Greek government debt crisis
Encyclopedia
From late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt
levels. This lead to a crisis of confidence, indicated by a widening of bond
yield spread
s and risk insurance on credit default swap
s compared to other countries, most importantly Germany. Downgrading of Greek government debt to junk bonds created alarm in financial markets. On 2 May 2010, the Eurozone countries and the International Monetary Fund
agreed on a loan for Greece, conditional on the implementation of harsh austerity measures. In October 2011, Eurozone leaders also agreed on a proposal to write off 50% of Greek debt owed to private creditors, increasing the EFSF to about €1 trillion and requiring European banks to achieve 9% capitalization to reduce the risk of contagion
to other countries.
, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974
. After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance public sector jobs, pensions, and other social benefits. Since 1993 the ratio of debt to GDP has remained above 100%.
Initially currency devaluation
helped finance the borrowing. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds could command. The late-2000s financial crisis
that began in 2007 had a particularly large effect on Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009.
To keep within the monetary union guidelines, the government of Greece had misreported the country's official economic statistics. In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs
and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. The purpose of these deals made by several successive Greek governments was to enable them to continue spending while hiding the actual deficit from the EU.
In 2009, the government of George Papandreou
revised its deficit from an estimated 6% (8% if a special tax for building irregularities were not to be applied) to 12.7%. In May 2010, the Greek government deficit was estimated to be 13.6% which is one of the highest in the world relative to GDP. Greek government debt was estimated at in January 2010. Accumulated government debt was forecast, according to some estimates, to hit 120% of GDP in 2010. The Greek government bond market relies on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally.
Estimated tax evasion costs the Greek government over per year.
Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January). According to the Financial Times
on 25 January 2010, "Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on." In March, again according to the Financial Times, "Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount."
1 Year of entry into the Eurozone
.
amidst hints of default by the Greek government. Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts continue to question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back. Stock market
s worldwide declined in response to this announcement.
Following downgradings by Fitch and Moody's, as well as Standard & Poor's, Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal
, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear."
On 3 May 2010, the European Central Bank
(ECB) suspended its minimum threshold for Greek debt "until further notice", meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier. As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.
on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring. A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to €110 billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent. It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.
Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an “orderly default
” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.
At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy. For example, the U.S. Federal Reserve expanded its balance sheet by over since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt, that money to be destroyed when the debt is paid back, later.
Greece represents only 2.5% of the eurozone economy. Despite its size, the danger is that a default by Greece will cause investors to lose faith in other eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues. Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable". Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, and it does not face a risk of default. Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.
packages since 2010. According to research published on 5 May 2010 by Citibank
, the fiscal tightening is "unexpectedly tough". It will amount to a total of €30 billion (i.e. 12.5% of 2009 Greek GDP) and consist of 5% of GDP tightening in 2010 and a further 4% tightening in 2011.
concerning a loan of 80 billion euro. The package was implemented on 9 February 2010 and included a freeze in the salaries of all government employees, a 10% cut in bonuses, as well as cuts in overtime workers, public employees and work-related travels.
from 4.5% to 5%, from 9% to 10% and from 19% to 21%, a rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported cars of up to 10%–30%, among others.
On 23 April 2010, after realizing the second austerity package failed to improve the country's economic position, the Greek government requested that the EU/International Monetary Fund
(IMF) bailout package be activated. Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. The IMF had said it was "prepared to move expeditiously on this request". Shortly after the European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan. The Troika was led by Servaas Deroose, from the European Commission, and included also Poul Thomsen (IMF) and Klaus Masuch (ECB) as junior partners. In return the Greek government agreed to implement further measures.
and massive protests the following day, with three people being killed, dozens injured, and 107 arrested.
The measures include:
On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and the International Monetary Fund
. The deal consisted of an immediate € in loans to be provided in 2010, with more funds available later. A total of € has been agreed. The interest for the eurozone loans is 5%, considered to be a rather high level for any bailout loan. The European Monetary Union loans will be pari passu
and not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. The loans should cover Greece's funding needs for the next three years (estimated at €30 billion for the rest of 2010 and €40 billion each for 2011 and 2012). According to EU officials, France and Germany demanded that their military dealings with Greece be a condition of their participation in the financial rescue.
As of 12 May 2010 the deficit was down 40 percent from the previous year.
as well, but was eventually passed with 155 votes in favor (a marginal 5-seat majority). The new measures included: raise 50 billion euros by denationalizing companies and selling national property, an increase in taxes for anyone with a yearly income of over 8,000 euro, extra tax for anyone with a yearly income of over 12,000 euro, an increase in VAT
in the housing industry, an extra tax of 2% for combating unemployment, an increase in taxes for pensioners by means of lower pensions ranging from 6% to 14% from the previous 4% to 10%, the creation of a specialized government body with the sole responsibility of exploiting national property, and others.
On 11 August 2011 the government introduced more taxes, this time targeted at people owning immovable property
. The new tax, which is to be paid through the owner's electricity bill, will affect 7.5 million Public Power Corporation accounts and ranges from 3 to 20 euro per square meter. The tax will apply for 2011–2012 and is expected to raise 4 billion Euro in revenue.
On 19 August 2011 the Greek Minister of Finance, Evangelos Venizelos
, said that new austerity measures "should not be necessary". On 20 August 2011 it was revealed that the government's economic measures were still out of track; government revenue went down by 1.9 billion euro while spending went up by 2.7 billion.
On a meeting with representatives of the country's economic sectors on 30 August 2011, the Prime Minister and the Minister of Finance acknowledged that some of the austerity measures were irrational, such as the high VAT, and that they were forced to take them with a gun to the head.
As an alternative to the bailout agreement, Greece could have left the eurozone. Wilhelm Hankel, professor emeritus of economics at the Goethe University Frankfurt suggested in an article published in the Financial Times that the preferred solution to the Greek bond 'crisis' is a Greek exit from the euro followed by a devaluation of the currency. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.
In the documentary Debtocracy
made by a group of Greek journalists, it is argued that Greece should create an audit commission, and force bondholders to suffer from losses, like Ecuador did.
On a poll published on 18 May 2011, 62% of the people questioned felt that the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Giorgos Papakonstantinou
, to handle the crisis. Evangelos Venizelos
replaced Mr. Papakonstantinou on 17 June. 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece's economy. 64% felt that the possibility of bankruptcy is likely, and when asked about their fears for the near future, polls showed a fear of: unemployment (97%), poverty (93%) and the closure of businesses (92%).
The social effects of the Greek austerity measures have been severe, including poor and needy foreign immigrants, but even some Greek citizens, turning to NGOs for healthcare treatment. On 17 October 2011 Minister of Finance Evangelos Venizelos
announced that the government would establish a new fund, aimed at helping those who were hit the hardest from the government's austerity measures. The money for this agency will come from the profits made by tackling tax evasion
.
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
levels. This lead to a crisis of confidence, indicated by a widening of bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
yield spread
Yield spread
In finance, the yield spread is the difference between the quoted rates of return on two different investments, usually of different credit quality.It is a compound of yield and spread....
s and risk insurance on credit default swap
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
s compared to other countries, most importantly Germany. Downgrading of Greek government debt to junk bonds created alarm in financial markets. On 2 May 2010, the Eurozone countries and the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
agreed on a loan for Greece, conditional on the implementation of harsh austerity measures. In October 2011, Eurozone leaders also agreed on a proposal to write off 50% of Greek debt owed to private creditors, increasing the EFSF to about €1 trillion and requiring European banks to achieve 9% capitalization to reduce the risk of contagion
Financial contagion
Financial contagion refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission...
to other countries.
Causes
The Greek economy was one of the fastest growing in the eurozone from 2000 to 2007; during that period, it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. According to an editorial published by the Greek right-wing newspaper KathimeriniKathimerini
I Kathimerini is a daily morning newspaper published in Athens. It is published in the Greek language, as well as in an abridged English-language edition. The English edition is sold separately in the United States and as a supplement to the International Herald Tribune in Greece and Cyprus. On 2...
, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974
Metapolitefsi
The Metapolitefsi was a period in Greek history after the fall of the Greek military junta of 1967–1974 that includes the transitional period from the fall of the dictatorship to the Greek legislative elections of 1974 and the democratic period immediately after these elections.The long...
. After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance public sector jobs, pensions, and other social benefits. Since 1993 the ratio of debt to GDP has remained above 100%.
Initially currency devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
helped finance the borrowing. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds could command. The late-2000s financial crisis
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
that began in 2007 had a particularly large effect on Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009.
To keep within the monetary union guidelines, the government of Greece had misreported the country's official economic statistics. In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. The purpose of these deals made by several successive Greek governments was to enable them to continue spending while hiding the actual deficit from the EU.
In 2009, the government of George Papandreou
George Papandreou
Georgios A. Papandreou , commonly anglicised to George and shortened to Γιώργος in Greek, is a Greek politician who served as Prime Minister of Greece following his party's victory in the 2009 legislative election...
revised its deficit from an estimated 6% (8% if a special tax for building irregularities were not to be applied) to 12.7%. In May 2010, the Greek government deficit was estimated to be 13.6% which is one of the highest in the world relative to GDP. Greek government debt was estimated at in January 2010. Accumulated government debt was forecast, according to some estimates, to hit 120% of GDP in 2010. The Greek government bond market relies on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally.
Estimated tax evasion costs the Greek government over per year.
Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January). According to the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
on 25 January 2010, "Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on." In March, again according to the Financial Times, "Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount."
| 1999 | 2000 | 20011 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 (estimates) | 2012 (forecasts) | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Public debt, billion € | 122.3 | 141 | 151.9 | 159.2 | 168 | 183.2 | 195.4 | 224.2 | 239.3 | 263.1 | 299.5 | 329.4 | 354.7/356.5 | 371.9/384.9 |
| Public debt, % of GDP | 94 | 103.4 | 103.7 | 101.7 | 97.4 | 98.6 | 100 | 106.1 | 107.4 | 113.0 | 129.3 | 144.9 | 161.8/162.8 | 172.7/181.4 |
| GDP growth, annual % | 3.4 | 3.5 | 4.2 | 3.4 | 5.9 | 4.4 | 2.3 | 5.5 | 3.0 | −0.2 | −3.2 | −3.5/−5.5 | −2.8/−5.5 | 0.7/−2.5 |
| Budget deficit, % of GDP | −3.7 | −4.5 | −4.8 | −5.6 | −7.5 | −5.2 | −5.7 | −6.5 | −9.8 | −15.8 | −10.6 | −8.5/−8.9 | −6.8/−7 |
1 Year of entry into the Eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
.
Downgrading of debt
On 27 April 2010, the Greek debt rating was decreased to the upper levels of 'junk' status by Standard & Poor'sStandard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
amidst hints of default by the Greek government. Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts continue to question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back. Stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
s worldwide declined in response to this announcement.
Following downgradings by Fitch and Moody's, as well as Standard & Poor's, Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear."
On 3 May 2010, the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
(ECB) suspended its minimum threshold for Greek debt "until further notice", meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier. As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.
Danger of default
Without a bailout agreement, there was a possibility that Greece would prefer to defaultSovereign default
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...
on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring. A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to €110 billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent. It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.
Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an “orderly default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.
At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy. For example, the U.S. Federal Reserve expanded its balance sheet by over since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt, that money to be destroyed when the debt is paid back, later.
Greece represents only 2.5% of the eurozone economy. Despite its size, the danger is that a default by Greece will cause investors to lose faith in other eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues. Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable". Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, and it does not face a risk of default. Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.
Austerity packages
Greece adopted a number of austerityAusterity
In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to...
packages since 2010. According to research published on 5 May 2010 by Citibank
Citibank
Citibank, a major international bank, is the consumer banking arm of financial services giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First National City Bank of New York...
, the fiscal tightening is "unexpectedly tough". It will amount to a total of €30 billion (i.e. 12.5% of 2009 Greek GDP) and consist of 5% of GDP tightening in 2010 and a further 4% tightening in 2011.
First austerity package
The first round came with the signing of the memorandums with the IMF and the ECBECB
ECB is an abbreviation for:*European Central Bank, the central bank for the Eurozone of the European Union* East Coast Bays, a suburb of North Shore City, New Zealand**East Coast Bays AFC, a football team from East Coast Bays...
concerning a loan of 80 billion euro. The package was implemented on 9 February 2010 and included a freeze in the salaries of all government employees, a 10% cut in bonuses, as well as cuts in overtime workers, public employees and work-related travels.
Second austerity package (Economy Protection Bill)
On 5 March 2010, amid new fears of bankruptcy, the Greek parliament passed the Economy Protection Bill, which was expected to save another €4.8 billion. The measures include (in addition to the above): 30% cuts in Christmas, Easter and leave of absence bonuses, a further 12% cut in public bonuses, a 7% cut in the salaries of public and private employees, a rise of VATVat
Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...
from 4.5% to 5%, from 9% to 10% and from 19% to 21%, a rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported cars of up to 10%–30%, among others.
On 23 April 2010, after realizing the second austerity package failed to improve the country's economic position, the Greek government requested that the EU/International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) bailout package be activated. Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. The IMF had said it was "prepared to move expeditiously on this request". Shortly after the European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan. The Troika was led by Servaas Deroose, from the European Commission, and included also Poul Thomsen (IMF) and Klaus Masuch (ECB) as junior partners. In return the Greek government agreed to implement further measures.
Third austerity package
On 1 May 2010, Prime Minister George Papandreou announced a new round of austerity measures, which have been described as "unprecedented". The proposed changes, which aim to save through 2012, represent the biggest government overhaul in a generation. The bill was submitted to Parliament on 4 May and approved on separate votes on 29 June and 30 June. It was met with a nationwide general strike2010–2011 Greek protests
The 2010–2011 Greek protests are an ongoing series of demonstrations and general strikes taking place across Greece. The protests, which began on 5 May 2010, were sparked by plans to cut public spending and raise taxes as austerity measures in exchange for a bail-out, aimed at solving the...
and massive protests the following day, with three people being killed, dozens injured, and 107 arrested.
The measures include:
- An 8% cut on public sector allowances (in addition to the two previous austerity packages) and a 3% pay cut for DEKO (public sector utilities) employees.
- Public sector limit of €1,000 introduced to bi-annual bonus, abolished entirely for those earning over €3,000 a month.
- Limit of €500 per month to 13th and 14th month salaries of public employees; abolished for employees receiving over €3,000 a month.
- Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month.
- Return of a special tax on high pensions.
- Extraordinary taxes imposed on company profits.
- Rise in the value of property (and thus higher taxes).
- Rise of an additional 10% for all imported cars.
- Changes were planned to the laws governing lay-offs and overtime pay.
- Increases in value added taxValue added taxA value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
to 23% (from 19%), 11% (from 9%) and 5.5% (from 4%). - 10% rise in luxury taxes and sin taxSin taxA sin tax is a kind of sumptuary tax: a tax specifically levied on certain generally socially proscribed goods and services. These goods are usually alcohol and tobacco, but also include candies, soft drinks, fat foods and coffee, while services range from prostitution to...
es on alcohol, cigarettes, and fuel. - Equalization of men's and women's pension age limits.
- General pension age has not changed, but a mechanism has been introduced to scale them to life expectancy changes.
- A financial stability fund has been created.
- Average retirement age for public sector workers will be increased from 61 to 65.
- The number of public-owned companies shall be reduced from 6,000 to 2,000.
- The number of municipalities shall shrink from 1,000 to 400.
On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
. The deal consisted of an immediate € in loans to be provided in 2010, with more funds available later. A total of € has been agreed. The interest for the eurozone loans is 5%, considered to be a rather high level for any bailout loan. The European Monetary Union loans will be pari passu
Pari passu
Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally", "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality."...
and not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. The loans should cover Greece's funding needs for the next three years (estimated at €30 billion for the rest of 2010 and €40 billion each for 2011 and 2012). According to EU officials, France and Germany demanded that their military dealings with Greece be a condition of their participation in the financial rescue.
As of 12 May 2010 the deficit was down 40 percent from the previous year.
Fourth austerity package (Mid-term plan)
2011 saw the introduction of further austerity. In the midst of public discontent, massive protests and a 24-hour-strike throughout Greece, the parliament debated on whether or not to pass a new austerity bill, known in Greece as the "mesoprothesmo" (the mid-term [plan]). The government's intent to pass further austerity measures was met with discontent from within the government and parliamentHellenic Parliament
The Hellenic Parliament , also the Parliament of the Hellenes, is the Parliament of Greece, located in the Parliament House , overlooking Syntagma Square in Athens, Greece....
as well, but was eventually passed with 155 votes in favor (a marginal 5-seat majority). The new measures included: raise 50 billion euros by denationalizing companies and selling national property, an increase in taxes for anyone with a yearly income of over 8,000 euro, extra tax for anyone with a yearly income of over 12,000 euro, an increase in VAT
Vat
Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...
in the housing industry, an extra tax of 2% for combating unemployment, an increase in taxes for pensioners by means of lower pensions ranging from 6% to 14% from the previous 4% to 10%, the creation of a specialized government body with the sole responsibility of exploiting national property, and others.
On 11 August 2011 the government introduced more taxes, this time targeted at people owning immovable property
Immovable property
Immovable property is an immovable object, an item of property that cannot be moved without destroying or altering it - property that is fixed to the Earth, such as land or a house. In the United States it is also commercially and legally known as real estate and in Britain as property...
. The new tax, which is to be paid through the owner's electricity bill, will affect 7.5 million Public Power Corporation accounts and ranges from 3 to 20 euro per square meter. The tax will apply for 2011–2012 and is expected to raise 4 billion Euro in revenue.
On 19 August 2011 the Greek Minister of Finance, Evangelos Venizelos
Evangelos Venizelos
Evangelos Venizelos is a Greek politician, currently Deputy Prime Minister and Minister for Finance of Greece since 17 June 2011...
, said that new austerity measures "should not be necessary". On 20 August 2011 it was revealed that the government's economic measures were still out of track; government revenue went down by 1.9 billion euro while spending went up by 2.7 billion.
On a meeting with representatives of the country's economic sectors on 30 August 2011, the Prime Minister and the Minister of Finance acknowledged that some of the austerity measures were irrational, such as the high VAT, and that they were forced to take them with a gun to the head.
Objections to proposed policies
The crisis is seen as a justification for imposing fiscal austerity on Greece in exchange for European funding which would lower borrowing costs for the Greek government. The negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. Joseph Stiglitz has also criticised the EU for being too slow to help Greece, insufficiently supportive of the new government, lacking the will power to set up sufficient "solidarity and stabilisation framework" to support countries experiencing economic difficulty, and too deferential to bond rating agencies.As an alternative to the bailout agreement, Greece could have left the eurozone. Wilhelm Hankel, professor emeritus of economics at the Goethe University Frankfurt suggested in an article published in the Financial Times that the preferred solution to the Greek bond 'crisis' is a Greek exit from the euro followed by a devaluation of the currency. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.
In the documentary Debtocracy
Debtocracy
Debtocracy is a 2011 documentary film by Katerina Kitidi and Aris Hatzistefanou. The documentary mainly focuses on two points: the causes of the Greek debt crisis in 2010 and possible future solutions that could be given to the problem that are not currently being considered by the government of...
made by a group of Greek journalists, it is argued that Greece should create an audit commission, and force bondholders to suffer from losses, like Ecuador did.
On a poll published on 18 May 2011, 62% of the people questioned felt that the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Giorgos Papakonstantinou
Giorgos Papakonstantinou
Giorgos Papakonstantinou , born October 30, 1961 in Athens, Greece, is a Greek economist and politician and the current Minister for the Environment, Energy and Climate Change of Greece, formerly Minister for Finance. He is a member of the Panhellenic Socialist Movement.-Education and career:He...
, to handle the crisis. Evangelos Venizelos
Evangelos Venizelos
Evangelos Venizelos is a Greek politician, currently Deputy Prime Minister and Minister for Finance of Greece since 17 June 2011...
replaced Mr. Papakonstantinou on 17 June. 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece's economy. 64% felt that the possibility of bankruptcy is likely, and when asked about their fears for the near future, polls showed a fear of: unemployment (97%), poverty (93%) and the closure of businesses (92%).
The social effects of the Greek austerity measures have been severe, including poor and needy foreign immigrants, but even some Greek citizens, turning to NGOs for healthcare treatment. On 17 October 2011 Minister of Finance Evangelos Venizelos
Evangelos Venizelos
Evangelos Venizelos is a Greek politician, currently Deputy Prime Minister and Minister for Finance of Greece since 17 June 2011...
announced that the government would establish a new fund, aimed at helping those who were hit the hardest from the government's austerity measures. The money for this agency will come from the profits made by tackling tax evasion
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
.