Tiểu luận tài chính công analysis of greek government debt crisis

DIPLOMATIC ACADEMY OF VIETNAM
INTERNATIONAL ECONOMICS

PUBLIC FINANCE
Analysis of Greek government debt
crisis
NAME

: VŨ KIM THÀNH

STUDENT ID

: KT41C – 091 - 1418

WORD COUNT

: 4012 Words



Hanoi, 2017



2




TableofContents

OVERVIEWOFGREEKCRISIS:..................................................................................................4
Beforethecrisisoccurred:................................................................................................................4
ThesituationofGreece’scrisis:........................................................................................................6
CAUSESOFPUBLICDEBT.........................................................................................................8
Domesticfactors:.............................................................................................................................8
Overspendingfromthegovernmentinthecontextoflimitingincomesources.................................8
Policyissuesandcompetitivecapability............................................................................................10
Internationalfactors:.....................................................................................................................11
Easytoaccessloanswithlowinterestrate.......................................................................................11
Thedisadvantageofsingleregionalcurrency...................................................................................12
NEGATIVEIMPACTSOFGREEKSOVERNITYDEBTS:...............................................................13
ForGreeceitself.............................................................................................................................13
SOLUTIONS:..........................................................................................................................15
CONCLUSION:.......................................................................................................................16
References............................................................................................................................18




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I.OVERVIEWOFGREEKCRISIS:
1.Beforethecrisisoccurred:

Greece is a small nation located in South Europe. It is included in
Eurozone as an official member. The total population of Greece is
about 11 million people accounting for 2.2% EU’s population and
contributing for 2.8% GDP of the block.
Greece was the 26th most developed countries in the world with 40% of

GDP was made by state sectors. The economic structure of Greece in
2006 was: 76% of income were from services, 20.6% from industrial
sector and only 3.4% from agricultural sector. The banking and
financing services had been developed greatly in Greece during this
phase.
The major economic reforms along with joining the European Union
have helped the Greek economy to flourish which improved the
standard of living for the Greeks as ranked 22nd in the world by
Human Development Index, the rate of growth was regularly believed
as one of the highest compared to other countries in the Eurozone.
Greece's economy grew annually from 2004 to 2007 by about 4% due
in part to spending on the 2004 Athens Olympics. Though this event
decimated a huge amount of investment from the government, Greeks
benefited extraordinarily thanks to the abrupt rise in services.
Biểu đồ về tốc độ tăng trưởng GDP hàng năm của Hy Lạp (19992009)



4


However, in 2008, the growth rate had staggered at only 0.2% and
2009 marks a negative milestone of Greece’s finance history with the
plunge in GDP rate (-2.5%) – which is alleged to be the aftermath of
global crisis one year before. An increasing number of failed measures
to settle the issue has shown that Athens was too inactive in managing
the government spending.
Public debt, unemployment, inflation of Greece has been put into
danger zone since 2007. In 2009, unemployment rate reached 9.4% as
the consequence of the national economic collapse.

Tỷ lệ thất nghiệp của Hy Lạp (2002-2010)

Tổng nợ chính phủ so với GDP
(%)

In the end of last decade, when 2008 crisis began to emerge, Greek
government decided to borrow from multiple foreign sources to cover
its deficit budget and current expenses. If in the interval of 2001 –
2008 (before the economic collapse), the average deficit of GDP was



5


only 5%/year (the European region was 2%) and current account
deficit was only 9%/year (EU: 1%), in 2009, this figure had achieved
13%. The main reason for this situation was the overspending from the
government. As a result, the national deficit leads to higher public debt
since officials opted to borrow more from sovereign investors. The
sovereign debt in 2009 was increased by 115%. Both sovereign debt
level and budget deficit level of Greece exceeded the limit regulated by
EU community.
The vague transparency of national financial stated had degraded the
credibility of foreign investors, hence, the lower investment attraction
leads to the lower chance of solving public debts.
2.ThesituationofGreece’scrisis:

And indeed when the 2008-2009 global economic meltdown triggered
a liquidity crise in many countries over the southern European region

which made the government spending increased and tax revenues
decreased. After winning on October 20, 2009, new prime minister
George Papandreou said the budget deficit for fiscal 2009 was at 12.7
percent, more than four times the allowable limit of an EU-nation. This
deficit level, together with a debt of € 300 billion, has indeed shown
the severity of the situation in Greece. In a worst scenerio, the 27th
largest economy in the world is likely to be the detonation of the entire
European financial and monetary system.
Hình 4: Thâm hụt ngân sách và tỷ lệ nợ của một số quốc gia Châu Âu
2009

It is indicated on the chart that the budget deficit and debt to GDP ratio
of Greece was overwhemingly high and ranked top 1 compared to


6


other countries.Since the end of 2009, investors' confidence in the
government has been shaky. After announcing a large budget deficit at
the threshold of 12.7 percent of GDP, Greek bonds were downgraded
by three top creditors. Countries with large foreign debts such as
Greece are the top concern of investors. Many allegations that the
Greek government has faked statistics and are not transparent about the
level of debt through complex financial instruments also contributed to
the distrust of investors.
On 8 December 2009, the crisis escalated when the government bonds
fell sharply after being downgraded from A- to BBB + by Fitch on
long-term debt credibility. For the first time in the decade, Greece was
ranked below A - and pushed up its cost of debt. To mitigate the

dilemma, on December 14, 2009, Prime Minister Papandreou declared
that he would tackle corruption and tighten spending, including taxing
90% on bonuses for bank executives. He also issued a ban on the entire
rewards for politicians in the public sector. Ten days later, the Greek
Parliament passed a provision to cut the budget deficit by 4% and
forecast the budget deficit for 2010 to be 9.1%. Faced with the
situation, thousands of workers flocked on the streets to protest against
Papandreou's budget cuts which affected their social welfares.
However, the international community, especially the eurozone
countries, is not satisfied with the plan, given that Greece's budget
deficit and instability can affect the whole block. On 11 February
2010, Germany voiced its rejection on the loosen financial aid package
for Greece and said the country needed to solve the problem on its
own.
And as being inferred from this list below, 2008 can be seen as the
worst fiscal year of Greece when the nation reached the lowest point in
debt and income of all time.
Current Accounts
I
Ι.A


Year
Current
(I.A+I.B+I.C+I.D)
Commercial trade

2007
Accounts -32,602.2

2008
-34,797.6

2009
-25,818.7

2010
-24,060.5

-41,499.2

-44,048.8

-30,767.3

-28,279.6
7


Ι.Β
Ι.C
Ι.D
II
ΙΙ.1
ΙΙ.2
III

Service Trade
Income Balance
One-way current transactions

Capital Balance (II1-II2)
Long-term cap inflow
Long-term cap outflow
Basic balance(I + II)

16,591.7
-9,285.8
1,591.1
4,332.3
4,673.9
341.6
-28,269.9

17,135.6
-10,643.0
2,758.6
4,090.8
4,637.8
547.0
-30,706.8

12,640.2
-8,984.3
1,292.6
2,017.4
2,328.1
310.7
-23,801.3

13,248.5

-9,228.3
198.9
2,071.5
2,356.2
284.7
-21,989.0

II.CAUSESOFPUBLICDEBT
1.Domesticfactors:
a.Overspendingfromthegovernmentinthecontextoflimitingincomesources

In the interval of 2001-2007, Greece's GDP increased annually by an
average of 4.3%, compared to the European average of 3.1%. High
economic growth is due to the rapid expansion of private sector
consumption (provided by loosen loan packages) and public
investment from the government and the EU. However, in those six
years, while government spending rose to 87%, revenues grew by only
31%, leading to budget deficits above the allowable levels of EU
regulation. Observers point to Greece's inefficient and cumbersome
public administration, costly health care and pension schemes, tax
evasion, and lack of financial discipline. The main factor behind
Greece's budget deficit.
According to the OECD, the total public expenditure on public
administration in Greece was higher than in any OECD countries in
2004, and there is no evidence that the quality and quantity of these
public services are outstanding. In 2009, public expenditure accounted
for 50% of GDP. The successor government continued to modernize
and consolidate public management issues, but what they identified as
main obstacles to economic growth were the excessive number of staff
and low productivity in the public sector. In addition, the average age

of the Greek population over 64 is projected to increase from 19% in
2007 to 32% in 2060, which could put additional burdens on public



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expenditures when the wage subsidy system for retirement in Greece
was one of the highest in Europe.

By contrast to increasing spendings, declines in revenues also
contributed to the Greek budget deficit. Many economists point out
that the problem of tax evasion and the unrecorded economy was a
major factor for insolvency. They argue that Greece must solve this
problem if it wants to increase the revenues needed to improve its
financial position. Some studies have estimated that the underground
economy in Greece accounts for 25-30% of GDP.



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b.Policyissuesandcompetitivecapability

Greek economy had been suffering from a dramatic plunge in the
international competition. Many assumed that low wages led to low
productivity which consequently resulted in low-compe capability.
According to the table below, we can acknowledge that the level of

competition in Greece was extremely low after the crisis erupted –
only sat at 109th in 2009. The nation was out-tripped largely by
regional countries, especially Ireland.



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Mức độ cạnh tranh của một số nước châu Âu năm 2009
Country

Ranking

Greece

109

Ireland

7

Italy

78

Potugal

48

Spain

62

According to one study, the level of Greek remittances has risen about
5% annually since the country was using the euro as the national
currency doubled its regional average. At the same time, exports from
Greece to major importers grew only 3.8% per year, equal to half the
speed of imports from other countries. Greece wants to boost its
competitiveness and reduce its current account deficit to increase labor
productivity, cut wages, and increase its accumulation. According to
some studies, the Papandreou government has begun to restrict public
sector wages and hopes to increase exports through investment in areas
of competitive advantage. In the past, the country's tourism and
shipping industry has been strong.
2.Internationalfactors:
a.Easytoaccessloanswithlowinterestrate

The appliance of euro as the national currency in 2001 seems to be a
contributing factor to the Greek debt crisis. When the monetary system
is anchored by strong economies such as Germany and France and a



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common monetary policy is managed by the European Central Bank,
investors tend to be more confident in their member countries of the
eurozone. Recognizing the stability of the euro, Greece, as well as

other members of the EU, are borrowing at preferential interest rates
than those outside the eurozone. This also facilitates the financing of
the budget and the repayment of outstanding loans. And it was these
benefits that contribute to Greece's public debt. Easy access to lowinterest loans made Greece quick to reach high levels of debt. And if
the market makes it difficult to make loans by making financial
donations to public debt become too expensive, Greece may have to
implement provisions for restructuring and impose further austerity
policy.
b.Thedisadvantageofsingleregionalcurrency

Many of the woes in Greece’s financial crisis stemmed from its
membership in the Eurozone. The Eurozone was created in 1999 as a
monetary union among 11 countries (of the, then, 15 member states of
the European Union) that lacked corresponding fiscal and political
unions. Greece had not qualified to join the Eurozone in 1999 when the
initial list of candidate entrants was drawn up, because it failed to meet
the 1992 Maastricht Treaty economic requirements for countries
joining the zone. Under the terms of the EU Stability and Growth Pact,
established in 1996, the economies of new members had to converge
with Eurozone members to a certain degree. Convergence was
demonstrated by compliance with five criteria, including: low inflation,
a budget deficit of less than 3% of GDP, and government debt levels of
less than 60% of GDP. Membership in the Eurozone was a major
economic constraint on Greece. If Greece had not agreed to the single
currency, it could have devalued its currency to stimulate exports and
its economy and inflate its way out of the crisis. Currency devaluation
would have taken the pressure off interest rates. Greece could not set
its own interest rates, however, because for a member of the Eurozone,
the role of determining interest rates is assumed by the ECB. Naturally,
the ECB’s aim is to maintain stability of the euro and the Eurozone

economies and to keep inflation under control. It has no direct mandate



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concerning Greece or any individual Eurozone economy in particular.
Therein
lay
the
problem.

c.GlobalCrisis:

The Greek financial crisis was a series of debt crises that began with
the global financial crisis of 2008. In 2008, the global financial crisis
devastatingly damaged Greece's key industries: Tourism and shipping.
Revenues fell by more than 15% in 2009. Greek economy is also in a
difficult situation, budget to finance the state expenditure was
shrinking. Meanwhile, Greece must increase public spending to
stimulate the economy. As of January 2010, Greek public debt was
estimated at € 216 billion and accumulated debt stood at 130% of
GDP..

III.NEGATIVEIMPACTSOFGREEKSOVERNITYDEBTS:
1.ForGreeceitself

The first impact of the sovereign debt crisis is the low credit rating of
Greece. On June 15, 2010, the credit rating agency Moody's

downgraded Greece's credit rating of four to a non-investment grade
and warned that Greece's budget deficit would create more bad
economic consequences. . Though the EU and IFM pledged to pump


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money, on 14th July 2011 Fitch Ratings downgraded the Greek rating
from B + to CCC, the lowest in Fitch's rating. On July 28, 2011,
Standard & Poor's (S & P) said that Greece would default once after
European officials pushed the debt restructuring plan into the bailout
package. Greece's credit rating from CCC to CC was just above the
two-tiered default rating with negative outlook. Within low credit
rating, Greece would find it hard to draw foreign investment to boost
their dying economy.
The second impact on Greece's financial and monetary situation is the
fall in bond prices and the rise in interest rates. Bond interest rates are
rising as the government has to raise bond yields to mobilize buyers.
This interest rate even has risen to 11.39% in 2008 when the authority
could not access new loans and in urgent of needing money to settle
rising stalemates.
The public debt crisis has also led to a reduction in spending and an
increase in taxes to improve the situation, although experts say the
policy will make life more difficult for Greek people. great number of
Greece's sovereign debt crisis has also led to declining GDP growth
and rising unemployment.
As a result, Greece faces a loss of access to international financial
markets and the preferential conditions of loans will be lost, interest
costs will be very high or even unable to call for capital mobilization.

2.Forregionalandinternationalbankingsystem:

Germany and France are the two largest creditors of Greece. It is
estimated by economists that the loss of French and German banks if
Greek defaults were $ 56.9 and $ 23.8 billion, respectively. In addition,
the Greek debtors also cause great damage to the Bank of England,
Portugal, America, the Netherlands, Japan ... If Greece default, the
banking system of these countries will face the debt big bad, affecting
the safety of the global banking system.
: Ước tính những khoản vay của một số nước tới Hy Lạp (đến 12/2010)



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Greece is a small member of the European Union, accounting for just
2.4% of the region's total GDP. However, one is concerned that the
domino effect will occur when Greece defaults. Ireland and Portugal
are also in a debt crisis and will face economic slowdown in the
coming years as the government attempts to tighten spending, reduce
budget deficits and bring stability to the banking system. And then the
default of Greece also led to the collapse of other countries such as
Italy and Spain. The first impact of Europe's sovereign debt crisis is the
continual devaluation of the euro against other currencies. This would
cause serious damage to all member states of the Eurozone. Exchange
rate fluctuations have a direct impact on the trade balance, as the cost
of imported goods increases in line with the decline of the euro.

IV.SOLUTIONS:

The essay is concerned mainly on the situation of crisis and causes for
this dilemma in general. Therefore, this part is only served as a
reference for broadening the perspective of the problem.
Firstly, in order to solve liquidity issues and default risks, apart from
accepting financial aids from EU/IMF, Greece must look for such
other options as: insure EU’s debts, look for loans on international
financial markets with loosening commitments, issue EU bonds,
negotiate on bilateral commercial deals and enhance public
infrastructures. However, these options are quite limited for Greece
since its credibility had reached at its lowest.



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In reality, The Greek prime minister at the time, George Papandreou,
formally requested a bailout. Before any default could take place, in
early May 2010, the European Commission, the ECB, and the
International Monetary Fund (colloquially referred to as the “European
troika”) agreed to bail out Greece with a EUR110 billion (USD146
billion) loan for three years. The loan was granted under conditions
that Greece would implement a wide-ranging agenda of reforms—
notably, austerity measures, structural reforms (including action
against tax evasion), and privatization of state-owned assets. This
initial intervention was subsequently referred to as the first Greek
bailout.
According to a recent report, (September 2017), the European Council
declared that Greece’s finances stabilized due to this financial support
program. The Council has closed the excessive deficit procedure for

Greece. It confirmed that the country's deficit is now below 3% of
GDP, the EU's reference value for government deficits.
On 25 September 2017, the Council repealed its 2009 decision on the
existence of an excessive deficit.
After many years of severe difficulties, Greece's finances are in much
better shape. They are now in the last year of the financial support
programme, and progress is being made to enable Greece to again raise
money on the financial markets at sustainable rates.
From a deficit of 15.1% of GDP reached in 2009, Greece's fiscal
balance has steadily improved, turning into a 0.7% of GDP surplus in
2016. Although a small deficit is projected for 2017, the fiscal outlook
is expected to improve again thereafter. Greece's debt-to-GDP ratio
peaked at 179.0% in 2016 and is expected to decrease over the coming
years.

V.CONCLUSION:
It is possible to say that the current situation of Greece is a possible
result of wrong policies applied in the last 25 – 30 years. This process


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is closely related with financial extravagancy and insufficiency of
Greece government, unfair and infertile taxation system, unsustainable
retirement, low competitive power, populist practices of political
parties and organizational and political problems in EU and Euro Zone.
Greece became tenth member of European Community in 1981 and
launched Euro as local currency. The passage was thought to be more
beneficial and to accelerate the modernization of economy. However,

although the passage to Euro, at first, had such positive effects as
development, high inflation and credibility of economy policies, it was
seen that it brought about some negative causes as well. Remarkable
increases in public spending, together with wrong political choices,
caused serious problems in competitive power of country and big
financial instability. This is quite important to explain the situation of
Greece.



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References
1.

Daniel Cohen, The Debt Crisis: A Postmortem

2.

TS. Mai Thanh Quế, Khủng hoảng nợ công và tác động của khủng hoảng nợ
công đến liên minh tiền tệ châu Âu.

3.

Kinh tế và dự báo 2011, Báo động đỏ cho tương lai của đồng Euro.

4.

CAND online, Khủng hoảng nợ công ở châu Âu và vấn đề của thời đại- 4 kỳ.

5.

PGS. TS. Nguyễn An Hà - Viện Nghiên cứu Châu Âu, Nợ công và khủng
hoảng nợ công ở Liên minh Châu Âu.

6.

ADB (2012), Key Economic Indicators for Asia and the Pacific.

7.

Bertola L. & Ocampo J.A. (2012), “Latin America’s Debt Crisis and “Lost
Decade””, Paper for Conference “Learning from Latin America: Debt Crises,
Debt Rescues and When They and Why They Work”, Institute for the Study of
the Americas, School of Advanced Study, University of London.

8.

Bank of Tokyo-Mitsubishi UFJ (2011), The March 11 Earthquake and the
Fraying of the JGB Domestic Consumption Structure, Vol. 6, No. 2, May 27,
2011.

9.

Carner,M, T. Grennes, F.Koeheler-Geib (2010), “Finding the Tipping PointWhen Sovereign Debt Turns Bad”, World Bank Policy Research Working
Paper 5391.

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