The Greek Debt Crisis Explained
There has been a great deal of attention to the economic situation facing Greek in recent years, particularly as it attempts to secure additional loans to make up for government budget deficits. In this article, we will discuss the history of the Greek economic crisis, its history with relation to borrowing from the International Monetary Fund and the European Union, as well as recent political and economic events in the country, in the European Union member states, as well as with regards to the statements and actions of the IMF.
The Need for Greece to Borrow Money
The need for Greece to look for international support with regards to borrowing money in order to keep its government functioning stems from activities as early as the middle of the 1990s. From this period, until 2014, the government was facing yearly budget deficits. What is interesting to note about this is that not only did deficits occur on a yearly basis, but the original reports as to the size of the shortfalls were vastly understated; it was only after an election cycle that the numbers were updated, showing much larger of a deficit (Kashyap, 2015). As a result, Greece requested loan assistance by outside actors. However, in 2009, it became evident that government deficits were even larger than anticipated (or stated), and thus, many believed that it would just be a matter of time before Greece would be unable to pay back their loans. So, in 2010, Greece was lent additional money by European Union countries France and Germany, for example, as well as the International Monetary Fund and the European Central Bank (Kashyap, 2015).
These loans in 2010 were attached with conditions, with the hopes that Greece would be able to change its ways with regards to government spending. Thus, organizations such as the International Monetary Fund (IMF) looked to see if the Greek government could indeed right the ship from the domestic economic turmoil it was facing. In the 2010 report, the IMF found that under strict regulatory conditions (cutting government programs (government spending)), the government in Greece could avoid default, and pay back the debt. However, it seems that this analysis itself was wrong. As Kashyap (2015) explains,
“This analysis was later shown to be deeply flawed by the IMF itself. The Greeks did actually cut their deficits substantially, but many of the reforms that were supposed to support growth did not occur and the economy contracted substantially. So the debt, relative to the size of the economy, did not improve. Importantly, no debt was written off in 2010, even though many analysts, including some on the executive Board of the IMF, at the time believed that it was necessary and that the banks and other private sector owners of the debt should have taken some losses.”
Unable to pay the Debt
In a couple of short years following the latest lending by the European Central Bank, IMF, and some EU states, it was clear to many that Greece was not taking steps to pay back the debt. For example, they were called to sell some of their assets, something that they never did (Kashyap, 2015). However, because of their efforts to cut back spending (something the IMF noted), the economic crisis in Greece at the time in turn led to lenders introduced additional money for Greece to borrow, but with that, more conditions. This 2012 bailout was an expensive one at 28 billion euros from the IMF. In 2012, Managing Director Christine Lagarde of the IMF, while discussing its new lending for Greece, was quoted as saying:
“Greece has made tremendous efforts to implement wide-ranging painful measures over the past two years, in the midst of a deep economic recession and a difficult social environment. The fiscal deficit has been reduced markedly and competitiveness has gradually improved. However, the challenges confronting Greece remain significant, with a large competitiveness gap, a high level of public debt, and an undercapitalized banking system.
“The new Fund-supported program will enable Greece to address these challenges while remaining in the Eurozone. The program focuses on restoring competitiveness and growth, fiscal sustainability, and financial stability. The authorities are fully committed to these ambitious objectives and stand ready to take any additional measures as may be necessary. The successful debt exchange operation, debt relief and long-term support from Greece’s European partners, and the commitment of the major Greek political parties to program objectives and policies provide important assurances for the new program.
“Greece’s priority is to undertake competitiveness-enhancing structural reforms. The government’s bold labor market measures will play a crucial role in this regard, complemented by measures to liberalize professions and product markets, improve the business environment, and privatize state-owned assets.
“Significant further fiscal adjustment is necessary to put debt on a sustainable downward trajectory. Reaching a primary surplus of 4½ percent of GDP by 2014 will require politically difficult cuts in government spending, as well as decisive measures to address tax evasion. It is important that the adjustment be both fair and sustainable, through strengthening the core social safety net and tax collection efforts.
“Securing financial sector stability and depositor confidence is also a priority. The program secures liquidity support for Greek banks, and provides funds for their recapitalization, alongside incentives to preserve private ownership. The resolution framework and the governance of oversight agencies have been strengthened to ensure appropriate use of public funds and safeguard against conflicts of interest.
“Risks to the program remain exceptionally high, and there is no room for slippages. Full and timely implementation of the planned adjustment—alongside broad-based public support and support from Greece’s European partners—will be critical to success. The euro area leaders have reiterated their commitment to provide adequate support to Greece during the life of the program and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment program.”
In addition, what also seemed to help reduce concern in the European and international community was the fact that Greek debt could be sold by those who held it. What this allowed was the ability to reduce risk by key debt holders such as France and Germany (Kashyap, 2015).
What Has Been Recently Happening In Greece?
There have been a number of key events in the past two years that have further shaped the direction of Greece’s ability to pay back its loans to different members of the international community. For example, in 2014, while the government spending was cut significantly (eliminating the deficit with regards to income compared to its spending), the interest on the loans moved Greece back into deficit territory. In addition, “the economy contracted for two more years as the reforms failed to deliver higher growth. Certainly the higher tax collections and reduced government spending contributed to the weak performance, but the degree to which the planned reforms, if fully implemented, could have offset that remains controversial. It is important to also recognize the massive collapse was preceded by a very large debt-fueled boom” (Kashyap, 2015).
However, one of the biggest issues recently was the Greek civil society response to the austerity measures implemented by the Greek government. Facing high unemployment (over 25 percent), and a reduction in government spending (which included social security), many in the country called for a new government. And with the new elections, in early 2015 (January), Greece selected far left parties. This new coalition was Syriza, and it was led by then new Prime Minister Alexis Tsipras. The new government called for lenders to reverse some of their controls on spending and on increased taxes. In addition, they also called for debt forgiveness for some of their loans (Kashyap, 2015).
These new requests were met with disagreement by Greece’s lenders.