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The Greek Crisis: Tragedy or Opportunity

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by

Eduardo Crea

on 21 July 2013

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Transcript of The Greek Crisis: Tragedy or Opportunity

1999
2001
2002
2008
2009
2010
2011
80
100
120
140
160
2000
2003
2004
2005
2006
2007
Percentage of debt over GDP of Greece
Year
Part of Ottoman Empire for 300 years
Turkish rule and unstable political climate -38 Governments before WWII
Historical Factors that have contributed to Greece’s Financial Crisis
Tip of Balkan Peninsula
Overview of past 40 years interaction between Government, Industry, and Labor
Chronically Corrupt Political System
Losing 8% of GDP to bribery and embezzlement
Tax Evasion
Greece produces very few products, Nineteenth century economy based on shipping and agriculture
High administrative burden due to government regulation and corruption
German occupation of Greece drained significant resources
Weak Economy
Inefficient and unnecessary public sector with high wages & pensions
Nationalization of industry
Public spending increased from 29% to 48% of GDP
Public Sector Expansion in 1980’s
Credit became available when Greece adopted the Euro
Borrowing to sustain the public sector
Excessive Debt Burden
Bailouts delaying the inevitable when behavior does not change
The Greek Crisis
Tragedy Or Opportunity?
Merriam Webster: balkanize – to break up … into smaller and often hostile units
1941 German occupation led to 250,000 deaths
Opposition was balkanized
1945 to ’49 civil war Communists defeated and hunted down
Governments until 1980
Mostly rightist
Good growth 1950 – ‘70
Nationalization of key industries and banking system
Directed investment led to state control of economy
1980s PASOK won landslide
PASOK (Panhellenic Socialist Movement) - leftist party
Introduced union friendly laws (employment protection)
Wage indexing
More public control of major industry, backed troublesome private loans
1941 - 1949
1950 - 1980
'80s
CPI high (94 out of 174 countries, US #19, Netherlands #9)
Under reporting of income – 67% below €12K, per capita €20K
Papaconstantinou (from case) now being prosecuted for tax cheat mis-handling
Vote buying through patronage
Fractious culture
Troika imposed cuts to public sector
(32% of wages vs 22% for OECD)
Debt as % of GDP
More comprehensive European Union to replace European Community
Common currency in exchange for rapid German unification after fall of Berlin wall
Budget deficit less than 3% of GDP
National debt less than 60% of GDP
Inflation no more than 1.5% higher and long-term interest rates no more than 2% higher than the 3 lowest inflation members
Weighted majority vote of member government to enter the common currency
Euro launched on January 1, 1999
Greece did not meet the criteria
Entering the European Union: Maastricht Treaty (EU 12) 1992
Stability and Growth Pact (SGP) enforced deficit and debt limit, but malleable
By 2010, 25 of the EU 27 exceeded deficit or debt limits
Violation monitored under “Excess Deficit Procedure”

Cut deficits, controlled money supply, stabilized exchange rate and liberalized economy
Bank of Greece politically independent in 1994
Greek government broadened tax base, established new tax authority and installed computerized tax-collection system
Balanced budget: from 5.1% deficit in 1990 to 4.2% surplus in 1994 through end of decade
May 3, 2000: European Commission declared that Greece met Maastricht requirements with a fiscal deficit at 1.6% of GDP, inflation at 2.0%, but exceeded total government debt requirement
January 1, 2001 Greece joined the Euro, with 70% of Greeks favoring the transition

Greek opinion and both political parties supported joining the Euro
Per-capita GDP: €20,900 vs. Euro average of €27,200
Average economic growth rate 2001 – 2008: 3.9% vs. 2.0% Eurozone average
Inflation converged to low levels of Eurozone
Exchange rate eliminated, capital inflow, and interest rates declined
Public debt stabilized at 100% of GDP, above the 70% Eurozone average
Public deficit increased dramatically
Government employee compensation: 32% of total compensation in Greece
Government overstaffing: 27,000 individuals added to public payroll before 2009 election
New Democracy government of Costas Karamanlis underestimated the 2009 deficit at 3.7% of GDP, but later revised it to 6.7%
PASOK government that followed estimated 2009 deficit at 12.5%
Official data disguised real fiscal deficit
Spooked the markets
Yield on two-year Greek bond doubled from 2% in November to 4% in December
Yield on the 10-year Greek bond rose from 4.7% to 5.8%
Three deficit reduction package in three month in 2010 cut deficit by 5% of GDP
Eurostat determined that Greek statistical office had falsifying data
Official in charge fired
Parliament established new independent statistical office
2012
Prime Minister George Papadreou informed EU leaders and initiated an austerity program to lower the deficit to 8.7% by 2010
Increase Value Added Tax (VAT)
Froze public-sector wages and cut bonuses and state-funded pension plans
2010
Greekovery or Grexit
Greek bond yield widened again
Three largest major ratings agencies downgraded Greek government debt
Interest rates rose
Deadlines tightened
Greek government forced to borrow or refinance €53 billion in 2010
Previous New Democracy government hired Goldman Sachs to mask some debt using opaque derivatives
George Papandreou stood down as prime minister
Fitch becomes the third rating agency to cut Greek debt to "junk" status after S&P and Moody's.
Greece unveils a series of privatisations, part of a goal to raise €50bn by 2015.
Further protests in central Athens, as Mr Papandreou agrees to make “significant” cuts in public-sector employment.
As investor concerns over a potential debt default by Greece mount, the country’s debt enters territory previously uncharted by a European sovereign.
Regional contagion effect
Sarkozy's $83B austerity plan in France
Berlusconi resigns after facing months of outside pressure to get Italy's fiscal house in order
9 countries downgraded. S&P drops both of France and Austria's top, triple-A credit ratings one notch to AA+. Italy (A to BBB+) and Spain (AA- to A) are cut two levels, while Portugal, Cyprus, Malta, Slovenia and Slovakia also fall.
Hollande elected in France; change in economic direction
Pro-bailout party wins Greece vote
Hofstede Analysis
Similar to Argentina?
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