how many bank shares have been sold, and provide estimation of the approximate value of the remaining shares held by HFSF. A follow-up stress test with publication in late January 2014, is expected to show some extra capital needs of €5bn for the entire Greek Banking sector, an amount which however can be entirely covered by the current HFSF reserve buffer for future additional bank recapitalizations.
In the early-mid-2000s, Greece's economy was strong and the government took advantage by running a large deficit, partly due to high defence spending amid historic enmity to Turkey. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries — shipping and tourism — were especially sensitive to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early 2010, as concerns about Greece's national debt grew, policy makers suggested that emergency bailouts might be necessary.
Danger of defaultEdit
Without a bailout agreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring.
A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to €110 billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent. It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.
Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an “orderly default” on Greece’s public debt which would allow the country to withdraw simultaneously from the Eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighbouring European countries even more.
At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy, as has happened with other economic zones, for example the U.S. Federal Reserve expanding its balance sheet over $1.3 trillion since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt.
Downgrading of creditworthinessEdit
On 23 April 2010, the Greek government requested an EU/IMF bailout package to be activated, providing them with a loan of €45 billion to cover their financial needs for the remaining part of 2010.[dead link] A few days later on 27 April Standard & Poor's slashed Greece's sovereign debt rating to BB+ or amidst hints of default by the Greek government, in which case investors were thought to lose 30–50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement.
Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts continue to question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back. Stock markets worldwide declined in response to this announcement.
Following downgradings by Fitch and Moody's, as well as Standard & Poor's, Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear."
On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold for Greek debt "until further notice", meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier. As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.
First bailout loan and austerity measures (May 2010 - June 2011)Edit
On 1 May 2010, the Greek government announced a series of austerity measures to persuade Germany, the last remaining holdout, to sign on to a larger EU/IMF loan package. The next day the eurozone countries and the International Monetary Fund agreed to a three-year €110 billion loan (see below) retaining relatively high interest rates of 5.5%, conditional on the implementation of austerity measures. Credit rating agencies immediately downgraded Greek governmental bonds to an even lower junk status. This was followed by an announcement of the ECB on 3 May that it will still accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating, in order to maintain banks' liquidity.
The new austerity package was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece. On 5 May 2010, a national strike was held in opposition to the planned spending cuts and tax increases. In Athens some protests turned violent, killing three people.
Still the situation did not improve. It was originally hoped that Greece’s first adjustment plan together with the €110 billion support package would reestablish Greek access to private capital markets by the end of 2012. However it was soon found that this process would take much longer. The November 2010 revisions of 2009 deficit and debt levels made the 2010 targets even harder to reach, and indications signaled a recession harsher than forecast. In May 2011 it became evident that due to the severe economic crisis tax revenues were lower than expected, making it even harder for Greece to meet its fiscal goals.
After the findings of a bilateral EU-IMF audit in June, which called for further austerity measures, Standard and Poor's downgraded Greece's sovereign debt rating to CCC, the lowest in the world. The major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuffled cabinet, and a vote of confidence in the parliament.
The crisis sent ripples around the world and major stock exchanges absorbed losses. To ensure the release of the next 12 billion euros from the eurozone bail-out package (without which Greece would have had to default on loan repayments in mid-July), the government proposed additional spending cuts worth €28 billion over five years.
On 27 June 2011 the trade unions began a forty-eight hour labor strike intended to force parliament members into voting against the austerity package; the first such strike in Greece since 1974. One United Nations official cautioned that the next planned package with new extra austerity measures in Greece could potentially pose a violation of human rights, if it was implemented without careful consideration to the peoples need for "food, water, adequate housing and work under fair and equitable conditions". Nevertheless, the new extra fourth package with austerity measures was approved on 29 June 2011, with 155 out of 300 members of parliament voting in favour.
Second bailout loan and austerity measures (July 2011 - present)Edit
EU emergency measures continued at an extraordinary summit on 21 July 2011 in Brussels, where euro area leaders agreed to extend Greek (as well as Irish and Portuguese) loan repayment periods from 7 years to a minimum of 15 years and to cut interest rates to 3.5%. They also approved the construction of a new €109 billion support package, of which the exact content was to be debated and agreed on at a later summit, although it was already certain to include a demand for large privatisation efforts. In the early hours of 27 October 2011, eurozone leaders and the IMF also came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt, the equivalent of €100 billion, to reduce the country's debt level from €340bn to €240bn or 120% of GDP by 2020.
On 7 December 2011, the new interim national union government led by Lucas Papademos submitted its plans for the 2012 budget, promising to cut its deficit from 9% of GDP 2011 to 5.4% in 2012, mostly due to the write-off of debt held by banks. Excluding interest payments, Greece even expects a primary surplus in 2012 of 1.1%. The austerity measures have helped Greece bring down its primary deficit before interest payments, from €25bn (11% of GDP) in 2009 to €5bn (2.4% of GDP) in 2011, but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011.
Overall the Greek GDP had its worst decline in 2011 with −7.1%  a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005, and with 111,000 Greek companies going bankrupt (27% higher than in 2010). As a result, the seasonally adjusted unemployment rate also grew from 7.5% in September 2008 to a, at the time, record high of 19.9% in November 2011, while the youth unemployment rate during the same time rose from 22.0% to as high as 48.1%.; since then both rates have kept rising with seasonally adjusted unemployment rate and youth unemployment rate reaching respectively 25.1% in July 2012 and 55% in June 2012 setting new record high values. 
In February 2012, an IMF official negotiating Greek austerity measures, admitted the so-far implemented measures were harming Greece in the short term, and cautioned that although further spending cuts were certainly still needed, it was important the fiscal consolidation was not implemented with an excessive pace, as time should now also be given for the implemented economic reforms to start to work.
Some of the economic experts had argued in June 2010 that the best option for both Greece and the EU would be to engineer an orderly default on Greece’s public debt, and by the same time force Greece to withdraw from the eurozone, with a reintroduction of its national currency the drachma at a debased rate. The argument for the latter part of this radical approach, was that Greece also strongly needed to improve its competitiveness in order to reestablish positive growth rates, and a reintroduction of the old drachma would enable Greece to return using the devaluation tool as a mean for that.
In June 2011, a majority of the economists indeed agreed to recommend an orderly default straight away, as it was predicted to be unavoidable for Greece at the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years) would simply end up hurting EU lenders and neighboring European countries even more.
However, if Greece were to leave the euro, the economic and political impact would be devastating. According to Japanese financial company Nomura an exit would lead to a 60 percent devaluation of the new drachma. UBS warned of "hyperinflation, military coups and possible civil war that could afflict a departing country". A confidential staff note drawn up in February 2012 by the Institute of International Finance, also revealed that they now favoured an orderly default with a continued Greek membership of the Euro, as the opposite scenario was expected to create losses of at least €1 trillion.
To avoid a chaotic Greek disorderly default and/or the systemic risks to the Eurozone in the scenario with Greece leaving the Euro, the EU leaders decided in October 2011, to engineer and offer an orderly default combined with a €130bn bailout loan, making it possible for Greece to continue as a full member of the Euro. The offered orderly default and bailout loan, was however conditional, that Greece at the same time approved a new austerity package.
Meeting requirements for activation of the second bailout loanEdit
On 12 February 2012, amid riots in Athens and other cities that left stores looted and burned and more than 120 people injured, the Greek parliament approved the new austerity package, with a 199-74 majority. Forty-three lawmakers from the ruling Socialist PASOK and conservative New Democracy who voted against the bill were immediately expelled from their parties, reducing the ruling coalitions's majority in the 300-seat parliament from 236 to 193. The vote is now expected to pave the way for the EU, ECB and IMF to jointly release the funds, which are supposed to cover all the Greek financial needs in 2012-2014. According to the bailout plan, Greece should then be stable enough for a full return in 2015, to obtain all its future needs of economic funding from the private capital markets.
On 21 February 2012 the Euro Group finalized the second bailout package (see below), which was extended from €109 billion to €130 billion. In a marathon meeting in Brussels private holders of governmental bonds accepted a slightly bigger haircut of 53.5% Creditors are invited to swap their Greek bonds into new 3.65% bonds with a maturity of 30 years, thus facilitating a €110bn debt reduction for Greece, if all private bondholders accept the swap.
EU Member States agreed to an additional retroactive lowering of the bailout interest rates. Furthermore they will pass on to Greece all profits that their central banks made by buying Greek bonds at a debased rate until 2020. Altogether this is expected to bring down Greece's unsustainable debt level from a forecast 198% in 2012, to a more sustainable level of 117% of GDP in 2020, somewhat lower than the originally expected 120.5%. The deal is expected to be finalized before 20 March, when Greece needs to repay bonds worth €14.5bn or default on its debts.
On 9 March 2012 a crucial milestone was reached, when it was announced that 85.8% of private holders of Greek government bonds regulated by Greek law (equal to €152 billion), had agreed to the debt restructuring deal. As this number was above the 66.7% threshold, it enabled the Greek government to activate a collective action clause (CAC), so that the remaining 14.2% (equal to €25 billion) were also forced to agree. At the same time it was announced that 69.8% of private holders of Greek government bonds regulated by foreign law (equal to €20 billion), also had agreed to the debt restructuring deal.
Thus, the total amount of debt to be restructured was now guaranteed to be minimum 95.7% (equal to €196.7 out of €205.5 billion), while the remaining 4.3% of the private holders (equal to €8.8 billion) were offered a prolonged deadline at March 23 to voluntarily join the debt swap. A deadline that subsequently got prolonged further to April 20, with the positive outcome, that the total and final amount of acceptance rose to 96.9% (equal to €199.1 out of €205.5 billion), corresponding to a haircut or debt relief worth €106.5 bn. The Greek government currently discuss, how they shall treat the remaining group of foreign bondholders who opted to refuse the deal, and a final answer is only expected after the May 6 national election; but in all circumstances no later than May 15, where the first holdouts are due for a repayment of their maturing bond.
After the announcement from Greece, that minimum 95.7% of the holders of Greek government bonds would be a part of the scheduled debt swap, the president of the Euro Group Jean-Claude Juncker declared, that Greece had now also met the last of the conditions, for the next bailout package to be activated. As the debt swap deal caused significant economic losses to private creditors, Fitch downgraded Greece's sovereign debt rating from "C" to "RD" (Restricted Default), and the ISDA declared a credit event, meaning that €3.5 billion worth of credit default swaps (CDSs) on Greek debt would be triggered. The deal with a €107 bn debt relief, is the largest government debt restructuring in history.
In regards of the debt-to-GDP ratio, it should however be noted the deal only slightly improved the numbers from the previously forecast 198% of GDP in 2012 to a new forecast at 160.5% of GDP in 2012. The reason for this mediocre improvement, is not only because the resctructured debt to private creditors only represented 58% of the total public debt (with no haircut implemented for the remaining 42% being held by public creditors); but also because Greece along with the debt relief, had to set up some new "temporary debt" in the form of €48bn to recapitalize Greek banks (getting financial assets in return with an unknown long term duration).
The need for money to recapitalize Greek banks, is not only due to the losses created by the debt restructure, but also because EU as part of the bailout plan require the banks to raise their core tier 1 capital ratio to minimum 9% by end-September 2012 and to minimum 10% in June 2013. Despite the fact that the recapitalization is scheduled to happen with a €25bn disbursement in Q2 2012 and a remaining €23bn disbursement in Q1 2013, both disbursements will account-wise be noted as new debt created in 2012. A temporary €35bn bank guarantee for the restructured debt was also loaned for in March 2012, but this loan was canceled again straight after the bank guarantee had expired in July 2012.
Net reduction of debt will be €58.5bn by the end of 2012 (reducing the debt-to-GDP ratio by 27%-point), with the full €106.5bn (equal to a debt-to-GDP ratio decline of 50%-point) only to take effect some years ahead, if Greece at that point of time succeeds to sell their financial assets used for bank recapitalisation at a 1:1 price to some private financial investors. The €48bn temporary debt established to recapitalize banks, will be fully financed by the new €130bn bailout package.
Cancellation/revision of the second bailout loanEdit
In May 2012 several EU officials reminded Greece, that no matter the outcome of the parliamentary elections, they had a choice to either
- respect and follow the agreed debt rescue plan, with the needed requirement to approve the next round of €11.9bn fiscal austerity for the budget years 2013 and 2014
- have the second bailout loan immediately cancelled, followed by an uncontrolled default and exclusion from the eurozone.
As all attempts to form a new government failed after the parliamentary elections in May, a new round of elections were scheduled for June.
The June election resulted in the formation of a new government that respected the initially-signed debt rescue plan and acknowledged the need to approve the planned fiscal austerity package for budget years 2013 and 2014. The new government did, however, request that the Troika extend from 2015 to 2017 the deadline for the Greek government to be self-financed and no longer need to receive additional bailout funds. The Troika will evaluate this request as part of a new analysis of the Greek economy's sustainability and of the current progress of the Greek government in following the initially agreed "debt rescue plan". The report is expected to be published in September 2012.
The Troika decided to withhold the scheduled €31.5bn disbursement for August, pending the outcome of the status report and the political developments in Greece. If the report finds, that Greece did not deliver any progress on the agreed path outlined in the bailout plan, the second bailout loan will most likely get cancelled. If the report finds, that serious progress was made, but that certain unforeseen factors justify a prolonged deadline for Greece to restore the fiscal balance, a revision of the second bailout loan will most probably be granted. It is already rumoured, that a 2-year extension of the deadline, will require the Troika to expand the bailout package with an extra €20bn to Greece. The Troika report is however still to get published, before IMF or EU will even start to consider stating any official opinion about revision proposals, and/or decide if the second bailout loan shall be cancelled due to an insufficient amount of progress for Greece in the attempt to follow the earlier agreed bailout plan.
Rescue packages provided by the EU and IMFEdit
First rescue package (May 2010)Edit
Having had the credit rating agencies further downgraded Greece's ability to achieve and the risk premiums on long-term Greek government bonds first record levels, the Greek government requested on 23 April 2010 official financial assistance.
The European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) agreed on 1–2 May 2010 with the Greek government to a three-year financial aid programme (loan commitments) totaling €110 billion. The Greek debt in exchange for household should be consolidated within three years, so that the budget deficit should be reduced by 2014 to below 3 percent.
Of the €110 billion promised by the IMF took €30bn, the Eurozone €80bn (as bilateral loan commitments). Instrumental in determining the rates of the individual euro area countries in the €80bn of the Eurozone was the respective equity interest in the capital of the ECB, which in turn is determined every five years after the prorated share of a country in the total population and economic output in the EU. The German share of the €80bn was 28%, or about €22.4bn in three years while France paid €16.8bn. Only Slovakia (of the eurozone countries) abstained from providing the bilateral loans.
On 13 September the second tranche of €6.5bn was disbursed. The 3rd tranche of the same amount was paid on 19 January 2011. On 16 March, 4th tranche in the amount of €10.9 billion was paid out, followed by the 5th installment on 2 July. The 6th tranche of €8bn was paid out after months of delay in early December. Of this amount, the IMF took over €2.2bn.
Second rescue package (July 2011 - February 2012)Edit
Early version - July 2011
Since the first rescue package proved insufficient, the 17 leaders of Euro countries approved a (preliminary) second rescue package at an EU summit on 21 July 2011. It was agreed that the aid package has a volume of €100 billion, provided by the newly created European Financial Stability Facility. The repayment period was extended from seven to 15 years and the interest rate was lowered to 3.5%.
For the first time, this also included a private sector involvement, meaning that the private financial sector accepted a voluntary cut. It was agreed that the net contribution of banks and insurance companies to support Greece would include an additional €37 billion in 2014. The planned purchase of Greek bonds from private creditors by the euro rescue fund at their face value will burden the private sector with at least another €12.6 billion.
- EU summit - 26 October 2011
On the night of 26 to 27 October at the EU summit, the politicians made two important decisions to reduce the risk of a possible contagion to other countries, in the case of a Greek default. The first decision was to require all European banks to achieve 9% capitalization, to make them strong enough to withstand those financial losses that potentially could erupt from a Greek default. The second decision was to leverage the EFSF from €500bn to €1 trillion, as a firewall to protect financial stability in other Eurozone countries with a looming debt crisis. The leverage had previously been criticized from many sides, because it is something taxpayers ultimately risk to pay for, due to the significantly increased risks assumed by the EFSF.
Furthermore, the Euro countries agreed on a plan to cut the debt of Greece from today's 160% to 120% of GDP by 2020. As part of that plan, it was proposed that all owners of Greek governmental bonds should "voluntarily" accept a 50% haircut of their bonds (resulting in a debt reduction worth €100bn), and moreover accept interest rates being reduced to only 3.5%. At the time of the summit, this was at first formally accepted by the government banks in Europe. The task to negotiate a final deal, also including the private creditors, was handed over to the Greek politicians.
In view of the uncertainty of the domestic political development in Greece, the first disbursement was suspended after Prime Minister George Papandreou announced on 1 November 2011 that he wanted to hold a referendum on the decisions of the Euro summit. After two days of intense pressure, particularly from Germany and France, he finally gave up on the idea. On 11 November 2011 he was succeeded as prime minister by Loukas Papadimos, who leads a new transitional government. The most important task of this interim government was to finalize the "haircut deal" for Greek governmental bonds and pass a new austerity package, to comply with the Troika requirements for receiving the second bailout loan worth €130bn (enhanced from the previously offered amount at €109bn).
One of the German EFSF-leverage critics, Fabian Lindner, then likened the austerity pressure Greece was feeling to the attitude the US exercised over Germany in 1931. In that earlier circumstance, the collapse of an Austrian and then a German bank followed, leading to a worsening of the Great Depression, political change and ultimately war.
Final agreement - February 2012
The Troika behind the second bailout package defined three requirements for Greece to comply with in order to receive the money. The first requirement was to finalize an agreement whereby all private holders of governmental bonds would accept a 50% haircut with yields reduced to 3.5%, thus facilitating a €100bn debt reduction for Greece. The second requirement was that Greece needed to implement another demanding austerity package in order to bring its budget deficit into sustainable territory. The third and final requirement was that a majority of the Greek politicians should sign an agreement guaranteeing their continued support for the new austerity package, even after the elections in April 2012.
On 21 February 2012, the Euro Group finalized the second bailout package. In a thirteen-hour marathon meeting in Brussels, EU Member States agreed to a new €100 billion loan and a retroactive lowering of the bailout interest rates to a level of just 150 basis points above the Euribor. The IMF will provide "a significant contribution" to that loan but will only decide in the second week of March how much that will be. EU Member States will also pass on to Greece all profits which their central banks made by buying Greek bonds at a debased rate until 2020. Private investors accepted a slightly bigger haircut of 53.5% of the face value of Greek governmental bonds, the equivalent to an overall loss of around 75%. The deal implies that previous Greek bond holders are being given, for €1000 of previous notional, €150 in “PSI payment notes” issued by the EFSF and €315 in “New Greek Bonds” issued by the Hellenic Republic, including a “GDP-linked security”. The latter represents a marginal coupon enhancement in case the Greek growth meets certain conditions. While the market price of the portfolio proposed in the exchange is of the order of 21% of the original face value (15% for the two EFSF PSI notes – 1 and 2 years – and 6% for the New Greek Bonds – 11 to 30 years), the duration of the set of New Greek Bonds is slightly below 10 years.
On 9 March 2012 the International Swaps and Derivatives Association (ISDA) issued a communiqué calling the debt restructuring deal with its private sector involvement (PSI) a "Restructuring Credit Event" which will trigger payment of credit default swaps. According to Forbes magazine Greece’s restructuring represents a default. It is the world's biggest debt restructuring deal, affecting some €206bn of bonds. The creditors are invited to swap their current Greek bonds into new bonds with a maturity of between 11 and 30 years and lower average yields of 3.65% (2% for the first three years, 3% for the next five years, and 4.2% thereafter), thus facilitating a €100bn debt reduction for Greece. Euro-area Member States have pledged to contribute €30bn for private sector participation. In case not enough bondholders agree to a voluntary bond swap, the Greek government has threatened to retroactively introduce a collective action clause to enforce participation.
The cash will be handed over after it is clear that private-sector bondholders do indeed join in the haircut, and after Greece gives evidence of the legal framework that it will put in place to implement dozens of "prior actions" - from sacking underperforming tax collectors to passing legislation to liberalise the country's closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June. In return for the bailout money Greece accepts "an enhanced and permanent presence on the ground" of European monitors. It will also have to service its debts from a special, separate escrow account, depositing sums in advance to meet payments that fall due in the following three months. This operation will be supervised by the troika: the International Monetary Fund, the European Union and the European Central Bank.
On 3 March 2012, The Institute of International Finance said twelve of its steering committee would swap their bonds and accept a loss of up to 75%. When all acceptances had been counted at March 9, and after the Greek parliament subsequently had decided to activate a collective action clause for the bonds covered by Greek law, the overall share of Greek government bonds to face a debt swap had reached 95.7% (equal to €197 billion). The remaining 4.3% of bond holders covered by foreign law and refusing the debt swap (equal to €9 billion), were given two weeks of extra time to reconsider and volountarily join the swap.
When the swap is executed, the bond holders will receive a cash payment on 15% of their original holding, and become issued with new Greek bonds worth 31.5% of their old bonds (covered by 24 new securities). Combined this will result in a 53.5% haircut of the face value, so that the Greek debt pile overall will decrease from its current level at €350 billion, to a more sustainable level around €250 billion.
Speculation about a third rescue packageEdit
A Financial Times editorial on 22 February 2012 argued leaders had "proved themselves unable to settle on a solution that will not need to be revisited yet again", that at best the deal could only hope to remedy one part of the Greek disaster, namely the country's debilitated public finances, though it would not likely even do that. The eurozone's latest plan did, at least, evince consistency with the currency block's previous behaviour:
from the start, its approach has been a halfway house of resisting a sovereign default but not doing enough to remove the risk altogether. The reason is obvious: core governments find it politically impossible to put up more money. So it is unfathomable that they did not demand more from private creditors. The debt restructuring leaves Greece and its helpers with €100bn of debt that could have been written down entirely and left funds to address future "accidents" without resorting to a third rescue. If there is another showdown with Greece it will have been caused by this.
The German finance minister Wolfgang Schäuble and Euro Group president Jean-Claude Juncker shared the scepticism, and did not rule out a third bailout. According to a leaked official report from the European Commission, European Central Bank and the International Monetary Fund, Greece may need another €50 billion ($66bn) from 2015 to 2020.
In mid-May 2012 the crisis and impossibility to form a new coalition government after elections led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as "Grexit" and started to affect international market behaviour, as well as causing an accelerated decrease of bank deposits in Greek banks (commonly referred to as a bank-run).
A second election in mid-June, ended with the formation of a new government supporting a continued adherence to the main principles outlined by the signed bailout plan. The new government however immediately asked its creditors to be granted 2 extra years, extending the deadline from 2015 to 2017 before being required to be self-financed, with minor budget deficits fully covered by extraordinary income from the privatisation program.
As of February 2014, the Troika was reported again to consider offering Greece a third bailout at €15-17bn, but now in conjunction with an additional debt relief for old Troika held debt, through expanding the maturity of the EFSF bonds from 30 to 50 years and lowering the interest rate 0.5% for the initial €80bn debt pile being owed to all other EU member states through the Greek Loan Facility. A decision about this potential third bailout loan, however awaits finalization of the third review of the second bailout programme, and will be conditional Greece comply with all terms specified in that programme - which include final fiscal data should verify that a primary surplus indeed was achieved in 2013. The potential third bailout loan is expected to be finally considered by European Union policy makers in May or June 2014.
Countermeasures taken by the Greek governmentEdit
Countermeasures taken by the Greek government involved fighting against corruption and tax evasion, as well as austerity packages and reforms.
Outlook in May 2010
Greece represents only 2.5% of the eurozone economy. Despite its size, the danger is that a default by Greece may cause investors to lose faith in other eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues. Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable".
Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, and according to Standard & Poor's it does not risk a default. Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.
Outlook in October 2012
The contagion risk for other eurozone countries in the event of an uncontrolled Greek default, has greatly diminished in the last couple of years. This is mainly due to a successful fiscal consolidation and implementation of structural reforms in the countries being most at risk, which significantly improved their financial stability. Establishment of an appropriate and permanent financial stability support mechanism for the eurozone (ESM), along with guarantees by ECB to offer additional financial support in the form of some yield-lowering bond purchases (OMT) for all eurozone countries involved in a sovereign state bailout program from EFSF/ESM (at the point of time where the country regain/possess a complete market access), also greatly helped to diminish the contagion risk.
If Spain signs a negotiated Memorandum of Understanding with the Troika (EC, ECB and IMF) outlining ESM shall offer a precautionary programme with credit lines for the Spanish government to potentially draw on if needed (beside of the bank recapitalisation package they already applied for), this would qualify Spain also to receive the OMT support from ECB, as the sovereign state would still continue to operate with a complete market access with the precautionary conditioned credit line. In regards of Ireland, Portugal and Greece they on the other hand have not yet regained complete market access, and thus do not yet qualify for OMT support. Provided these 3 countries continue to adhere to the programme conditions outlined in their signed Memorandum of Understanding, they will qualify to receive OMT at the moment they regain complete market access.
At the current economic climate, with the long term 10-year government bond rate down at 1.5% in Germany, financial markets as a rule of thumb only indicate a continued existence of significant contagion risks, for those countries still having a similar government bond rate above the 6% limit. Looking at the average values for October 2012, only the following 3 out of 17 eurozone countries still battled with long term interest rates higher than 6%:
- Cyprus = 7.0% (Not regulated by the market since Sep.2011; If traded freely it was expected to be significantly higher in Oct.2012)
- Portugal = 8.2%
- Greece = 18.0%
Criticism of Germany's roleEdit
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Germany has played a major role in discussion concerning Greece's debt crisis, though that is hardly surprising given that it was German banks who held the largest amount of Hellenic debt. Critics have accused the German government of hypocrisy; of pursuing its own national interests via an unwillingness to adjust fiscal policy in a way that would help resolve the eurozone crisis (and citing benefits it enjoyed through the crisis including falling borrowing rates, investment influx, and exports boost thanks to Euro’s depreciation); of using the ECB to serve their country's national interests; and have criticised the nature of the austerity and debt-relief programme Greece has followed as part of the conditions attached to its bailouts.
Charges of hypocrisyEdit
Hypocrisy has been alleged on multiple bases. "Germany is coming across like a know-it-all in the debate over aid for Greece", commented Der Spiegel, though "[n]ot a single German finance minister has balanced the budget since 1970." A Bloomberg editorial, which also concluded that "Europe's taxpayers have provided as much financial support to Germany as they have to Greece", stated the German role and posture in the Greek crisis thus:
In the millions of words written about Europe's debt crisis, Germany is typically cast as the responsible adult and Greece as the profligate child. Prudent Germany, the narrative goes, is loath to bail out freeloading Greece, which borrowed more than it could afford and now must suffer the consequences. […] By December 2009, according to the Bank for International Settlements, German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal and Spain, much more than the German banks' aggregate capital. In other words, they lent more than they could afford. [… I]rresponsible borrowers can't exist without irresponsible lenders. Germany's banks were Greece's enablers.
German economic historian Albrecht Ritschl describes his country as "king when it comes to debt. Calculated based on the amount of losses compared to economic performance, Germany was the biggest debt transgressor of the 20th century." Despite calling for the Greeks to adhere to fiscal responsibility, and although Germany's tax revenues are at a record high, with the interest it has to pay on new debt at close to zero, Germany still missed its own cost-cutting targets in 2011 and is also falling behind on its goals for 2012. There have been widespread accusations that Greeks are lazy, but analysis of OECD data shows that the average Greek worker puts in 50% more hours per year than a typical German counterpart, and the average retirement age of a Greek is, at 61.7 years, older than that of a German. US economist Mark Weisbrot has also noted that while the eurozone giant's post-crisis recovery has been touted as an example of an economy of a country that "made the short-term sacrifices necessary for long-term success", Germany did not apply to its economy the harsh pro-cyclical austerity measures that are being imposed on countries like Greece, In addition, he noted that Germany did not lay off hundreds of thousands of its workers despite a decline in output in its economy but reduced the number of working hours to keep them employed, at the same time as Greece and other countries were pressured to adopt measures to make it easier for employers to lay off workers. Weisbrot concludes that the German recovery provides no evidence that the problems created by the use of a single currency in the eurozone can be solved by imposing "self-destructive" pro-cyclical policies as has been done in Greece and elsewhere. Arms sales are another fountainhead for allegations of hypocrisy. Dimitris Papadimoulis, a Greek MP with the Coalition of the Radical Left party:
If there is one country that has benefited from the huge amounts Greece spends on defence it is Germany. Just under 15% of Germany's total arms exports are made to Greece, its biggest market in Europe. Greece has paid over €2bn for submarines that proved to be faulty and which it doesn't even need. It owes another €1bn as part of the deal. That's three times the amount Athens was asked to make in additional pension cuts to secure its latest EU aid package. […] Well after the economic crisis had begun, Germany and France were trying to seal lucrative weapons deals even as they were pushing us to make deep cuts in areas like health. […] There's a level of hypocrisy here that is hard to miss. Corruption in Greece is frequently singled out as a cause for waste but at the same time companies like Ferrostaal and Siemens are pioneers in the practice. A big part of our defence spending is bound up with bribes, black money that funds the [mainstream] political class in a nation where governments have got away with it by long playing on peoples' fears.
Thus allegations of hypocrisy could be made towards both sides: Germany complains of Greek corruption, yet the murky arms sales meant that the trade with Greece became synonymous with high-level bribery and corruption; former defence minister Akis Tsochadzopoulos was gaoled in April 2012 ahead of his trial on charges of accepting an €8m bribe from Germany company Ferrostaal. In 2000, the current German finance minister, Wolfgang Schäuble, was forced to resign after personally accepting a "donation" (100,000 Deutsche Mark, in cash) from a fugitive weapons dealer, Karlheinz Schreiber.
Another is German complaints about tax evasion by moneyed Greeks. Germans stashing cash in Switzerland to avoid tax could sleep easy" after summer 2011, when "the German government […] initialled a beggar-thy-neighbour deal that undermine[d] years of diplomatic work to penetrate Switzerland's globally corrosive banking secrecy." Nevertheless, Germans with Swiss bank accounts are so worried, and so intent on avoiding paying tax, that some have taken to cross-dressing, wearing incontinence diapers, and other ruses to try and smuggle their money over the Swiss–German border and so avoid paying their dues to the German taxman. Aside from these unusual techniques to avoid paying tax, Germans have a history of partaking in massive tax evasion: a 1993 ZEW estimate of levels of income-tax avoidance in West Germany in the early 1980s was forced to conclude that "tax loss [in the FDR] exceeds estimates for other countries by orders of magnitude." (The study even excluded the wealthiest 2% of the population, where tax evasion is at its worst). A 2011 study noted that, since the 1990s, the "effective average tax rates for the German super rich have fallen by about a third, with major reductions occurring in the wake of the personal income tax reform of 2001–2005."
Alleged pursuit of national self-interestEdit
Since the euro came into circulation in 2002—a time when the country was suffering slow growth and high unemployment—Germany's export performance, coupled with sustained pressure for moderate wage increases (German wages increased more slowly than those of any other eurozone nation) and rapidly rising wage increases elsewhere, provided its exporters with a competitive advantage that resulted in German domination of trade and capital flows within the currency bloc. As noted by Paul De Grauwe in his leading text on monetary union, however, one must "hav[e] homogenous preferences about inflation in order to have a smoothly functioning monetary union." Thus, as the Levy Economics Institute put it, in jettisoning a common inflation rate, Germany "broke the golden rule of a monetary union". The violation of this golden rule led to dire imbalances within the eurozone, though they suited Germany well: the country's total export trade value nearly tripled between 2000 and 2007, and though a significant proportion of this is accounted for by trade with China, Germany's trade surplus with the rest of the EU grew from €46.4 bn to €126.5 bn during those seven years. Germany's bilateral trade surpluses with the peripheral countries are especially revealing: between 2000 and 2007, Greece's annual trade deficit with Germany nearly doubled, from €3 bn to €5.5 bn; Italy's more than doubled, from €9.6 bn to €19.6 bn; Spain's well over doubled, from €11 bn to €27.2 bn; and Portugal's more than quadrupled, from €1 bn to €4.2 bn. German banks played an important role in supplying the credit that drove wage increases in peripheral eurozone countries like Greece, which in turn produced this divergence in competitiveness and trade surpluses between Germany and these same eurozone members:
There is ample evidence that, in the last ten years, the largest wage increases took place in countries like Spain or Greece that experienced the strongest domestic demand growth. Thus demand drives wages and not the other way round, since the PIGS suffered from the bulk of the loss of competitiveness after unemployment in these countries had fallen sharply. The statistical loss of competitiveness of the PIGS thus should not be traced back to inadequate reforms or aggressive trade unions, but instead to booms in domestic demand. The latter has been driven above all by cheap credit for consumption purposes in the case of Greece and for construction work in the cases of Spain and Ireland. This, in turn, translated into higher labor demand and, as a consequence, also to higher wages
Nobel Prize-winning economist Paul Krugman remarked: "Listen to many European leaders—especially, but by no means only, the Germans—and you'd think that their continent's troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they're paying the price, and fiscal austerity is the only answer." Germans see their government finances and trade competitiveness as an example to be followed by Greece, Portugal and other troubled countries in Europe, but the problem is more than simply a question of southern European countries emulating Germany. Dealing with debt via domestic austerity and a move toward trade surpluses is very difficult without the option of devaluing your currency, and Greece cannot devalue because it is chained to the euro. Roberto Perotti of Bocconi University has also shown that on the rare occasions when austerity and expansion coincide, the coincidence is almost always attributable to rising exports associated with currency depreciation. As can be seen from the case of China and the US, however, where China has had the yuan pegged to the dollar, it is possible to have an effective devaluation in situations where formal devaluation cannot occur, and that is by having the inflation rates of two countries diverge. If German inflation rises faster than that of Greece and other strugglers, then the real effective exchange rate will move in the strugglers' favour despite the shared currency. Trade between the two can then rebalance, aiding recovery, as Greece's products become cheaper. Dean Baker therefore argued that the problem is Germany continuing to shut off just such an adjustment mechanism, meaning its "position on the heavily indebted southern countries is absurd. It wants to maintain its huge trade surplus with these countries, while still insisting that they make good on their debts. This is like a store owner insisting that his customers keep buying more from him, while still paying off their debts." "The counterpart to Germany living within its means is that others are living beyond their means", agreed Philip Whyte, senior research fellow at the Centre for European Reform. "So if Germany is worried about the fact that other countries are sinking further into debt, it should be worried about the size of its trade surpluses, but it isn't." Germany, though not the worst offender, has even been ringing up arms sales to Greece in the order of tens of millions of euros, and has "recruited thousands of the Continent's best and brightest […] a migration of highly qualified young job-seekers that could set back Europe's stragglers even more, while giving Germany a further leg up", the latter fact openly acknowledged by the new German foreign minister, Frank-Walter Steinmeier.
OECD projections of relative export prices—a measure of competitiveness—showed Germany beating all euro zone members except for crisis-hit Spain and Ireland for 2012, with the lead only widening in subsequent years. A study by the Carnegie Endowment for International Peace in 2010 noted that "Germany, now poised to derive the greatest gains from the euro's crisis-triggered decline, should boost its domestic demand" to help the periphery recover. In March 2012, Bernhard Speyer of Deutsche Bank reiterated: "If the eurozone is to adjust, southern countries must be able to run trade surpluses, and that means somebody else must run deficits. One way to do that is to allow higher inflation in Germany but I don't see any willingness in the German government to tolerate that, or to accept a current account deficit." (A year year later, Germany continued to reject pleas for it to run deficits). A research paper by Credit Suisse concurred: "Solving the periphery economic imbalances does not only rest on the periphery countries' shoulders even if these countries have been asked to bear most of the burden. Part of the effort to re-balance Europe also has to been borne by Germany via its current account." At the end of May 2012, the European Commission warned that an "orderly unwinding of intra-euro area macroeconomic imbalances is crucial for sustainable growth and stability in the euro area," and prodded Germany to "contribute to rebalancing by removing unnecessary regulatory and other constraints on domestic demand". In July 2012, the IMF added its call for higher wages and prices in Germany, and for reform of parts of the country's economy to encourage more spending by its consumers (which would help generate demand that would soak up exports from other countries), saying such adjustments were "pivotal" to rebalancing the eurozone and global economy. In October 2012, even Christine Lagarde called for Greece to at least be given more time to meet bailout targets, though this was immediately rejected by Germany's finance minister. As if to emphasise the root problem, when downgrading France and other eurozone countries in January 2012, S&P gave one of its reasons as "divergences in competitiveness between the eurozone's core and the so-called 'periphery'". The Germans "wear their anti-inflation obsession as a badge of honour", but "price stability for Germany [… means] catastrophe for the euro." Paul Krugman estimates that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent to become competitive again:
If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery—which would imply an overall eurozone inflation rate of something like 3 percent. But if Germany is going to have only 1 percent inflation, we're talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.
The US has also repeatedly, and heatedly, asked Germany to loosen fiscal policy at G7 meetings, but the Germans have repeatedly refused. The US Treasury Department's semi-annual currency report for October 2013 observed that:
Within the euro area, countries with large and persistent surpluses need to take action to boost domestic demand growth and shrink their surpluses. Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany's nominal current account surplus was larger than that of China. Germany's anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy. […] Stronger domestic demand growth in surplus European economies, particularly in Germany, would help to facilitate a durable rebalancing of imbalances in the euro area.
These October 2013 Treasury Department observations would germinate in the very poorest of soil, however, because the year before, in October 2012, Germany had chosen to legally cement its dismissal of these repeated pleas by legislating against the very possibility of stimulus spending, "by passing a balanced budget law that requires the government to run near-zero structural deficits indefinitely." November 2013 saw the European Commission open a formal "in-depth review" of German surplus.
Even with such policies, Greece and other countries would face years of hard times, but at least there would be some hope of recovery. By May 2012, there were signs that the status quo, and "it's tough to overstate just how fantastic the status quo has been for Germany", was beginning to change as even France began to challenge German policy, and in April 2013, EU employment chief Laszlo Andor called for a radical change in EU crisis strategy—"If there is no growth, I don't see how countries can cut their debt levels"—and criticised what he described as the German practice of "wage dumping" within the eurozone to gain larger export surpluses. "The euro has allowed Germany to 'beggar its neighbours', while also providing the mechanisms and the ideology for imposing austerity on the continent", announced Heiner Flassbeck (a former German vice finance minister) and economist Costas Lapavitsas in 2013, not long after a leaked version of a text from French president Francois Hollande's Socialist Party openly attacked "German austerity" and the "egoistic intransigence of Mrs Merkel". 2012 saw the German trade surplus rise to second highest level since 1950, but 2013 saw continuing signs that the crisis was gradually taking its toll.
Battered by criticism, the European Commission finally decided that "something more" was needed in addition to crushing peripheral countries like Greece with austerity. "Something more" was announced to be structural reforms—things like making it easier for companies to sack workers—but such reforms have been there from the very beginning, leading Dani Rodrik to dismiss the EC's idea as "merely old wine in a new bottle." Indeed, Rodrik noted that with demand gutted by austerity, all structural reforms have achieved, and would continue to achieve, is pumping up unemployment (further reducing demand), since fired workers are not going to be re-employed elsewhere. Rodrik suggested the ECB might like to try out a higher inflation target, and that Germany might like to allow increased demand, higher inflation, and to accept its banks taking losses on their reckless lending to Greece. That, however, "assumes that Germans can embrace a different narrative about the nature of the crisis. And that means that German leaders must portray the crisis not as a morality play pitting lazy, profligate southerners against hard-working, frugal northerners, but as a crisis of interdependence in an economic (and nascent political) union. Germans must play as big a role in resolving the crisis as they did in instigating it." Paul Krugman described talk of structural reform as "an excuse for not facing up to the reality of macroeconomic disaster, and a way to avoid discussing the responsibility of Germany and the ECB, in particular, to help end this disaster." Furthermore, Financial Times analyst Wolfgang Munchau observed that
Austerity and reform are the opposite of each other. If you are serious about structural reform, it will cost you upfront money. [… A]usterity […] weaken[s] the economy's capacity in the short run, and possibly also in the long run. If you have youth unemployment of more than 50 per cent for a sustained period, as is now the case in Greece, […] many of those people will never find good jobs in their lives.
Though Germany claims its public finances are "the envy of the world", the country is merely continuing what has been called its "free-riding" of the euro crisis, which "consists in using the euro as a mechanism for maintaining a weak exchange rate while shifting the costs of doing so to its neighbors." The weakness of the euro, caused by the economy misery of peripheral countries, has been providing Germany with a large and artificial export advantage to the extent that, if Germany left the euro, the concomitant surge in the value of the reintroduced Deutsche Mark, which would produce "disastrous" effects on German exports as they suddenly became dramatically more expensive, would play the lead role in imposing a cost on Germany of perhaps 20–25% GDP during the first year alone after its euro exit. Claims that Germany had, by mid-2012, given Greece the equivalent of 29 times the aid given to West Germany under the Marshall Plan after World War II completely ignores the fact that aid was just a small part of Marshall Plan assistance to Germany, with another crucial part of the assistance being the writing off of a majority of Germany's debt.
Germany insists that it is ready to do "everything" to guarantee the eurozone. "Yet, for all the rhetoric, little has changed. The austerity strategy imposed by Berlin on Europe's 'Arc of Depression'—against the better judgement of the European Commission, the OECD, International Monetary Fund, and informed economic opinion across the globe—has not been modified in the slightest even though economic contraction has proved deeper than expected in every single victim country." The version of adjustment offered by Germany and its allies is that austerity will lead to an internal devaluation, i.e. deflation, which would enable Greece gradually to regain competitiveness. "Yet this proposed solution is a complete non-starter", in the opinion of one UK economist. "If austerity succeeds in delivering deflation, then the growth of nominal GDP will be depressed; most likely it will turn negative. In that case, the burden of debt will increase." A February 2013 research note by the Economics Research team at Goldman Sachs again noted that the years of recession being endured by Greece "exacerbate the fiscal difficulties as the denominator of the debt-to-GDP ratio diminishes", i.e. reducing the debt burden by imposing austerity is, aside from anything else, utterly futile. "Higher growth has always been the best way out the debt (absolute and relative) burden. However, growth prospects for the near and medium-term future are quite weak. During the Great Depression, Heinrich Brüning, the German Chancellor (1930–32), thought that a strong currency and a balanced budget were the ways out of crisis. Cruel austerity measures such as cuts in wages, pensions and social benefits followed. Over the years crises deepened". The austerity program applied to Greece has been "self-defeating", with the country's debt now expected to balloon to 192% of GDP by 2014. After years of the situation being pointed out, in June 2013, with the Greek debt burden galloping towards the "staggering" heights previously predicted by anyone who knew what they were talking about, and with her own organization admitting its program for Greece had failed seriously on multiple primary objectives and that it had bent its rules when "rescuing" Greece; and having claimed in the past that Greece's debt was sustainable—Christine Lagarde felt able to admit publicly that perhaps Greece just might, after all, need to have its debt written off in a meaningful way. In its Global Economic Outlook and Strategy of September 2013, Citi pointed out that Greece "lack[s] the ability to stabilise […] debt/GDP ratios in coming years by fiscal policy alone",:7 and that "large debt relief" is probably "the only viable option" if Greek fiscal sustainability is to re-materialise;:18 predicted no return to growth until 2016;:8 and predicted that the debt burden would soar to over 200% of GDP by 2015 and carry on rising through at least 2017.:9 Unfortunately, German Chancellor Merkel and Foreign Minister Guido Westerwelle had just a few months prior already spoken out again against any debt relief for Greece, claiming that "structural reforms" (i.e. "old wine in a new bottle", see Rodrik et al. above) were the way to go and—astonishingly—that "debt sustainability will continue to be assured".
Strictly in terms of reducing wages relative to Germany, Greece had been making 'progress': private-sector wages fell 5.4% in the third quarter of 2011 from a year earlier and 12% since their peak in the first quarter of 2010. The second economic adjustment programme for Greece called for a further labour cost reduction in the private sector of 15% during 2012-2014.
The question then is whether Germany would accept the price of inflation for the benefit of keeping the eurozone together. On the upside, inflation, at least to start with, would make Germans happy as their wages rose in keeping with inflation. Regardless of these positives, as soon as the monetary policy of the ECB—which has been catering to German desires for low inflation so doggedly that Martin Wolf describes it as "a reincarnated Bundesbank"—began to look like it might stoke inflation in Germany, Merkel moved to counteract, cementing the impossibility of a recovery for struggling countries. With eurozone adjustment locked out by Germany, economic hardship elsewhere in the currency block actually suited its export-oriented economy for an extended period, because it caused the euro to depreciate, making German exports cheaper and so more competitive. By July 2012, however, the European crisis was beginning to take its toll. Germany's unemployment continued its downward trend to record lows in March 2012, and yields on its government bonds fell to repeat record lows in the first half of 2012 (though real interest rates are actually negative).
German and other financial institutions have scooped a huge chunk of the rescue package: "more than 80 percent of the rescue package is going to creditors—that is to say, to banks outside of Greece and to the ECB. The billions of taxpayer euros are not saving Greece. They're saving the banks." The shift in liabilities from European banks to European taxpayers has been staggering: one study found that the public debt of Greece to foreign governments, including debt to the EU/IMF loan facility and debt through the eurosystem, increased by €130 bn, from €47.8 bn to €180.5 billion, between January 2010 and September 2011. The combined exposure of foreign banks to Greek entities—public and private—was around 80bn euros by mid-February 2012. In 2009 they were in for well over 200bn. The Economist noted that, during 2012 alone, "private-sector bondholders reduced their nominal claims by more than 50%. But the deal did not include the hefty holdings of Greek bonds at the European Central Bank (ECB), and it was sweetened with funds borrowed from official rescuers. For two years those rescuers had pretended Greece was solvent, and provided official loans to pay off bondholders in full. So more than 70% of the debts are now owed to 'official' creditors", i.e. European taxpayers and the IMF. With regard to Germany in particular, a Bloomberg editorial noted that, before its banks reduced its exposure to Greece, "they stood to lose a ton of money if Greece left the euro. Now any losses will be shared with the taxpayers of the entire euro area." Similarly in Spain:
German lenders will be among the biggest beneficiaries of a Spanish bank bailout, with rescue funds helping to ensure they get paid back in full for poor lending decisions made in the run-up to the financial crisis, and helping politicians in Berlin avoid a politically sensitive bank bailout of their own. German lenders were among Europe's most profligate before 2008, channelling the country's savings to the European periphery in search of higher profits. […] German banks were facing deep losses linked to potential Spanish bank failures. However, a bailout of Spanish banks—backed initially by Spanish taxpayers and potentially later by the European Stability Mechanism—will ensure creditors won't take losses, making the bailout effectively a back-door bailout of reckless German lending. […] Jens Sondergaard, senior European economist at Nomura, said: "The Spanish bailout in effect is a bailout of German banks. If lenders in Spain were allowed to default, the consequences for the German banking system would be very serious."
The director of LSE's Hellenic Observatory mused: "Who is rescued by the bailouts of the European debt crisis? The question won't go away. […] The Greek banks—vital to the provision of new investment in an economy facing a sixth year of continuous recession—have certainly not been 'rescued' [… and] face large-scale nationalisation. […] Athenians might well turn the aphorism around and warn their partners in Lisbon: 'Beware of Europeans bearing gifts.'"
All of this has resulted in increased anti-German sentiment within peripheral countries like Greece and Spain. German historian Arnulf Baring, who opposed the euro, wrote in his 1997 book Scheitert Deutschland? (Does Germany fail?): "They (populistic media and politicians) will say that we finance lazy slackers, sitting in coffee shops on southern beaches", and "[t]he fiscal union will end in a giant blackmail manoeuvre […] When we Germans will demand fiscal discipline, other countries will blame this fiscal discipline and therefore us for their financial difficulties. Besides, although they initially agreed on the terms, they will consider us as some kind of economic police. Consequently, we risk again becoming the most hated people in Europe." Anti-German animus is perhaps inflamed by the fact that, as one German historian noted, "during much of the 20th century, the situation was radically different: after the first world war and again after the second world war, Germany was the world's largest debtor, and in both cases owed its economic recovery to large-scale debt relief." When Horst Reichenbach arrived in Athens towards the end of 2011 to head a new European Union task force, the Greek media instantly dubbed him "Third Reichenbach"; in Spain in May 2012, businessmen made unflattering comparisons with Berlin's domination of Europe in WWII, and top officials "mutter about how today's European Union consists of a 'German Union plus the rest'". Almost four million German tourists—more than any other EU country—visit Greece annually, but they comprised most of the 50,000 cancelled bookings in the ten days after the 6 May 2012 Greek elections, a figure The Observer called "extraordinary". The Association of Greek Tourism Enterprises estimates that German visits for 2012 will decrease by about 25%.
Though it was largely foreign banks, represented in the various talks by the Institute of International Finance, who originally held Greek government bonds they had so recklessly bought, by the time of the February 2012 negotiations they had sold on perhaps half their holdings, largely to hedge funds and other investors not represented at the talks. In February, hedge funds were thought to control 25–30% of Greek bonds, and are widely believed to be unwilling to participate in any voluntary debt reduction, complicating any deal. Their reluctance to take losses stems from their reckoned investment strategy, which would bring profit from a formal default on Greek bonds via a pay-out from the bond insurance. To neuter the hedge-fund veto on negotiations, the Greek government was expected to, and did, pass retroactive legal provisions to allow it to force a restructuring on bondholders. An imposed deal, however, would apparently trigger CDS payments, the Greek case might be more complicated than Argentina, putting some investors off. One hedge fund that had earlier told Reuters it was considering legal options said it had now decided to agree to the swap, even though that would mean a small loss.
"For much of the past 18 months, investing in or against eurozone bonds has been a fool’s errand for the world’s $2tn hedge fund industry. A regime of political vacillation and punishing volatility left few fund managers who sought to play the crisis-stricken market with anything to show for their efforts."
Analysis of the restructuringEdit
A myth is developing that private creditors have accepted significant losses in the restructuring of Greece's debt, while the official sector gets off scot free. […] The reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors [i.e. taxpayers. …]
Greece's public debt will [remain] unsustainable at close to 140 per cent of gross domestic product: at best, it will fall to 120 per cent by 2020 and could rise as high as 160 per cent of GDP. Why? A "haircut" of €110bn on privately held bonds is matched by an increase of €130bn in the debt Greece owes to official creditors. A significant part of this increase in Greece’s official debt goes to bail out private creditors: €30bn for upfront cash sweeteners on the new bonds that effectively guarantee much of their face value. Any future further haircuts to make Greek debt sustainable will therefore fall disproportionately on the growing claims of the official sector. Loans of at least €25bn from the European Financial Stability Facility to the Greek government will go towards recapitalising banks in a scheme that will keep those banks in private hands and allow shareholders to buy back any public capital injection with sweetly priced warrants. The new bonds will also be subject to English law, where the old bonds fell under Greek jurisdiction. So if Greece were to leave the eurozone, it could no longer pass legislation to convert euro-denominated debt into new drachma debt. This is an amazing sweetener for creditors. […]
The reality is that most of the gains in good times […] were privatised while most of the losses have been now socialised. Taxpayers of Greece's official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece's past, current and future insolvency.
One estimate is that Greece actually subscribed to €156bn worth of new debt in order to get €206bn worth of old debt to be written off, meaning the trumpeted write-down of €110bn by the banks and others is more than double the true figure of €50bn that was truly written off. Taxpayers are now liable for more than 80% of Greece's debt. James Mackintosh, Investment Editor at the Financial Times, noted a JPMorgan Chase estimate that "only €15bn of €410bn total 'aid' to Greece" actually went into the country's economy, the rest having been handed over to its creditors. "No wonder they are cross", said Mackintosh of the Greeks. One journalist for Der Spiegel noted that the second bailout was not "geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks. How else can one explain the fact that around a quarter of the package won't even arrive in Athens but will flow directly to the country's international creditors?" He accused the banks of "cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction" in order to get paid. According to Robert Reich, in the background of the Greek bailouts and debt restructuring lurks Wall Street. While US banks are owed only about €5bn by Greece, they have more significant exposure to the situation via German and French banks, who were significantly exposed to Greek debt. Massively reducing the liabilities of German and French banks with regards to Greece thus also serves to protect US banks.
On a scholarly critique of the EU management of the debt crisis, Papadopoulos comments:
The euro zone crisis management has been disastrous from its very beginning in 2009–2010. Instead of tackling the problem head-on by re-profiling the distressed Greek debt into jointly guaranteed European debt and securitizing part of it under EU guarantee, ending thus in one fell swoop speculative movements and the debt crisis before even its outburst, the EU has been dragging its feet by refusing to consider the problem as a European instead of a national one out of fear for "moral hazard". This attitude has been seriously undermining the EU's political credibility vis-à-vis the capital markets and Europe's strategic partners as well as competitors. This, in its turn, has brought about a social crisis.
Greek public opinionEdit
According to a poll in February 2012 by Public Issue and SKAI Channel, PASOK—which won the national elections of 2009 with 43.92% of the vote—had seen its approval rating decimated to a mere 8%, placing it fifth after centre-right New Democracy (31%), left-wing Democratic Left (18%), far-left Communist Party of Greece (KKE) (12.5%) and radical left SYRIZA (12%). The same poll suggested that Papanderou is the least popular political leader with a 9% approval rating, while 71% of Greeks do not trust Papademos as prime minister.
In a poll published on 18 May 2011, 62% of the people questioned felt the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Giorgos Papakonstantinou, to handle the crisis. (Evangelos Venizelos replaced Papakonstantinou on 17 June). 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece's economy. 64% felt that the possibility of sovereign default is likely. When asked about their fears for the near future, Greeks highlighted unemployment (97%), poverty (93%) and the closure of businesses (92%).
Polls have shown that, despite the awful situation, the vast majority of Greeks are not in favour of leaving the Eurozone, a fact attributed by some to there having been "so much propaganda over the years about the merits of the euro and the perils of being outside it that both expert and popular opinion can barely see straight. It is true that default and a euro exit could endanger Greece's continued membership of the EU. More importantly, though, there is a strong element of national pride. For Greece to leave the euro would seem like a national humiliation. Mind you, quite how agreeing to decades of misery under German subjugation allows Greeks to hold their heads high defeats me." Nonetheless, other polls have shown that almost half (48%) of Greeks are in favour of default, in contrast with a minority (38%) who are not.
Speculation about Euro exitEdit
"The euro should now be recognized as an experiment that failed", wrote Martin Feldstein in 2012. Economists, mostly from outside Europe, and associated with Modern Monetary Theory and other post-Keynesian schools, condemned the design of the Euro currency system from the beginning, and have since been advocating that Greece (and the other debtor nations) unilaterally leave the Eurozone, which would allow Greece to withdraw simultaneously from the Eurozone and reintroduce its national currency, the drachma at a debased rate.
Economists like Tyler Cowen who favor this radical approach to solve the Greek debt crisis typically argue that an orderly default is unavoidable for Greece in the long run, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just end up hurting EU lenders and neighboring European countries even more. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.
Others argue that a Greek exit from the eurozone would result in major capital flight and significant inflation that would destroy savings and make imports very expensive for Greeks. A Greek departure from the eurozone might, moreover, precipitate a larger contraction of the eurozone, as a result of the more marginal southern economies leaving. The departure of major eurozone economies such as Spain and Italy would be a major blow to the stability of the euro and might even lead to its eventual collapse.
Furthermore, German Chancellor Angela Merkel and former French President Nicolas Sarkozy said on numerous occasions that they would not allow the eurozone to disintegrate and have linked the survival of the Euro with that of the entire European Union. In September 2011, EU commissioner Joaquín Almunia shared this view, saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration".
In a 2003 study that analyzed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth. The increase in the share of the population living at "risk of poverty or social exclusion" was not significant during the first 2 years of the crisis: the figure was at 27.6% in 2009 and 27.7% in 2010 (and only slightly worse than the EU27-average at 23.4%). In 2011, however, the estimated figure rose sharply above 33%. According to an IMF official, the austerity measures contributed to a worsening of the Greek recession, which began in October 2008 and which only worsened in 2010 and 2011.
Greek GDP suffered its worst decline in 2011 when it clocked growth of −6.9%; a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005, during that year, 111,000 Greek companies went bankrupt (27% higher than in 2010). As a result, the seasonally adjusted unemployment rate also grew from 7.5% in September 2008 to a then record high of 23.1% in May 2012, while the youth unemployment rate during the same time rose from 22.0% to 54.9%. On 17 October 2011, Minister of Finance Evangelos Venizelos announced that the government would establish a new fund, aimed at helping those who were hit the hardest from the government's austerity measures. The money for this agency would come from a crackdown on tax evasion.
The social effects of the austerity measures on the Greek population have been severe, as well as on poor and needy foreign immigrants, with some Greek citizens turning to NGOs for healthcare treatment and having to give up children for adoption. "[F]ood aid, in a western European capital?" remarked one aghast BBC journalist after visiting Athens, before observing: "You do not measure a people's ability to survive in percentages of Gross Domestic Product." Another BBC reporter wrote: "As you walk around the streets of Athens and beyond you can see the social fabric tearing." The suicide rate in Greece used to be the lowest in Europe, but by March 2012 it had increased by 40%; Dimitris Christoulas, a 77-year-old pensioner, shot himself outside the Greek parliament in April because the austerity measures had "annihilated all traces for my survival". Patients with chronic conditions attending treatment at state hospitals in Athens are told to bring their own prescription drugs.
In February 2012, it was reported that 20,000 Greeks had been made homeless during the preceding year, and that 20 per cent of shops in the historic city centre of Athens were empty. The same month, Poul Thomsen, a Danish IMF official overseeing the Greek austerity programme, warned that ordinary Greeks were at the "limit" of their toleration of austerity, and he called for a higher International recognition of "the fact that Greece has already done a lot fiscal consolidation, at a great cost to the population"; and moreover cautioned that although further spending cuts were certainly still needed, they should not be implemented rapidly, as it was crucial first to give some more time for the implemented economic reforms to start to work. Estimates in mid-March 2012 were that an astonishing one in 11 residents of greater Athens—some 400,000 people—were visiting a soup kitchen daily.
Prominent UK economist Roger Bootle summarised the state of play at the end of February 2012:
Since the beginning of 2008, Greek real GDP has fallen by more than 17pc. On my forecasts, by the end of next year, the total fall will be more like 25pc. Unsurprisingly, employment has also fallen sharply, by about 500,000, in a total workforce of about 5 million. The unemployment rate is now more than 20pc. […] A 25pc drop is roughly what was experienced in the US in the Great Depression of the 1930s. The scale of the austerity measures already enacted makes you wince. In 2010 and 2011, Greece implemented fiscal cutbacks worth almost 17pc of GDP. But because this caused GDP to wilt, each euro of fiscal tightening reduced the deficit by only 50 cents. […] Attempts to cut back on the debt by austerity alone will deliver misery alone.
Thus, youth unemployment in mid-2013 stood at almost 65%; there were 800,000 people without unemployment benefits and health coverage, and 400,000 families without a single bread winner; the far Right was consistently polling a double-digit share of the vote; the Greek healthcare system on its knees, and HIV infection rates were up 200%.
Controversy about media coverageEdit
||This section possibly contains original research. (March 2014)|
It is interesting to note that initially there was little market reaction to the October 2009 deficit revision. The Greek 10-year bond yield remained below 5% until early December 2009, and only climbed over 6% in February 2010 and over 7% in April 2010 after an unusually high number of overwhelmingly negative articles in mainstream media. The study by Sonja Juko (September 2010) includes findings like the following: "A closer look at the development of media reporting during the months of the crisis reveals that the dynamic of media reporting (measured as the sum of total press reports by German, UK und US press using ‘Greece’ and ‘public finance’ as key words) matches strongly with the dynamic of the loss in trust in Greece’s creditworthiness measured by the credit spreads. The faster rise in the risk premium for Greek bonds that started in December 2009 coincided with a much higher reporting frequency. The same applies to the development in the weeks and months that followed this initial ascent of the Greek yield spread. The surge in the risk premium during April and May 2010 was accompanied by a strong jump in news coverage. During the peak period when the risk premium climbed to its highest level (calendar week 18, 19 and 20) the number of reports stood between 1000 and 1400 per calendar week." … "Titles like “Time bomb for the Euro” (Der Spiegel, 7 December 2009), “Shockwave from Athens” (Die Welt, 16 January 2010), “The next tsunami” (Manager magazine, 1 February 2010), “Prayers on the deathbed” (Der Spiegel, 15 March 2010), or “Looming default. Economists give up on Greece” (Spiegel Online, 28 April 2010) are just afew examples for the use of sensational language in press reports during the observation period. The wording used by the media clearly created a psychology of looming collapse. Even if investors did not believe in a Greek default at first, they were much more likely to do so after hearing or reading the news on Greece."
The media coverage of the Greek debt crisis has been seen as often employing bias, stereotyping and inaccurate arguments. Outright inaccurate arguments that have been very often repeated include:
- "The need of (lazy) Greeks to work harder". Actually Greeks have the highest average annual hours actually worked per worker in the European Union.
- "Too many vacation days". Actually Greeks have on average fewer vacation days then most EU workers (including the German and French).
- "Greeks retiring early" (an erroneous argument based on focusing on specific groups which - like in many countries - enjoy early retirement). Actually the average retirement age (both official and effective) for Greeks is close to that for Germans, and, more importantly, effective retirement age is higher than this in countries like Austria, France, Finland and Belgium.
- "Profligate Greek governments". Actually government expenditures as a percentage of GDP in Greece have been near or below EU average and certainly below these in Germany, Netherlands, Finland, France, Austria, and Belgium.
- "Greeks living beyond their means". Actually private, household and total (private and public) debt-to-GDP ratios in Greece are among the lowest in the Eurozone.
- "Greece cheated its way into the Eurozone (did not truly meet admission criteria)". This is a surprisingly widespread erroneous statement. It refers to one of five entry criteria (as the rest had been met), the 1999 budget deficit which should be below 3% of GDP. Although Greece has been the worst (but not sole) violator of the Eurozone fiscal rules after its entrance, it actually fulfilled all criteria for admission including the 1999 budget deficit (even with all later corrections) according to the accounting method in force at the time (ESA79). Actually, even the highest ever alternative estimate for the 1999 budget deficit (in 2004, using an unorthodox accounting for military orders, later corrected, coupled with retroactive application of the current EU accounting method, i.e., ESA95) did not exceed 3.38%.
- "Goldman Sachs helped Greece cheat its way into the Eurozone”. Also a surprisingly widespread erroneous statement, since by 2001 (Goldman Sachs deal) Greece had already been admitted into the Eurozone.
Moreover, a lot of references to problems after Greece’s entry into the EU and the Eurozone (increase in public spending, lower competitiveness, over-regulation, corruption, "protected" professions, tax evasion etc.) are often made without quantification or comparison with other EU countries, possibly creating an impression of an "inevitable" Greek debt crisis (independent of external factors). However, Greek public debt-to-GDP ratio was essentially stable prior to the 2008-2009 international crisis, averaging between 1995 and 2007 (including all recent Eurostat revisions) 99.8%, compared with 110.5% in Italy, 106.8% in Belgium 65.1% in Austria and 62.3% in Germany. Relevant arguments include those expressed by Nobel Prize Winner Paul Krugman: "Ever since Greece hit the skids, we’ve heard a lot about what’s wrong with everything Greek. Some of the accusations are true, some are false — but all of them are beside the point. Yes, there are big failings in Greece’s economy, its politics and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart, and threatens to spread across Europe."
In general, when quantified, the true relative position of Greece has been shown in a number of issues, including state borrowing (measured by public debt to GDP as shown above), tax evasion, bureaucracy etc.
- Balance-of-payments crisis
- The role of the Institute of International Finance in the Greek debt crisis
- List of acronyms: European sovereign-debt crisis
- List of countries by external debt
- Net international investment position
- Uniform Invoice lottery
Film about the debt
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"Structural reform increases productivity in practice through two complementary channels. First, low-productivity sectors shed labor. Second, high-productivity sectors expand and hire more labor. Both processes are needed if the reforms are to increase economy-wide productivity. But, when aggregate demand is depressed—as it is in Europe’s periphery—the second mechanism operates weakly, if at all. It is easy to see why: making it easier to fire labor or start new businesses has little effect on hiring when firms already have excess capacity and have difficulty finding consumers. So all we get is the first effect, and thus an increase in unemployment."
See also Simon Evenett (9 June 2013). "Incoherent EU economic policy won't deliver a swift recovery". The Observer. Retrieved 16 June 2013. "Many promoters of structural reform are honest enough to acknowledge that it generates short-term pain. This isn't difficult to understand. If you've been in a job where it is hard to be fired, labour market reform introduces insecurity, and you might be tempted to save more now there's a greater prospect of unemployment. Economy-wide labour reform might induce consumer spending cuts, adding another drag on a weakened economy."
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