Tiểu luận tài chính công analysis of greek government debt crisis

DIPLOMATIC ACADEMY OF VIETNAM INTERNATIONAL ECONOMICS PUBLIC FINANCE Analysis of Greek government debt crisis NAME : VŨ KIM THÀNH STUDENT ID : KT41C – 091 - 1418 WORD COUNT : 4012 Words Hanoi, 2017 Table of Contents OVERVIEW OF GREEK CRISIS: Before the crisis occurred: The situation of Greece’s crisis: CAUSES OF PUBLIC DEBT 8 Domestic factors: 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 I OVERVIEW OF GREEK CRISIS: 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 tốc độ tăng trưởng GDP hàng năm Hy Lạp (19992009) 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 Hy Lạp (2002-2010) Tổng nợ 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 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 tỷ lệ nợ 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 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 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 Current Accounts I Ι.A Year Current (I.A+I.B+I.C+I.D) Commercial trade 2007 Accounts -32,602.2 2008 -34,797.6 2009 -25,818.7 2010 -24,060.5 -41,499.2 -44,048.8 -30,767.3 -28,279.6 Ι.Β Ι.C Ι.D II ΙΙ.1 ΙΙ.2 III Service Trade Income Balance One-way current transactions Capital Balance (II1-II2) Long-term cap inflow Long-term cap outflow Basic balance(I + II) 16,591.7 -9,285.8 1,591.1 4,332.3 4,673.9 341.6 -28,269.9 17,135.6 -10,643.0 2,758.6 4,090.8 4,637.8 547.0 -30,706.8 12,640.2 -8,984.3 1,292.6 2,017.4 2,328.1 310.7 -23,801.3 13,248.5 -9,228.3 198.9 2,071.5 2,356.2 284.7 -21,989.0 II CAUSES OF PUBLIC DEBT 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 b Policy issues and competitive capability 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 10 Mức độ cạnh tranh số nước châu Âu năm 2009 Country Ranking Greece 109 Ireland Italy 78 Potugal 48 Spain 62 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 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 11 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 lowinterest 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 12 concerning Greece or any individual Eurozone economy in particular Therein lay the problem 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: 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 13 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 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 khoản vay số nước tới Hy Lạp (đến 12/2010) 14 Greece is a small member of the European Union, accounting for just 2.4% of the region's total GDP However, one is concerned that the domino effect will occur when Greece defaults Ireland and Portugal are also in a debt crisis and will face economic slowdown in the coming years as the government attempts to tighten spending, reduce budget deficits and bring stability to the banking system And then the default of Greece also led to the collapse of other countries such as Italy and Spain The first impact of Europe's sovereign debt crisis is the continual devaluation of the euro against other currencies This would cause serious damage to all member states of the Eurozone Exchange rate fluctuations have a direct impact on the trade balance, as the cost of imported goods increases in line with the decline of the euro IV SOLUTIONS: The essay is concerned mainly on the situation of crisis and causes for this dilemma in general Therefore, this part is only served as a reference for broadening the perspective of the problem Firstly, in order to solve liquidity issues and default risks, apart from accepting financial aids from EU/IMF, Greece must look for such other options as: insure EU’s debts, look for loans on international financial markets with loosening commitments, issue EU bonds, negotiate on bilateral commercial deals and enhance public infrastructures However, these options are quite limited for Greece since its credibility had reached at its lowest 15 In reality, The Greek prime minister at the time, George Papandreou, formally requested a bailout Before any default could take place, in early May 2010, the European Commission, the ECB, and the International Monetary Fund (colloquially referred to as the “European troika”) agreed to bail out Greece with a EUR110 billion (USD146 billion) loan for three years The loan was granted under conditions that Greece would implement a wide-ranging agenda of reforms— notably, austerity measures, structural reforms (including action against tax evasion), and privatization of state-owned assets This initial intervention was subsequently referred to as the first Greek bailout According to a recent report, (September 2017), the European Council declared that Greece’s finances stabilized due to this financial support program The Council has closed the excessive deficit procedure for Greece It confirmed that the country's deficit is now below 3% of GDP, the EU's reference value for government deficits On 25 September 2017, the Council repealed its 2009 decision on the existence of an excessive deficit After many years of severe difficulties, Greece's finances are in much better shape They are now in the last year of the financial support programme, and progress is being made to enable Greece to again raise money on the financial markets at sustainable rates From a deficit of 15.1% of GDP reached in 2009, Greece's fiscal balance has steadily improved, turning into a 0.7% of GDP surplus in 2016 Although a small deficit is projected for 2017, the fiscal outlook is expected to improve again thereafter Greece's debt-to-GDP ratio peaked at 179.0% in 2016 and is expected to decrease over the coming years V CONCLUSION: It is possible to say that the current situation of Greece is a possible result of wrong policies applied in the last 25 – 30 years This process 16 is closely related with financial extravagancy and insufficiency of Greece government, unfair and infertile taxation system, unsustainable retirement, low competitive power, populist practices of political parties and organizational and political problems in EU and Euro Zone Greece became tenth member of European Community in 1981 and launched Euro as local currency The passage was thought to be more beneficial and to accelerate the modernization of economy However, although the passage to Euro, at first, had such positive effects as development, high inflation and credibility of economy policies, it was seen that it brought about some negative causes as well Remarkable increases in public spending, together with wrong political choices, caused serious problems in competitive power of country and big financial instability This is quite important to explain the situation of Greece 17 References Daniel Cohen, The Debt Crisis: A Postmortem TS Mai Thanh Quế, Khủng hoảng nợ công tác động khủng hoảng nợ công đến liên minh tiền tệ châu Âu Kinh tế dự báo 2011, Báo động đỏ cho tương lai đồng Euro CAND online, Khủng hoảng nợ công châu Âu vấn đề thời đại- kỳ PGS TS Nguyễn An Hà - Viện Nghiên cứu Châu Âu, Nợ công khủng hoảng nợ công Liên minh Châu Âu ADB (2012), Key Economic Indicators for Asia and the Pacific Bertola L & Ocampo J.A (2012), “Latin America’s Debt Crisis and “Lost Decade””, Paper for Conference “Learning from Latin America: Debt Crises, Debt Rescues and When They and Why They Work”, Institute for the Study of the Americas, School of Advanced Study, University of London Bank of Tokyo-Mitsubishi UFJ (2011), The March 11 Earthquake and the Fraying of the JGB Domestic Consumption Structure, Vol 6, No 2, May 27, 2011 Carner,M, T Grennes, F.Koeheler-Geib (2010), “Finding the Tipping PointWhen Sovereign Debt Turns Bad”, World Bank Policy Research Working Paper 5391 18 ... Greek public debt was estimated at € 216 billion and accumulated debt stood at 130% of GDP III NEGATIVE IMPACTS OF GREEK SOVERNITY DEBTS: For Greece itself The first impact of the sovereign debt. .. Table of Contents OVERVIEW OF GREEK CRISIS: Before the crisis occurred: The situation of Greece’s crisis: CAUSES OF PUBLIC DEBT 8 Domestic factors:... lay the problem 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