Greece Debt Crisis

In this article, we will explain the Greece debt crisis which has and continues to greatly affect the country, and has serious implications on the state and on the European Union as well. We will discuss the origins of the Greece debt crisis, attempts at resolving the Greek financial crisis, the international relations implications of the domestic debt crisis, and more specifically, actions by outside actors such as the European Union and International Monetary Fund, and the domestic politics within Greece in recent months and years.

What is the Greece Debt Crisis?

Currently, the country of Greece, which is a member of the European Union, is facing severe economic problems on account of highly accumulated debt. Greece’s debt to GDP is at 175%, meaning that the country owes much more than its economy is bringing in. Greece has a severe balance of payments imbalance, which has lead to massive economic troubles for the country. Since 2010, “Economic output has plunged 25 percent and employment sunk by a quarter since 2010” (Davis, 2015).

When did the Greece Debt Crisis Begin?

Many have argued that the Greece financial crisis began as early as the middle of the 1990s, when earlier governments were not being completely open and truthful on the amount of debt that Greece was accumulating. From around this time period, government expenditures were much higher than their revenue, which led to budget deficits. However, as noted, it was only later that people realized that there differences in expenditures verses revenue was even worse. For example, in 2004, following a change in power, the new government–under Prime Minister Konstantinos Karamanlis found that while the previous budget deficit was reported at 1.5 percent of GDP, it was actually 8.3 percent (Melvin, 2015). However, the government then did now make people aware of the actual figures (Melvin, 2015).

With regards to how people found out about these true numbers, “The revisions tended to be most substantial right after elections when a new government would find that its predecessor was much more profligate than had been reported” (Kashyap, 2015). So, as we can see, those in power were hiding the complete truth from the public.

Because of the imbalances of expenditures, Greece’s government needed to cover the differences, and thus, turned to taking out loans. However, doing this frequently led to more and more debt. Then, “In the fall of 2009, a then newly elected government reported that the deficit for that year was going to be 13.6 percent of economic output and that the deficits in 2007 and 2006 were also larger than had been reported. From that point onward, the world began to wonder if Greece really could pay the debt that it had issued or needed to default. Its borrowing costs rose sharply and the country began looking for ways to reduce its required debt payments and end its borrowing addiction” (Kashyap, 2015: 1).

A few international actors such as the International Monetary Fund, the European Union, and the European Central Bank were willing to provide Greece economic support; in 2010, Greece was given 140billion dollars (USD) worth of loans. However, instead of resolve the debt crisis, this only temporarily stopped the crisis as “[t]he massive loans allowed Greece to stay afloat (if barely), but successive bouts of mandatory austerity measures send the Greek economy spiraling into depression” (Davis, 2015).

Then, in 2012, Greece was lent additional money, namely, an additional 200 billion dollars (USD). However, this is was not enough to pay back all of their debt. Rather, it was enough to pay back private banks, primarily in France and Germany. In addition, these loans did however come with conditions (namely, austerity measures), which we shall discuss below.

Interestingly, Dominique Strauss Khan, who headed the IMF in 2010, initially said that with the new bailout, and austerity measures, Greece could get back on economic track. However, the IMF later came out and said that this alone would not be enough (Kashyap, 2015).

Greece was being helped by the “troika”: The IMF, the EU states, and also the European Central Bank. The EU countries and the IMF helped offer additional loans to Greece, whereas the European Central Bank “also provided support to Greece in two ways. First, it allowed banks in Greece (and everywhere else) to borrow from it by posting bonds guaranteed by Greece as the collateral. Second, it bought some Greek government bonds in the open market. So all three of these organizations were now exposed to losses in the event that Greece ever defaulted. As such, they had representatives that met regularly with the Greek government to make sure that the reforms were on track” (Kashyap, 2015).

Then, as mentioned above, seeing that despite the first loans and economic support that the debt to GDP ratio was roughly the same, additional loans were given to Greece in 2012. Again, the terms were similar, but there was a great hope that these actions were needed to help Greece’s economic crisis, and in turn, help ensure stability with the Euro and the European Union. The hope was that between the two series of loans, that this would be enough to end the Greek debt crisis. But, unfortunately, it was not even close to the amount needed. As we shall discuss, Greece’s expenditures continued to be at very high levels, and with interest on the debt, they were unable to solely rely on the outside funding.

Therefore, in 2015, the “troika” promised an additional 100 billion dollars (USD) of loans, but under the conditions that Greece adhere to a number of reforms (Bolton, 2015). Current discussions as to whether Greece will get another payment from this agreement center on whether the IMF, EU, and European Central Bank believe that Greece is adequately implementing required reforms.

What were some of the reasons that Greece Got Into So Much Debt?

Greece’s debt levels rose with high government spending, and an inability to increase tax revenue or other forms of revenue. Here are just a few of the expenses that have led to an increase in Greece’s overall indebtedness.

Greece’s Pension Plan. The issue of Greece’s pension plan has been at the center of the Greek debt crisis. Greece’s pension system has been an inefficient one for decades, leading to higher state costs for the program. As the Economist explains,

There have been calls for reform of Greece’s pension system since the 1980s when worries arose about the mass retirement of baby boomers coinciding with a working generation with falling birth rates. The problem of an ageing population was not unique to Greece. But while other European countries, like Sweden, carried out reforms in the 1990s, Greece held on to its ill-structured system. Entitlements were calculated by an array of special regulations that varied not only among the numerous different funds but also among workers belonging to distinct groups within the same fund. Factors like age, gender and union membership made the system discriminatory: some got a lot while contributing little; some got little despite paying a lot. The most successful attempt to change the regime came in the early 1990s, but it only managed to scratch the surface. Strong unions, professional associations and some sectors resisted any change that would deprive them of special treatment and politicians gave in to save their seats. After 1992, pensions were not matched by contribution increases, says professor Platon Tinios of the University of Piraeus; they became reliant on state grants that were financed by external borrowing.

Greece’s pension system allows one to collect a pension if they work 35 years (White, 2010), collecting 80 percent of their last salary for the rest of their life (New York Post, 2015). In addition, one can file for government pension at the age of 60 for women, and 65 for men (White, 2010) (with the possibly of applying for early retirement). Other work-related policies that led to further debt were “13th and 14th month salaries–double pay around the holidays” (Davis, 2015).

So, again, following announcements of the Greek economic troubles, in 2010, the European Union, the IMF, and the European Central Bank (ECB) agreed that they would offer Greece an economic bailout, but only if Greece followed conditions set forth by these institutions. Among them were calls to reform the country’s pension plan. Concerned about the possibility of losing their pensions, many people filed for early retirement to ensure that they would receive their pensions. However, this led to a mass influx of early retirees; ” By 2015 there were 3.6 million workers and 2.7m pensioners —25% of those who retired at the time were below the age of 55″ (Economist, 2016).

Furthermore, “in 2012 the country’s pension funds lost an estimated €25 billion ($28 billion) of reserves held in government bonds as a result of a debt restructuring” (Economist, 2016). Thus, because of the inability to borrow money to cover the gaps in order to pay the pensions, along with outside pressures for reform, Greece has had to cut their pension programs, doing so once by 14 percent, and then by another 40 percent (Economist, 2016). However, despite this, given the early retirement, and the number of additional people going to go on pension, it has been projected that the Greece pension will cost the government 25 percent of its overall GDP by the year 2050 (The Economist, 2016).

There have been conversations about increasing retirement to 67 years. While even the socialist government under Tsipras agrees with this, he has said that such a plan should go into affect in 2025.

Other State Expenditures

While the Greece pension program has been one of the more costly state expenditures, it has not been the only one. The government has also provided other social services such as government backed health care. The government–which introduced a national health care program since 1983, has been spending a large amount for this program. There have been concerns that “the public healthcare system was highly centralised, used ineffective management structures, allocated health care workers inefficiently and lacking planning systems” (Lethbridge, 2013: 2). The health care system has thus been a point of concern by the IMF and EU, where “[o]ne of the conditions of the two loans from the “troika” was to restrict spending on health services to no more than 6% GDP” (Lethbridge, 2013: 2).

There have been other health care-related austerity measures as well. For example, “Government has started to buy medicines at lower rates, with a reduction of annual spending on medical expenses from €5∙2 billion in 2009 to €1∙65 billion in 2011.3 Cheaper, generic medicines have been promoted. The introduction of co‐payments of between €3 to €5 per patient aimed to reduce unnecessary use of healthcare services. There was a freeze on the recruitment of doctors to the public healthcare sector, with private doctors allowed to work one day a week in public hospitals. Perhaps the most controversial of the reforms was the provision for 500 public hospital beds to be set aside for private insurance companies to use for their clients. It is this last development that reveals the lack of commitment to a publicly funded and universally accessible healthcare service” (Lethbridge, 2013: 2).

However, there have also been effects of health care due to changes in the government’s approach. One example of this is with regards to medicine. As Lethbridge (2013) notes: “The government policy of reducing the prices of medicines that it purchases has resulted in shortages of medicines, for many common conditions, because wholesale pharmaceutical companies have moved to other, better funded markets. Health insurance funds have delayed payments to pharmacies and patients have been asked to pay for drugs themselves. Eventually, in 2012, the government agreed to pay some of the pharmacists’ debts” (2).

So, because of high unemployment, many in Greece do not have health insurance, and those that do have higher co-pays than they used to have, leading to further financial difficulty (Lethbridge, 2013).

What Has been the Public Response to the Greek Financial Crisis?

While many in Greece backed the new austerity measures, there was also a large public backlash to the IMF and EU’s calls for these measures (measures to reduce Greece expenditures). In particular, Greek citizens have went to the streets to protest the various pension cuts either implemented or planned cuts by the government (Gaglias, 2016). Because of the drop in wages, higher unemployment, and reduced pensions, things like health care has become even more financially burdensome for citizens.

So, citizens have been protesting calls for austerity measures. Yet, they also understand that not receiving loans could further weaken their economy, the social programs in place in the country, and also the hopes of continuing to stay within the European Union. But, because of rising unemployment (which for a while was at 25 percent, and is currently around 21 percent), along with a reduction in social services, the citizens voted in for a new coalition, Syriza, which is seen as being on the far left. The leader of the Syriza coalition, and the current leader of Greece, Alexis Tsipras, has been in charge of working with outside actors to fix Greece’s debt crisis (Kashyap, 2015).

Then, in the summer of 2015, the Greek government, under Tsipras–held a referendum to the public on whether they wanted to accept the loan conditions set forth by the IMF, the EU, and the European Central Bank. 38.69 percent of those who voted said “yes,” whereas 61.31 percent voted “no” (The Guardian, 2015).

However, this result differs vastly from the goals of the “troika” or “the institutions;” the important goal that the “troika” have for Greece is to ensure that the debt is being reduced. So, according to projections (Khan, 2016), by the year 2060, if Greece is not given debt relief, the overall debt will rise to 294 percent of their overall GDP. If they are given debt relief, and Greece follows through on the various austerity measures that outside actors are calling for, then the debt could drop to 100 percent of their overall GDP  (Khan, 2016) (which is still quite bad, but much better than the other alternative).

Other Solutions to the Greek Budget Crisis

So, given the dire mess that Greece has found itself in economically, the question remains: What can be done to fix the problems the country is facing? The IMF, EU, and others have offered a series of actions that they would like Greece to take so that they can cut expenditures and raise state income. So, one example, mentioned earlier, is increasing the retirement age to 67 years. But there is hesitancy by the Greek government to do this, at least in the near future.

Collecting Unpaid Taxes in Greece: There are also calls for the Greek government to be more on top of people who have failed to pay taxes. According to reports, “At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009. The government says most of that has been lost to insolvency and only €9 billion can be recovered” (Karnitschnig & Stamouli, 2015). Furthermore, it is believed that there is a great amount of underreporting of taxes, or not reporting at all. It is believed that over 25 percent of the GDP is in the various elements of an “underground economy” (Karnitschnig & Stamouli, 2015). For many in Greece, there is a sentiment that the taxes are either a form of “theft,” or, another sentiment that the tax collected would go towards a corrupt political system (Karnitschnig & Stamouli, 2015).

Reduce Tax Breaks for Tourist Industry: Moreover, tax breaks that were offered to tourist areas are being cut back, with the hopes that the additional revenue is going to help the government overall economic affairs. For example, in 2015, there were calls to increase meal tax to 23 percent (from 13 percent), along with “a doubling of the hotel tax to 13 percent” (Bialik, 2015). But while this might increase the state’s overall revenue, this approach might possibly make matters worse for Greece’s tourism sector, since the higher prices (given the removal of tax breaks) will affect the purchaser, who may now look to other locations for their travels, although some may still take trips if the difference is not that great of a difference for them.

So, if this is the case, then why choose this approach for increase state revenue? Well, politically, this is an easy approach for the state. The reason? A politician in Greece can raise taxes on those who cannot vote them out of power (Bialik, 2015), but bringing cuts to pension and health care will affect voters who will in all likelihood be upset and take it out on the leaders at the ballot box. However, if Greece uses the money to pay down the debt, and not for reinvesting in tourism, then this could affect the tourism sector long term (Bialik, 2015).

Sell State Assets: There have also been calls for the Greece government to sell off  50 billion euros worth of state-owned assets, as “the privatisation of state assets has always been an integral feature of Greece’s international bailouts” (Rankin & Smith, 2015). The idea would be to sell these assets, and then use the mont to “shore up capital reserves at Greece banks; a quarter will be used to repay Greece’s creditors, and the remainder will be spend on unspecified investments” (Rankin & Smith, 2015).

However, as of 2015, the government “has only sold 6 percent of its goal” (New York Post, 2015). In addition, as of 2015, “none of the most sensitive aspects – airports, ports, railways – had been sold” (Rankin & Smith, 2015). Interestingly, there has been a great deal of international interest on Greece property and businesses. For example, “Both Russia and China have expressed interest in snapping up the state-run railway network, one of the biggest encumbrances on public finances before the debt crisis erupted in late 2009. The Greek state is also rich in buildings bequeathed by individuals to municipalities and the Orthodox Church – properties that are also expected to be included in the fund. Contrary to popular perception, the public sector owns very few islands” (Rankin & Smith, 2015).

If Greece is able (or willing to carry out the austerity measures), the IMF and other entities are willing to allow Greece the ability to defer payments on bonds or loans until the year 2040. As Khan (2016) explains, ” this would require an extension of the grace period on its existing European Financial Stability Fund loans by another 17 years, ESM loans another 6 years, and loans owed to member states by 20 years. In total, these measures would help reduce the country’s payments bill by 4.5 per cent of GDP over the next 24 years, according to the IMF.” In addition to deferred loan payments, there have also been calls “to extend the life on the loans owed to Greece’s fellow member states (known as the Greek loan facility) by 40 years, from their current maturation date of 2040 to 2080 instead.

Moreover, loans issued by the eurozone’s emergency bailout fund – the European Financial Stability Facility – would be extended by 24 years from 2056 to 2080 and from the permanent European Stability Mechanism (Greece’s largest single creditor) by another 20 years, also taking them up to 2080″ (Khan, 2016). Between the two ideas, the hope is that this “would help keep the cost of servicing Greece’s total loans below its crucial 20 per cent threshold up until 2060” (Khan, 2016). Lastly, there have been calls to swap shorter loans for longer loans with lower interest rates, this will allow Greece to pay only 1.5 percent of their GDP for the loans until the year 2045 (Khan, 2016).

Now, none of this is to suggest that it will automatically happen, particularly if either political currents in Greece or in the European Union disagree (Khan, 2016), which makes it all the more difficult to alter the current trajectory of where Greece is headed economically.

Loan Forgiveness?

While Greece has moved away from additional budget shortfalls, the economic growth has not been very high, leaving Greece looking for additional long-term solutions to its financial crisis. Because of this, and despite questions about whether reforms could significantly turn around Greece’s economy, there have been calls for lenders to forgive Greece of some of its debt. For example, this has been a position held by Tsipras for quite some time. On August 27th, 2016, Greece felt that the austerity measures creating divide among EU member states, and that they have been doing their part to reduce expenditures (Reuters, 2016).

There are a couple of different sides on this issue of forgiving Greek debt. On the one hand, it is believed that not doing so will ensure that Greece stays in a situation that it will be unable to get itself out of. The situation does not look good for Greece unless they enact many more austerity measures, and even that might not lead to them fixing the debt crisis.

On the other hand, critics worry that if Greece’s loans are forgiven, then this sets a bad example for other nations who might be in similar financial situations, and who, in turn might want their own loans forgiven. So, as Kashyap (2015) argues, “if there are substantial concessions to Greece, then these countries will insist upon getting similar treatment. The existing governments in these countries all realize that if electing a radical government in Greece is seen as being rewarded, then voters elsewhere will do the same.” Furthermore, creditors still wonder whether genuine austerity measures will be taken by the Greek government (Kashyap, 2015); who is to say that following loan forgiveness, that the government won’t continue, or even expand social programs?

2016: Current Conditions

In early September of 2016, European states in the Eurozone said that they would hold back an additional 2.8 billion euro payment to Greece because of their unhappiness with how Greece has carried out the economic reforms. These funds are from the 2015 agreement in which Greece would receive 100 billion dollars in additional loans. However, again, there are concerns that Greece is not meeting their obligations (Rumney, 2016).

There are also continued disagreements between the International Monetary Fund and the European Union as it pertains to helping Greece through its debt crisis. While the European Union still seems more likely to follow through with the additional bailout money, the IMF is sending signals suggesting the possibility of them not being on board with additional loan money to Greece. Again, the IMF has been very critical of Greece’s inability (or unwillingness ) to alter their domestic economic policies in order to become more privatized, collect more in taxes, and they are also unsure if Greece can reach their financial targets (Reuters, 2016a). In July of 2016, Christine Lagarde, who is the Managing Director of the IMF, said that while the IMF would continue to work with Greece, but that “We still need to be rigorous and disciplined. On accession we will still make recommendations that people are not happy with because it is hard” (Zikakou, 2016). The IMF position seems to be skeptical that Greece can get out of the financial hole that it has dug itself into.

On September 11th, 2016, Greek leader Tsipras argued that the disagreements between the two international organizations are making it even more difficult for Greece to attract investors. Speaking on this issue, Tsipras said, “”I would say that what is creating conditions of delay in regaining trust of markets and investors … is the constant clash and disagreement between the IMF and European institutions” (Reuters, 2016).

Others, such as “Marica Frangakis, political secretariat and economist for Syriza, which governs in an awkward coalition with the right-wing Independent Greeks party, told CNBC that Greece’s lenders had “failed miserably” in their policies aimed at rescuing the Greek economy” (Ellyatt, 2016). Frangakis went on to say that “These (troika) policies have been emphasizing austerity, that is internal devaluation – that is, reducing the cost of labor as a way of increasing competitiveness and reducing the size of the public sector as a way of reducing fiscal debt and the deficit – now this is a recipe that has been tried many times before by the IMF and failed. They were tried in Latin America and Africa in the 1980s and failed then and even the IMF admits that…” (Ellyatt, 2016). 

Meanwhile, the economy is not growing at high levels, and hundreds of thousands of Greek citizens are leaving the country. According to reports, “Greece’s young professionals and graduates are escaping economic hardship at a rate of over 100,000 per year, according to the Bank of Greece. They have gone to Germany, Britain and the United Arab Emirates” (DW, 2016).

Thus, the question remains: Can the austerity measures, coupled with the additional loan payment be enough to turn Greece’s debt crisis around? And if not, what other economic approaches can be used? 

Greece Debt Crisis References

Bialik, C. (2015). Greece Hopes Foreign Tourists Will Help Pay Its Debts. Five Thirty Five. July 16, 2015. Available Online: http://fivethirtyeight.com/datalab/greece-hopes-foreign-tourists-will-help-pay-its-debts/

Bolton, D. (2015). Greece debt crisis live: The list of reforms that Greece must meet if it wants another bailout from Europe. The Independent. 12 July 2015. Available Online: http://www.independent.co.uk/news/business/news/greece-debt-crisis-live-the-list-of-reforms-that-greece-must-meet-if-it-wants-another-bailout-from-10383901.html

Davis, O. (2015). Greek Debt Crisis: How Did Greece Get Here And Where Is It Going? International Business Times. July 1, 2015. Available Online: http://www.ibtimes.com/greek-debt-crisis-how-did-greece-get-here-where-it-going-1992390

DW (2016). Greece Central Bank reports ‘brain drain’ of 427,000 young, educated Greeks since 2008. DW. 02 07 2016. Available Online: http://www.dw.com/en/greece-central-bank-reports-brain-drain-of-427000-young-educated-greeks-since-2008/a-19373527

Ellyatt, H. (2016). Greek blame game begins again: Syriza says lenders have ‘failed dismally.’ CNBC. September 12th, 2016. Available Online: http://www.cnbc.com/2016/09/12/greek-blame-game-begins-again-syriza-says-lenders-have-failed-dismally.html 

Gaglias, A. (2016). Greece’s Seniors Reveal The Harsh Truth About Nation’s Pension Crisis. The Huffington Post. February 16, 2016. Available Online: http://www.huffingtonpost.com/entry/greece-pension-crisis_us_56c33e8be4b0b40245c7dc9e

Karnitschnig, M. & Stamouli, N. (2015). Greece Struggles to Get Citizens to Pay Their Taxes. The Wall Street Journal. February 25, 2015. Available Online: http://www.wsj.com/articles/greece-struggles-to-get-citizens-to-pay-their-taxes-1424867495

Khan, M. (2016). IMF lays out Greece’s debt options: here’s what it all means. FT. May 20, 2016. Available Online: https://www.ft.com/content/cb60fe92-6efe-3498-822d-e76c25e4fe4a

Lethbridge, J. (2013). Effects of Austerity on Greece: Health and social services. Public Services International Research Unit (PSIRU). 29 October 2013. Available Online: http://www.psi-can-greece.org/sites/default/files/Health%20and%20social%20services.pdf

Melvin, D. (2015). Between rock, hard place, Greece picks austerity. How did it get into this mess? CNN. July 13, 2015. Available Online: http://www.cnn.com/2015/07/13/europe/how-greece-reached-this-point/

New York Post (2015). The Greek welfare-state road to ruin. New York Post. July 2, 2015. Available Online: http://nypost.com/2015/07/02/the-greek-welfare-state-road-to-ruin/

Rankin, J. & Smith, H. (2015). The great Greece fire sale. The Guardian. 24 July 2015. Available Online: https://www.theguardian.com/business/2015/jul/24/greek-debt-crisis-great-greece-fire-sale 

Reuters (2016a). EU/IMF rift on Greek debt is hurting economy, Tsipras says. Reuters. September 11, 2016. Available Online: http://finance.yahoo.com/news/eu-imf-rift-greek-debt-123916799.html

Reuters (2016). Greece PM says EU sleepwalking toward cliff, wants debt relief by end 2016. Reuters. August 27, 2016. Available Online: http://www.reuters.com/article/us-greece-economy-pm-idUSKCN1120NY

Rumney, E. (2016). Greece faces fresh bailout cash freeze over reform progress. Public Finance International. 6 September 2016. Available Online: http://www.publicfinanceinternational.org/news/2016/09/greece-faces-fresh-bailout-cash-freeze-over-reform-progress goo

The Economist (2016). Why Greeks are protesting over pension reforms again. The Economist. February 18th, 2016. Available Online: http://www.economist.com/blogs/economist-explains/2016/02/economist-explains-12

The Guardian (2015). Greek referendum: full results. 6 July 2015. Available Online: http://www.theguardian.com/world/ng-interactive/2015/jul/05/live-results-greek-referendum

White, G. (2010). 10 Facts About the Greek Pension System Destroying Any Hope Of A Bailout. Business Insider. April 27, 2010. Available Online: http://www.businessinsider.com/greece-germany-pensions-2010-4?op=1/#ars-of-work-to-earn-a-full-pension-greece-35-germany-45-1

Zikakou, I. (2016). Christine Lagarde Admits Failure of Greek Bailout Program. Greece Greek Reporter. July 14, 2016. Available Online: http://greece.greekreporter.com/2016/07/14/christine-lagarde-admits-failure-of-greek-bailout-program/