WHY WORLD COUNTED
UPON GREECE???
Greece is the birthplace of
Democracy, Western philosophy, the Olympic Games, Western Literature,
Historiography, Political Science, Major Scientific and Mathematical
Principles, and Western Drama, including both tragedy and comedy. The cultural
and technological achievements of Greece have greatly influenced the world,
having been imparted to the East through Alexander the Great's conquests, and
to the West via incorporation into the Roman Empire and the succeeding
Byzantine Empire. Greece's rich legacy is also reflected by its 17 UNESCO World
Heritage Sites, among the most in Europe and the world.
A founding member of the United
Nations, Greece was the tenth member to join the European Communities
(precursor to the European Union) and has been part of the Eurozone since 2001.
It is also a member of numerous other international institutions, including the
Council of Europe, NATO, OECD, OSCE and the WTO. Greece, which is one of the
world's largest shipping powers, has the largest economy in the Balkans, where
it is an important regional investor.
Greece is the 15th largest
economy in the 27-member European Union. In terms of per capita income, Greece
is ranked 38th or 40th in the world at $21,910 and $25,705 for nominal GDP and
PPP respectively.
GREECE ENTRY IN EUROZONE…
In January 2001 Greece adopted
the Euro as its currency, replacing the Greek drachma at an exchange rate of
340.75 drachma to the Euro. Greece is also a member of the International
Monetary Fund and the World Trade Organization.
Greece was accepted into the
Economic and Monetary Union of the European Union by the European Council on 19
June 2000, based on a number of criteria (inflation rate, budget deficit,
public debt, long-term interest rates, exchange rate) using 1999 as the
reference year.
REVELATION OF UNDER REPORTED BUDGET DEFICIT
After an audit commissioned by
the incoming New Democracy government in 2004, Eurostat revealed that the
statistics for the budget deficit had been under-reported.
Most of the differences in the
revised budget deficit numbers were due to a temporary change of accounting
practices by the new government, i.e., recording expenses when military material
was ordered rather than received. However, it was the retroactive application
of ESA95 methodology (applied since 2000) by Eurostat, that finally raised the
reference year (1999) budget deficit to 3.38% of GDP, thus exceeding the 3%
limit. This led to claims that Greece (similar claims have been made about
other European countries like Italy) had not actually met all five accession
criteria, and the common perception that Greece entered the Eurozone through
"falsified" deficit numbers.
In the 2005 OECD report for
Greece, it was clearly stated that "the impact of new accounting rules on
the fiscal figures for the years 1997 to 1999 ranged from 0.7 to 1 percentage
point of GDP; this retroactive change of methodology was responsible for the
revised deficit exceeding 3% in 1999, the year of [Greece's] EMU membership
qualification". The above led the Greek minister of finance to clarify
that the 1999 budget deficit was below the prescribed 3% limit when calculated
with the ESA79 methodology in force at the time of Greece's application, and thus
the criteria had been met.
The original accounting practice
for military expenses was later restored in line with Eurostat recommendations,
theoretically lowering even the ESA95-calculated 1999 Greek budget deficit to
below 3% (an official Eurostat calculation is still pending for 1999).
A frequent error is the confusion
of the discussion regarding Greece's Eurozone entry with the controversy
regarding usage of derivatives' deals with US banks by Greece and other
Eurozone countries to artificially reduce their reported budget deficits. A
currency swap arranged with Goldman Sachs allowed Greece to "hide" $1
billion of debt; however, this affected deficit values after 2001 (when Greece
had already been admitted into the Eurozone) and is not related to Greece's
Eurozone entry.
Forensic accountants found that
data submitted by Greece to Eurostat had a statistical distribution indicative
of manipulation.
BEGINNING OF ECONOMIC CRISIS…
By the end of 2009, as a result
of a combination of international and local factors the Greek economy faced its
most-severe crisis since the restoration of democracy in 1974 as the Greek
government revised its deficit from an estimated 6% to 12.7% of gross domestic
product (GDP).
In early 2010, 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".
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
the United Kingdom third with 12.6%.
As a consequence, there was a
crisis in international confidence in Greece's ability to repay its sovereign
debt. To avert such a default, in May 2010 the other Eurozone countries, and
the IMF, agreed to a rescue package which involved giving Greece an immediate
€45 billion in loans, with more funds to follow, totalling €110 billion. To
secure the funding, Greece was required to adopt harsh austerity measures to
bring its deficit under control.
On 15 November 2010, the EU's
statistics body Eurostat revised the public finance and debt figure for Greece
and put its 2009 government deficit at 15.4% of GDP and public debt at 126.8%
of GDP making it the biggest deficit (as a percentage of GDP) among the EU
member nations.
In 2011, it became apparent that
the bail-out would be insufficient and a second bail-out amounting to €130
billion ($173 billion) was agreed in 2012, subject to strict conditions,
including financial reforms and further austerity measures. The so-called
troika eventually lend the total more than 240 billion euros, or about $264
billion at today's exchange rates. The bailouts came with conditions. Lenders
imposed harsh austerity terms, requiring deep budget cuts and steep tax
increases. They also required Greece to overhaul its economy by streamlining
the government, ending tax evasion and making Greece an easier place to do
business.
Greece's accession to the euro
helped to lower the country's borrowing costs. European banks lent the country
billions of euros, which it used to pay for things such as the 2004 Olympic
Games and higher salaries for the country's public sector workforce. The boom
quickly turned to bust following the 2008 financial crisis.
As part of the deal, there was to
be a 53% reduction in the Greek debt burden to private creditors and any
profits made by Eurozone central banks on their holdings of Greek debt are to
be repatriated back to Greece.
Greece became the epicenter of
Europe's debt crisis after Wall Street imploded in 2008. With global financial
markets still reeling, Greece announced in October 2009 that it had been
understating its deficit figures for years, raising alarms about the soundness
of Greek finances.
Greece's debt-to-GDP ratio surged
from 109 per cent in 2008 to 146 per cent in 2010. Following this, the country
was downgraded to junk bond status, which cut off its access to bond markets.
Investors panicked and turned their attention to other indebted economies, notably
Italy, Spain and France. By the spring of 2010, it was veering toward
bankruptcy, which threatened to set off a new financial crisis.
Greece’s unemployment
rate has climbed steadily since the 2008 Recession and now stands at
approximately 25%.
OPPOSITION OF AUSTERITY MEASURES
The austerity measures were
widely unpopular in Greece. In December 2014, Greek parliament called for a
premature election. The central issue during the election was the austerity
measures imposed by the troika.
The new government that came to
power refused to accept the terms of the agreement. The political uncertainty
led to a suspension of the remaining tranche of aid, unless Greece accepted the
original terms of the bailout or mutually reached an agreement with its public
creditors.
The money was supposed to buy
Greece time to stabilize its finances and quell market fears that the euro
union itself could break up. While it has helped, Greece's economic problems
haven't gone away. The economy has shrunk by a quarter in five years, and
unemployment is above 25 percent.
The bailout money mainly goes
toward paying off Greece's international loans, rather than making its way into
the economy. And the government still has a staggering debt load that it cannot
begin to pay down unless a recovery takes hold.
Many economists, and many Greeks,
blame the austerity measures for much of the country's continuing problems. The
leftist Syriza party rode to power this year promising to renegotiate the
bailout; Tsipras said that austerity had created a "humanitarian
crisis" in Greece.
The current Prime Minister, Alexis Tsipras,
is a member of the Syriza party, which has pushed for anti-austerity measures.
He has rejected harsh austerity measures, referring to them as “unbearable.”
But the country's exasperated
creditors, especially Germany, blame Athens for failing to conduct the economic
overhauls required under its bailout agreement. They don't want to change the
rules for Greece.As the debate rages, the only thing everyone agrees on is that
Greece is yet again running out of money — and fast.
HEALTH OF GREEK BANKS…
Greek banks are solvent on paper,
but lending is practically at a standstill and they are not able to play the
role they should in financing the economy.
The European Central Bank capped its
emergency credit line for Greek banks at 89 billion. Most if not all of that
money has already been used to cover withdrawals by customers, and there is
virtually no money available for new loans.
If a Greek bank goes bust, it
could create havoc in the financial markets, because Greece has not yet put in
place European rules for the orderly shutdown of failed banks.
The country’s banking sector,
which has suffered severe deposit flight, is being kept alive by liquidity via
the Bank of Greece.
But the European Central Bank
ultimately decides whether that liquidity remains in place. ECB rules require
that this emergency liquidity only be provided to banks that are solvent—that
is a stretch given that the banks are closed, Greece’s bailout program has expired,
and the country is in arrears with the IMF. A decision by the ECB to demand
more collateral or to revoke liquidity would be devastating, leaving Greek
banks unable to reopen until they are recapitalized. That could leave Greece no
choice but to leave the euro.
Greece’s prime minister imposed cash
withdrawal restriction to 60 euros a day and closed banks for a week. However
tourists can still withdraw money if they can find an ATM that has any cash
left. The Greek stock exchanges also remain closed for a week.
One of the big four banks in Greece is almost out of
cash.
MOUNTING DEBT BURDEN…
The country has been in a long
standoff with its European creditors on the terms of a multibillion-dollar
bailout. If the country goes bankrupt or decides to leave the 19-nation
eurozone, the situation could create instability in the region and reverberate
around the globe.
Greece owes the European Central
Bank a 3.5 billion euro payment.
The European Financial Stability
Facility has lent Greece €144.6 billion ($160 billion) in recent years and the
terms of those loans allow the fund to seek immediate repayment if a borrower
defaults on the IMF.
Greece owes €330bn (£234bn) to
its international creditors. Most of it (60pc) is owed directly to other
eurozone nations, and Germany is its biggest creditor.
The rest is owed to the
International Monetary Fund (IMF), the ECB, and a combination of Greek and
foreign banks. Under current projections, Greece will be paying back its debts
until 2057.
Greece, the weak link in the eurozone,
has defaulted on its debt. The International Monetary Fund did not use the term
default after Greece missed its payment deadline. The fund instead placed the
country in so-called arrears.
Credit-rating agencies will not
consider Greece to be in default based on missing the IMF payment, for the
technical reason that the IMF is not considered a commercial borrower. But the
ratings agency Standard & Poor's did say that it would designate Greece as
being in default if the country cannot make payments to private creditors, like
2 billion in Greek Treasury bills that are due on July 10, 2015.
Regardless of the country's
technical status, missing the payment will most likely prove to be a warning
that Greece will probably be unable to meet its other obligations in coming
weeks to its bond holders and to the European Central Bank. That might make the
central bank less willing to continue emergency loans that have been propping
up the Greek banking system for the past several weeks.
If Greece defaults on its debt,
it could also be locked out of the international credit market and be forced to
savagely cut government expenditure. This would have an adverse impact on
growth and could increase unemployment.
While a default would mean that
creditors, especially European banks, would have to take a hit, care has been
taken over the past few years to insulate other European countries and the
European banking system from the risks of an eventual Greek default.
The impending default on the IMF
loans leaves Greece sliding towards an exit from the euro, with unforeseeable
consequences for Europe's common currency project. It also carries broad
implications for the global financial system.
WORSENING ECONOMIC SITUATIONS…
Since Greece's debt crisis began in 2010, most international
banks and foreign investors have sold their Greek bonds and other holdings, so
they are no longer vulnerable to what happens in Greece. (Some private
investors, who subsequently plowed back into Greek bonds, betting on a
comeback, regret that decision.)
Greece closed its banks and imposed capital controls to
check the growing strains on its crippled financial system, bringing the
prospect of being forced out of the euro into plain sight.
After bailout talks between the left wing government and
foreign lenders broke down, the European Central Bank froze vital funding
support to Greece's banks, leaving Athens with little choice but to shut down
the system to keep the banks from collapsing.
Banks and the stock market
remained closed for a week, and there was a daily 60 euro limit on cash
withdrawals from cash machines for a week too. Capital controls are likely to
last for many months at least. As speculation of capital controls increased
over few weeks, Greeks have pulled billions of euros from their accounts. Long
queues formed in supermarkets as shoppers stocked up on essentials.
The broader consequences for
Greece's economy, now back in recession, are likely to be severe, with the
tourism sector, which accounts for almost a fifth of economic output, about to
start its vital summer season. Anxious to reassure tourists, the government
said the 60 euro cash withdrawal limit would not apply to people using foreign
credit or debit cards.
Travel companies had been warning
tourists for weeks that they should take extra cash, but finding empty ATMs was
still a shock to many.
Lines formed at petrol stations
and the dwindling number of bank machines still holding cash, highlighting the
scale of the disaster facing Greeks, who have endured more than six years of
economic decline.
In a country where one in four of
the workforce is without a job, the plight of the pensioners, whose monthly
benefits can often be the only source of income for families, is an acutely
sensitive issue.
Mindful of the fact that many
older Greeks do not use credit or debit cards and so do not have access to cash
machines, the government has ordered 1,000 banks to open across the country to
pay out a maximum of 120 euros and issue cards.
WHAT SUNDAY’S (5
JULY, 2015) GREEK REFERENDUM MEANT…
Greek voters voted to the polls in a referendum that could
decide whether the country exits the euro or resumes painful negotiations with
its creditors.
Greece and its international
creditors — fellow eurozone countries, the International Monetary Fund and the
European Central Bank — have been negotiating for months to come up with a plan
to extend the country’s bailout program and unlock frozen rescue funds. The
talks never made much progress.
Prime Minister Alexis Tsipras on
June 26, 2015 shocked creditors, and the broader market, by effectively
breaking off talks, calling a referendum on a proposal offered by creditors.
The referendum asked voters to
accept or reject the terms included in a June 25 proposal by the creditors. But
Tsipras’s stunning move led European leaders to revoke that offer. So,
effectively, Greek citizens voted on a proposal that was no longer on the
table.
Relations between the current
Greek government and the creditors have deteriorated beyond repair and that
European leaders may be prepared to let the country slip out of the eurozone.
Greeks voters overwhelmingly rejected austerity proposals
from the country’s creditors - the ECB, EU and IMF - in a snap referendum
called by the leftist Syriza government.
THIS IS WHAT THE EXACT
MATTER OF GREECE WITH IMF…
Greece has missed its deadline to
repay €1.6 billion to the International Monetary Fund (IMF). Greece is now the
first advanced country to default on an IMF loan, and the first country to fall
into arrears with the lender since Zimbabwe in 2001.
The IMF released a statement
saying: 'We have informed our executive board that Greece is now in arrears and
can only receive IMF financing once the arrears are cleared.'
Greece requested a last-minute
extension from the IMF which the lender said would be dealt with 'in due
course'.
The International Monetary Fund
warned that Greece would need an extension of its European Union loans and a
potentially a large debt writeoff if it grows more slowly than expected and
economic reforms are not implemented.
IMF is overseeing the bailout,
said that even if Greek policies came back on track, loans made by Europe "will
need to be extended significantly" and that the country would need further
concessional financing.
The IMF said Greece would need an
additional 36 billion euros ($39.89 billion) in European funding from total
additional financing needs of 50 billion euros due to policy slippages and the
latest proposals from Athens.
Even under the most optimistic
current IMF projection and with concessional financing through 2018, it said
Greece's debt to gross domestic product ratio was seen at 150 percent in 2020
and 140 percent in 2022.
Using the thresholds agreed in
November 2012, a haircut that yields a reduction in debt of over 30 percent of
GDP would be required to meet the November 2012 debt targets.
The Fund believes that given the
fragile debt dynamics of Greece, one option would be to extend the grace period
to 20 years and the amortization period to 40 years on existing EU loans and to
provide new official sector loans to cover financing needs falling due on
similar terms at least through 2018.
Under an IMF projection where
real economic growth was lower, at just 1 percent, Greece's debt would remain
above 100 percent of GDP for the next three decades, even with a lengthening of
maturities and new loans on concessional terms.
A lower medium-term primary surplus
of 2.5 percent of GDP and lower real GDP growth of 1 percent per year would
require not only concessional financing with fixed interest rates through 2020
to cover gaps as well as doubling of grace and maturities on existing debt but
also a significant haircut of debt, for instance, full write-off of the stock
outstanding in the GLF facility (€53.1 billion) or any other similar operation.
The immediate effect is that
Greece can no longer receive financing from the IMF under the existing extended
arrangement and the IMF will not approve new financing to Greece until it
clears its arrears. This is standard procedure when a member fails to repay the
IMF.
Greece remains a member of the
Fund, with voting rights and representation on its Executive Board. The IMF’s
annual health check of a member country’s economy (called surveillance) will
continue to be an obligation. For the time being, Greece will also be eligible
for IMF technical assistance — that is, access to IMF expertise on a range of
economic issues, including tax administration and financial sector policies.
Within 12 months, the Executive
Board may consider a declaration of ineligibility against Greece if Greece
continues to incur arrears to the IMF. If the non-payment persists for more
than 12 months, the IMF Executive Board may declare that the country is
“noncooperative” in efforts to clear arrears, which could trigger a suspension
of technical assistance, possibly followed by a suspension of voting rights
and, ultimately—if the non-cooperation is extreme and protracted—compulsory
withdrawal from the IMF.
WHAT MAY HAPPEN
NEXT???
Greece may be on the verge of not
just leaving the eurozone but also the European Union itself.
New elections could also be held
if Greece's financial situation worsens. Or Greece could test the willingness
of Russia or China to help should talks with Europe falter.
Greece may also choose to exit
Eurozone nowadays termed as GREXIT as the voting on referendum turned out to be
a NO by the Greeks. Exiting the euro currency union and the European Union
would also involve a legal minefield that no country has yet ventured to cross.
There are also no provisions for departure, voluntary or forced, from the euro
currency union.
A withdrawal from the European
Union will mean Greece will have to reintroduce its old currency, Drachma,
likely to be greatly devalued.
A devalued currency will boost
exports, spurring growth, but the flip side is that the import bill will rise.
A devalued currency will also
increase Greece's debt burden, which will still be denominated in the euro.
The impending default on the IMF
loans leaves Greece sliding towards an exit from the euro, with unforeseeable
consequences for Europe's common currency project. It also carries broad
implications for the global financial system.
TRYING TO COME OUT
FROM THIS TURMOIL…
Greece formally asked for a three-year bailout from the
eurozone’s rescue fund, though Germany said it wouldn’t consider the request
until it sees a full list of reforms.
Pressure is growing on both sides
to come to some kind of deal and avert a potentially imminent Greek exit from
the euro. Europe needs to restructure Greece’s huge debt as a key part of an
emergency-financing solution, a move Germany has resisted.
Greece’s letter is a first step toward fulfilling a demand
by international creditors to come up with tougher measures in return for
desperately needed financing that could keep the country from bankruptcy and
even worse economic turmoil.
The letter reiterates a call for
debt relief, but also says Greece will put in place tax-reform and
pension-related measures by the beginning of next week, though it doesn’t go
into detail.
The full list of overhauls and
budget cuts is what will determine whether the application for a new rescue
program will be approved by the rest of the eurozone. The currency union’s
leaders will assess whether it makes sense to start formal negotiations on a
bailout program at an emergency summit on Sunday (12 July, 2015).
