Greece seems to be at crossroads. At a time when the emerging markets are pulling the global economy out of the worst economic crisis in decades, the sovereign debt troubles of Greece are challenging its very fragile recovery. European leaders are already alarmed and global equity markets are volatile. Everyone wants to know how Greece is going to tackle its woes.
The advent of troubles
Before starting to explore the depth of the debt crisis, it is important to understand that Greece is a part of the Eurozone - the second largest global economy.
The crisis once again reminded Eurozone of the dangers of a single currency system for the entire continent. The impact of global recession coupled with the country’s own economic problems only added more fuel to the fire. At the time of the introduction of euro, many had warned that it would deprive weaker countries of their powers to intervene in the currency market. In crises, these powers are crucial for a country. The biggest challenge Greece faces now is that it can’t change the value of the euro to adjust its debts.
Since the early 1990s, Greece`s GDP growth has on an average surpassed even the EU’s. But what rang in trouble was a combination of factors like rising joblessness, an inefficient bureaucracy coupled with a corrupt system.
It went on a spending spree on borrowed finances in the last 10 years. Due to a huge wage hike along with the government’s inability to successfully contain tax evasion, and failure to implement financial reforms, the country’s coping mechanism was already weak when it got hit by the global slump. Soon Greece realized that its enormous debt levels had far exceeded Eurozone-set limits.
In the first half of 2009, the ratio of loans to savings exceeded 100 percent primarily due to over lending. And because of this, for the first time since 1990s, Greece’s economic growth turned negative. The downward spiral had begun and its effect was cascading. Markets across Europe suffered a severe downfall which once again brought the legitimacy of a single currency system into question.
The basis for the current crisis that has hit Eurozone lies in the 2008 subprime crisis which in turn emanated from the easy credit conditions on which Europe was reliant for its growth. Because of this, Europe was literally on a spending spree. But when global recession hit, realisation dawned that the expected revenues resulting from a lenient credit system could not sustain at the same levels always.
Countries like Greece, Spain and Portugal were impacted hugely by mounting deficits and the absence of an independent currency regulation system added to their woes. The prolonged crisis, has forced the global rating agency Standard and Poor’s to downgrade the ratings of these countries, with Greece being accorded the junk status.
At present Greece has a mounting budget deficit of 13 percent and a debt mountain of 113 percent of GDP. One corrective step that the government took to counter the same was the introduction of radical pension reforms and other austerity measures. Greece’s austerity bill amounts to a whopping USD 40 billion. But it was not a cakewalk for the ruling Socialist government. The government had to cope with massive strikes and violent protests.
Reason to worry…
Yannos Papantoniou, Greece`s ex-Economy Minister, had urged Europe to prevent Greece from becoming "the Lehman Brothers of the sovereign debt crisis."
A prolonged crisis in Europe will sooner or later have a cascading effect on the rest of the world and who knows it may lead the globe into throes of another crisis! The key equity markets around the world, including India’s BSE and NSE, are trading volatile on Greece fears.
It’s at this juncture the European powers and the International Monetary Fund (IMF) stepped in. Better late than never. Obviously no country in Europe wants the Greek crisis to pull the entire continent down. The EU and the IMF have jointly announced USD 1 trillion rescue package for the debt-laden Greece.
Is that enough? Well, expert opinions vary. German Chancellor Angela Merkel, who initially opposed any bailout of Greece, herself admitted: "We`ve done no more than buy time for ourselves". This means that Europe has to come up with more radical policy decisions to avert a global financial contagion. Many economists, including the Nobel Laureate Paul Krugman, say the fate of Euro is doomed.
Anyway, it is premature to make predictions at this time. All we can say is that it’s a “wait-and-watch” situation.