Greece: New Beginnings v/s Past Sins

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Shanu Kumar

Shanu Kumar

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While the rest of the world watches in amusement the world economy post the COVID-19 era, they might as well glare into the Greek economic recovery that has by far been way more resilient than they might have anticipated.


A country that was drowning in self destructive debt trap patterns and longest ever recession from 2008 to late 2018, has been able to, after all, display signs of a steady revival. In March 2021 Greece secured its first 30-year bond deal since the Great Recession- regaining access to the public markets and marching back to normalcy. A year back in February 2020 Greek bond yields fell below 1 percent. Just before that in January 2020, it had issued 15-year bonds and investors had shown great enthusiasm about Greece’s prospects. Although the challenges thrown up by COVID-19 were difficult to surmount, Greece’s ability to hold its own against the crisis is remarkable in its own little ways. Andtherefore, barring the COVID-19 difficulties that marred the globe, Greece’s economic world is worth a study, post its last bailout in late 2018.


In 2020 credit rating agencies rated Greek bonds a BB. Mind you, the debt to GDP ratio exceeded 180 percent. But Greece had little to worry for most of it was in the form of long- term low- interest loans. And there were countries like Germany’ and France offering negative yields. So, Greece smirked after a decade.


But this is not all. Greece delivered hits after hits in the year 2020. While the major world economies were grappled in 2020, Greece became the first European country to acquire Dassault made Rafale jets, sealing a €2.3 bn deal amidst tensions with Turkey. They next sought upgradation of its F-16 fleet and procurement of drones and helicopters.


But what’s behind this new zeal for a country that was almost struggling to make ends meet. Perhaps, the government. The New Government.


In 2019 with the victory of a centre-right New Democracy party, business sentiment danced in high spirits. The extreme leftist party had left the country on the brink of Grexit and financial defaulting. The new government came as a messiah.


When the new government began with revolutionary aspirations, two issues deterred their optimism: foreign investments that dreaded entering Greece and crippled privatization and absence of credit extension to the real economy. Greek banking system had been plagued with non-performing loans (NPLs). So, they began working like really hard.


First, they cut down taxes in a package of €1.2bn. This gave respite to the Greek public that had suffered through the austerity measures imposed by the bailout programs. They suspended VAT and Capital gains tax for construction projects to boost the tourism sector. Annual property tax rate was cut down by 22 percent. Corporate tax was cut down by 4 percent. Tax arrears were allowed to be paid in 120 monthly instalments.


Then Greece obtained EU’s approval to offload bank loans and put the same on the Greek government run investment vehicle. This enabled credit extension to the real economy. Next, they vowed to clean up bank bad debts.


The govt proposed high primary budget surpluses, freeing up funds for public projects. They marched on to reform the insolvency laws so that bad debts were recovered easily and indebted persons began anew. They began accelerating privatization projects that would relieve Greece of the vast public expenditure, financed through borrowings. Additionally, high exports helped refuel the economy.


The government further proposed an early repayment of 35 percent of debt it owed to IMF, at 5.1 percent interest rate, after raising 2.5 bn euros through a 7-year bond issue and 1.9 percent yield. By the end of 2019, Greece achieved a growth rate of 2.2 percent.


Fundamentals improved post the financial crisis and stability beckoned to Greece. Though financial fragility still persisted but perseverance was deemed to overcome it. In a short span of time Greece was able to overturn many forecasts.


In 2020 when EU proposed a €750 bn COVID-19 aid fund, Greece took a note from the bailouts led by the Troika and the harsh conditions imposed by them leading Greece to adopting austerity. It recalled how the austerity meant to cut down on Greece’s borrowings, in actuality, caused the economy to shrink by large measures. And so, Greece cursed the Troika.


When EU led by Germany supported the recovery fund for COVID-19 in 2020, Greece had the courage to refuse compliance with the “forced reforms”.


Greece was wise to recall how Germany’s flight was financed by Greece’s doom. Not surprising though, Germany was the same country that had hailed the austerity program post financially bailing Greece out. And even while the IMF apologized for imposing severe sanctions on Greece, Germany did not. When Greece lost investors, Germany gained them. And then it paid heavily for the Greece bailout programs. That’s another story, however.


Coming back to Greece, it’s handling of the covid crisis has been exceptionally well. Though admittedly it depended heavily on tourism, and had planned investment in the same, the plan backfired in the pandemic. Ergo, Greece contracted economically.


However, it turned a page. And won the confidence that was lost in the populist led Tsipras’s administration (the previous Greek Government).


Having said all this, Greece govt that seems aggressively reformist in stance has issues to address that fall behind numbers and go unscanned by economic projections.


Greece must eliminate bureaucracy that threatens political intervention in judicial affairs. Administration often works at maximizing the interests of local corporations and eliminating the global competition entering Greece. Thus, if the government hopes to catapult privatization and increase inflow of foreign investment it must make structural changes to administration.


We can just hope that the series of reforms in public administration, labour laws, govt spending are further upgraded to tackle this problem.


Next, focus must be directed at blocking brain drain and retaining the confidence of the Greek Diaspora to return to Greece.


To sum up its present state, the Greek economic growth rate is not extraordinary but the resilience is. Anyone aware of the state Greece was in until late 2018 will agree. But perhaps revisiting its past Greece could come up with greater insights for the future.


Let us, therefore, get back to when it all started. The old story begins in 1930’s.


Post the Great Depression Era of 1930’s, the GDPs of several countries far and wide were gasping for breath. Two countries, however, did fairly well than their counterparts: Japan and Greece. Greece, in fact, had the second highest GDP growth rate in the world – from 1950 to 1970.


Alas! In 1967 the caretaker Greece government was overthrown by the military junta and Greece was politically and economically crumbling. In the early 1970’s Greece emerged out of the national turmoil and a left leaning liberal government took over.


And that marked the beginning of the disaster that would boomerang years after. The government pursued overambitious public sector dominated economic policies. (Note that there have been countries especially Nordic countries whose public sector policies have been rewarding, but Greece erred time and again.)


The public spending was too high to be sustainable, crippling the private sector. Govt borrowings was at an ever increasing high and the fiscal deficit marched upward: sustaining two digits for two decades.


In this era, internal policies gradually crippled. Inflation surged and averaged at 25% for the next many years. Trade Unions rose in power, public sector was plagued by bureaucratic forces, prospects of privatisation were doomed, legislation was in deep slumber, in fact, allegedly corrupt, and the judiciary made no sense.

This sowed the seeds of internal collapse: tax evasion, manipulated data projections and less productive economic capacity for the public that knew the govt could always borrow to walk them through. But the interest rate for a country like Greece was brutal.


Now comes the twist. Greece joins the EU in 1981. But it could not join the Euro as that required strict monetary and fiscal protocol to be followed. So, Greece marched the path of crisis. In 1983 it devalued the drachma (the Greek currency then). This did not help much for the policies of the country were structurally faulty.


By 1993 Greece’s bond rates had more than doubled compared to the EU counterparts. Credit rating agencies couldn’t help but rank Greek bonds low.


In 2001 Greece finally joined the EURO. The then President had remarked it to be a historic day. None knew years after Greece would decry this event: having a cascading impact on its fate.


Everyone believed that since joining the EURO required adherence to strict monetary and fiscal policies, that would increase economic efficiency of Greece. Next Greece would have to take steps towards subsidizing it’s spending and expanding the private sector.


But there was a problem. All the protocols were on paper and Greece well knew how to defy math. It allegedly colluded with Goldman Sachs to hide the extent of its debts. As directed by Monetary Union Guidelines, countries were not to register financial derivatives as debt until 2008. So, Greece went for a cross currency swap where billions worth of Greek debts were converted into USD and Yen at fictitious exchange rates.


However, the external creditors were experienced players. Although unaware of the state of affairs the country was in, Greece joining the EURO made them confident that EU could always bail it in an event of financial turmoil.


This led to a domino effect. A country that had huge debt to GDP ratio was flooded with investment. But it took practically no steps to rectify its structural deficiencies. The EURO helped Greece to the extent that it’s GDP shot up and inflation rate came down. Moreover, its bond rating improved and credit agencies ranked it good. But Greece focused on fiscal expansion and borrowings continued to rise. The rising Debt to GDP ratio was offset by increasing GDP rate. But this could not continue for long. And Greece did not take its lessons.



In 2004 the EU expressed reservations to Greece data reporting mechanism. Greece admitted to the fudging of data. This happened at least four times till 2009. But it was not until 2010 that EU would find out that Greece had more than double the budget deficit it had reported.


The financial bomb blew everyone off. The world had already been suffering through the Great Recession of 2008 and in such times, Greece was entirely shut out of financial markets. Greek Debt was downgraded to junk status and it was on the verge of bankruptcy.



So came the EC, IMF and ECB together to Greece’s rescue. European Commission could not overlook the financial instability it faced due to Greece’s potential default. If Greece defaulted that would raise question on EU’s integrity and its economic stability would be in dire straits.


So together the EC, IMF and the ECB (Troika) launched several financial bailout programs for Greece. But this was just the beginning of Greece’s troubles.


Greece had been labelled a shadow economy by then. Tax collection of the country was almost zero. Corruption was at an all-time high. Intellectual Greek diaspora fled the country in the face of crisis. About 20 billion euros belonging to Greeks were kept in Swiss banks of which just 1 percent was taxable. Brain drain was another nail in the coffin.



Then came the blow of the Troika’s economic sanctions that led Greece towards adopting austerity to counter rising Debt. This did not help. The economy shrunk further, contracting by 20%. Unemployment gripped the Greek world. IMF apologized but EC led by Germany insisted it was doing what was needed the most.


There was news afloat all around: Greece would exit. (Grexit). Eurozone was in a soup and so was Greece. If Greece left who would pay its debts? If it stayed who would save it in the future. The debt trap pattern was as dark as a black hole. Euro did not help and perhaps switching back to the drachma and devaluing it was something Greece could hold on to. But there was no certainty. More so, the Greek masses believed that would lead to more trouble. EU affiliation had got it the confidence of creditors. External financial markets were shut without EU and when available the bond yield was quite high. Governments rose and fell. But Greece’s condition was deteriorating every day. The series of bailouts continued until late 2018 and Greece clueless in the face of economic distress merely obeyed the Troika. Until it believed it had enough. And exited the bailout program.

What followed, you’ve read already.




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