Tiểu luận tài chính công analysis of greek government debt crisis

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 for

DIPLOMATIC ACADEMY OF VIETNAM INTERNATIONAL ECONOMICS

Analysis of Greek government debt

crisis

STUDENT ID : KT41C – 091 - 1418 WORD COUNT : 4012 Words

Hanoi, 2017

Table of Contents

OVERVIEW OF GREEK CRISIS: 4

Before the crisis occurred: 4

The situation of Greece’s crisis: 6

CAUSES OF PUBLIC DEBT 8

Domestic factors: 8

Overspending from the government in the context of limiting income sources 8

Policy issues and competitive capability 10

International factors: 11

Easy to access loans with low interest rate 11

The disadvantage of single regional currency 12

NEGATIVE IMPACTS OF GREEK SOVERNITY DEBTS: 13

For Greece itself 13

SOLUTIONS: 15

CONCLUSION: 16

References 18

1 Before the crisis occurred:

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 (1999-2009)

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

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 The situation of Greece’s crisis:

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

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

(I.A+I.B+I.C+I.D)

-32,602.2 -34,797.6 -25,818.7 -24,060.5

Ι.A Commercial trade -41,499.2 -44,048.8 -30,767.3 -28,279.6

Ι.Β Service Trade 16,591.7 17,135.6 12,640.2 13,248.5

Ι.C Income Balance -9,285.8 -10,643.0 -8,984.3 -9,228.3

Ι.D One-way current transactions 1,591.1 2,758.6 1,292.6 198.9

II Capital Balance (II1-II2) 4,332.3 4,090.8 2,017.4 2,071.5

ΙΙ.1 Long-term cap inflow 4,673.9 4,637.8 2,328.1 2,356.2

ΙΙ.2 Long-term cap outflow 341.6 547.0 310.7 284.7

III Basic balance(I + II) -28,269.9 -30,706.8 -23,801.3 -21,989.0

II CAUSES OF PUBLIC DEBT

1 Domestic factors:

a Overspending from the government in the context of limiting income sources

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

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

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

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

Potugal 48

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 International factors:

a Easy to access loans with low interest rate

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

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 low-interest 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 The disadvantage of single regional currency

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

concerning Greece or any individual Eurozone economy in particular

c Global Crisis:

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 NEGATIVE IMPACTS OF GREEK SOVERNITY DEBTS:

1 For Greece itself

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

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 For regional and international banking system:

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)