«The Effects of Global Crisis into Euro Region: A Case Study of Greek Crisis Bora Selçuk1 and Naci Yılmaz2 Abstract: With the parallel to the ...»
Since the beginning of 2008, the media often expressed that Greece, Portugal, Ireland and Spain, which were seen as the weakest countries in the EU, were in difficulty in terms of economy and finance. The countries including Portugal, Ireland, Greece and Spain were started to call as “the PIGS”. Among them, Greece was the most often on the agenda because of its economic, political and social problems. The events, demonstrations and occupations in Greece were started to be expressed as “Greek Syndrome” in the EU.
Together with the shaken Greek economy by the global crisis, the vulnerabilities of the countries located especially in the southern wing of the EU have shocked the Euro Area and the Euro. Like Germany, the people of the countries who preferred the sound money such as the Mark felt anger against that situation (Sönmez 2010: 31The feeling that the Euro has been left alone and nobody has owned it no more has led to a panic in the markets and the thought that Portugal, Ireland and Spain went also into the crisis.
At the end of 2009, the total debt of the Southern European countries consisting of Italy, Spain, Portugal and Greece has reached to 2.9 trillion Euro. Italy owned 1.7 trillion Euro and Spain owned 600 billion Euro of that debt. It was seen that about half of the debt had been financed by the foreign investors and France and Germany (USAK 201: 20) would be the most damaged countries if the debt was not paid.
The EU support and the extension of new loans were argued seriously for the debtor countries, mainly Greece, that started to live some problems. It was observed that the member countries, except for Germany, Netherlands and to the extent France, suggest giving them new loans at low interest rates. The EU uncertainty on the solution of Greek financial crises and the application for IMF to solve the problem
caused to the question in public what the reason of being unity was (Sönmez 2010:
30-32). While it was argued that which was the correct authority to give support, the effect of the current risk on the Euro made the monetary authorities apply to IMF.
A deep concern occurred in Greek public opinion that the country would be taken under a sound fiscal control after such an agreement.
In ending of the debates on the crises, it was effective that the public deficit has reached to the serious levels in Ireland and Spain and the credit rate of Portugal has declined during the debates.
The non-performance possibility of the two countries such as especially Spain and Italy that located in the South of the EU and were the biggest 9th and 7th economies
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in the world respectively could threat to the world economy and the EU headed by German-French leadership (Marsh, 2010). The spread of the crisis over these countries could have a domino effect and panic in the countries having no difficulty with paying their debts in the normal conditions.
In order to prevent the situation not getting out of control throughout the EU, the saving packages at the low amount and costs have been applied. Complaining of its role as the financier and savior of the Unity because of its key position, Germany believed that the countries avoiding to take the necessary measures should pay the cost. This belief showed itself in the conditions of the saving packages.
The EU Saving Plans (Billion EURO) Source: Sinn 2010, 3 The first important step has been taken in March 2010 and the EU countries have agreed on an aid package by the help of IMF. The Fund, for the first time, played a role in a country in the Eurozone that was different from its past EU interventions in the countries such as Hungary, Latvia, Romania (Sönmez 2010: 32). Finally the IMFEU aid package of 750 Billion Euro was applied on May 10th 2010 (Giles, 2010).
The Reasons of Greek Crisis It was observed that the fiscal imbalances, the foreign trade deficits, the power of weak competitiveness, the mismanagement, the financial frauds and the imperfect markets were the sources of the economic and social problems faced with by Greece. Greece was seen in the same position like the old Eastern Bloc
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countries participating in the EU lately. Like the other EU countries, the global crisis has negatively affected the Greek budget balance through public incomes and expenses. The public incomes declined due to the decreasing consuming expenses and the narrowing foreign trade volume affected by the crisis. The public expenses on the other hand increased due to the cost of intervention to financial system and the increasing social insurance spending.
Greek Public Debt Payments and Term Profile (2010-2057) Source: Kouretas and Vlamis 2010, 404 Greece had joined to the Union together with Italy, Belgium and Ireland with the expectation of obeying the violated rule that any country should not own a debt amount more than 60 per cent of its GDP according to the Maastricht Treaty (Sönmez 2010: 3). Greek public debt to GDP ratio was 101.5 per cent when it participated in the Euro Region in 2001(Çapanoğlu 2010, 2). It could not go down below the ideal ratio in the past years, but in opposition, its public debt increased fast. The case was hidden from the EU authorities. Greek speculators owning their big shares in the debt structure of Greece supported to continue the process.
With the coming of the new social democrat cabinet in power in the 2009 election following the old conservative government, it was seen through the investigation that the old government had changed the data and deceived financial markets and the EU authorities. This deception was achieved by the support of the Goldman Sachs being as an international banking institution. Greece had continued to borrow the new loans by hiding its current debts.
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Starting since 2001, the Goldman Sachs managed to hide the sovereign debts with the help of the complex derivative products called as “cross-currency basis swap” from the EU institutions such as Eurostat and international investors and the Maastricht rules have been broken (Aybar, 2010: 76-77). Aside from the macro economic problems, the statistical data being not credible and transparent caused to the investors to be skeptical about Greek debt papers.
After these developments, as a result of the corrected data provided by the new government, it was proved that the rate of foreign deficit to the GDP was 15 per cent in the end of 2008 by reaching 5 times over the Maastricht limit (Aybar 2010:76). The rate of real Greek budget deficit to the GDP in 2008 was also understood more than 2 times over the figure declared by the old government with 13 per cent by reaching to 4 times more than the EU Stability Fund limit (Yıldızoğlu 2010: 304). The budget deficit was declared 2.9 per cent in 2006 and
7.7 per cent in 2008 by the old government (Maliye 2010: 9). New data showed that the country growing at 4 per cent annually in the pre-crisis period was, not in the growth as declared before but, in the recession in the last year. The risk premium of the country increased in the autumn of 2009. The bond interest rate of the country applying to the international financial markets for turning the current debt and providing new sources reached to over 6 per cent (Sönmez, 2010, 31).
The foreign debt of the country also reached to 112.6 per cent of the GDP with 300 billion Euro (Yıldızoğlu, 2010: 304).
The events happening needed the international credit rating agents to review their credit ratings for Greece. The Fitch decreased its rating to (A-) that was (A) in October in 2009. The budget deficit declared by the government affected its decision. The Fitch made again another drop in its rating in December. The country rate dropped back to BBB+. Standart & Poors degraded its rate to BBB+ from A2. The Moody’s, the other important rating agency, also decreased its rate to A2 level from A1 level by dropping back one level (Kouretas and Vlamis 2010: 404).
Credit Rating Development of the Greek Bonds (1997-2010) Source: Kouretas and Vlamis 2010, 404 The events forced Greece to look for cheap source from the EU. So, if Greece couldn’t find urgently 50 billion dollar, it would be in non-performance (Yıldızoğlu 2010: 317). The Greek government would have two payments in April and May; each of them was 21.5 billion Euros. But its reserves were only 15 billion Euros. This case made Greece start the negotiations with the international financial institutions (Aybar 2010: 76).
The Greek Rescue Package If Greece were not a member of the EU, the measure that it will take would possibly devalue the domestic currency and open money/credit taps like in the US, erode its debt nominated in domestic currency through inflation and restructure its
foreign debt through serious bargaining. However, the EU conditions and the single currency eliminated these possibilities.
The various solutions were offered to Greece in the process. One of them was the suggestion of devaluation. Greece would stay in the Euro but balance the foreign deficit by setting the prices of domestic goods and services. One of the other interesting offer was the dual currency system. Greece would stay in the Euro but put the Drachma into domestic market and try the domestic balance to keep away from foreign balance (Aybar 2010: 75). However, these suggestions were not accepted.
The German public opinion was opponent to transfer the sources to the consuming countries, primarily to Greece, having no budget discipline. It was thought that the aid guarantees could prevent the budget discipline in the countries such as Greece, Spain, Ireland and Portugal (Çapanoğlu 2010: 3). In order to overcome the crisis in the EU, it was expected that Germany, as a leader in the EU, would accept to be a locomotive within its initiative for the EU recovering from the crisis by strengthening the domestic demand and providing the financial support for the countries, primarily for Greece. It was effective in this regard that the biggest part of Greek foreign debts was supplied by the German banks. Germany being able to be pioneer in the extending credit process would in fact ease the stress on its banking system.
Even though the crisis starting in Greece has shaken the Eurozone, the fact that Greece has only 2-3 per cent share in the EU economy by its GDP of 330 billion dollar caused to the thought that the crises in the country could be stopped without spreading over the Union (Tilford, 2010). It provided the countries located in the centre of the Union with the possibility to form the other countries located in the periphery of the Union with the more stringent requirements again. Greece was used as “a case study” or “a laboratory mouse” if we evaluate it more mercilessly. If the crisis started in Spain with its source requirement of 200 billion dollar, two times more than Greece, Ireland and Portugal, the measures to be taken could be different (Yıldızoğlu 2010: 318). It was deemed that the Greek economic bankruptcy would not be so effective as to create a black hole throughout the Union.
As soon as the Pasok took over the power, it declared the Stability and Growth Program. The program was the application of the program called as Lisbon strategy in the EU. The program included the measures of increasing the power of competitiveness. It also included the retreat in the influence of the social state affecting adversely the capital gains, privatizations, the pension reform narrowing the rights of the labor classes (Aybar 2010: 75-76). Greece presented its stability program to the European Commission on January 15th 2010. The target for budget
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deficit in the program was predicted as 8.7 per cent. A serious austerity policy was accepted. It was declared that the budget deficit would decrease to 5.6 per cent in 2011 and to 2.8 per cent in 2012 and to 2 per cent in 2013 (Çapanoğlu 2010: 2). It was believed that the structuring process aiming at cuts in spending and rise in tax revenues would provide new sources to the country.
The package was the same with the general context of all the neo-liberal rescue packages. It included the tax increases on oil products, the measures such as the cuts in public spending, no wage raises in public sector in 2010, the suspension in recruitment, the bringing a ceiling for all wages in public sector. The EU declared its support for the package. It also advised that the deficits should be diminished fast especially in social security and health systems and higher flexibility should be provided in labor markets and the financial system should be strengthened faster.
It was aimed that the control over the public finance should be applied fast by the measures to be taken and effectiveness, transparency and reliance should be provided by the restructuring measures.
With the declaration of the rescue package, the Greek labor classes having a militant past went on the two general strikes, first on December 17th 2009, and second on February 24th 2010, and so many domestic demonstrations (Aybar
2010: 77). While the process advanced, the EU accepted a rescue package of 30 billion Euros for Greece on April 11th 2010. The Greek government declared that it needed the IMF aid of 45 billion Euros on April 23th 2010. As result of these developments, the EU and IMF accepted the common aid package of 110 billion Euro and applied (USAK 2011: 24).
According to the agreement between the EU and IMF, it was aimed that IMF should provide Greece with the source of an important amount but the biggest part of source should be supplied by the EU countries. While the package provided Greece to borrow from the countries in the Eurozone, it did not force these countries to lend it. The package was bound to the firm requirements demanded especially by Germany. If demand for borrowing happens at a rate below the market conditions, it needs the consent of all Eurozone countries together with the positive views of the EU Commission and the ECB. The mechanism provided German to give the big part of the aid and IMF to be controller (Sönmez 2010:33).