Decoding Greek crisis

There has been a lot of hullaballoo about the Greece crisis. Right from news headlines to crowd funding campaigns to financially support Greece, everyone is concerned. But first let’s see in detail, what’s the chaos all about?

It started from Greece’s adoption of the Euro in 2001, at the rate of 1 Euro = 340 Drachma. For entry into the Euro, each country had to fulfill the criteria – less than three <g data-gr-id="124">per cent</g> of <g data-gr-id="130">budget</g> deficit. Though it made its entry, in 2004, a financial audit was done, which proved that Greece fudged numbers to gain entry. Its budget deficit was marginally above the three per cent mark. But, Greece continued.

Post few years after its entry, Greece’s <g data-gr-id="112">economy</g> boomed like anything. Foreign investors lined up on the back of the euro’s credibility, borrowing for governments, business and households alike had never seemed so cheap.However, Greece’s fudging of data and economic statistics came back to hit them hard.

The infamous 2008 economic recession, which crippled the entire world, didn’t really create much of an impact in Greece that year. But 2009 was the decisive year. It was found that Greece’s figures had again been manipulated: A budget deficit of six per cent was eventually raised to 15 per cent after recalculations. Further, the global economic recession led to the Eurozone sovereign debt crisis in 2009, which brought Greece to its knees. Foreign investments reduced heavily, exports reduced, credit expansion towards businesses and households got constrained and the gross debt increased. 

Greece’s gross domestic product (GDP) growth in 2009 was estimated at -1.2 <g data-gr-id="115">per cent</g>. A major problem, which has contributed significantly to the crisis is tax evasions by Greek citizens and businesses. Tax evasion accounted for half of Greece’s 2008 deficit and a third of its 2009 deficit.

Greece plunged into neck deep level debt and eventually had to seek bailout support. In 2010, the European Commission, European Central Bank (ECB) and the International Monetary Fund (IMF), termed as Troika, agreed to provide 110 billion Euros in a three-year financial aid programme. In return for the aid, they compelled Greece to follow a series of harsh austerity measures such as increasing VAT from 21 per cent to 23 per cent, scrapping bonus payments for public sector workers, banning increases in public sector salaries and pensions for at least three years, etc.

However, they never realised that the austerity will further push Greece into deeper trouble.  

Apparently, Greece was supposed to sell some assets to manage some portion of the debt, but it never happened and the first Troika bailout failed, post which, a second bailout package of 130 billion Euros was approved by the European Union in 2012.

The second bailout programme was granted with revised terms and conditions. Additional money was given by IMF, but the main T&C remained around making tax collection more efficient, reducing spending promises, and undertaking reforms to encourage hiring and business growth.

In 2014, there was some growth for the Greek economy, but the benefits failed to reach the people and thus resentment continued against the government. Utility bills have become so expensive that many families have taken to burning wood and anything available to stay warm, which has created smog all over the city. Did the new government change anything?

Faced with five long years of hardship and austerity, a <g data-gr-id="127">left wing</g> party “Syriza” led by Alexis Tsipras, stormed into power. Their primary agenda was fierce anti-austerity and anti-bailout conditions, which helped them to win the elections. They secured a clear victory but fell just short of an outright majority. They partnered with Independent Greeks (ANEL), an anti-austerity rightist bloc.

However, things didn’t go as expected.

Tsipras had promised to renegotiate bailout terms, which required less severe austerity measures. But he failed to live up to expectations, went back on a number of core promises and after a stand-off with <g data-gr-id="133">European Union</g>, he agreed to extend the bailout for four months. On June 30, 2015, Greece defaulted on a 1.6 billion Euros loan payment to the IMF, thereby being the first developed country to miss an IMF <g data-gr-id="131">payment,</g> and the largest in IMF’s history.

Further, Prime Minister Tsipras organised a referendum in the country to take <g data-gr-id="136">the their</g> view on whether or not; they wanted the severe bailout conditions to continue. The historical referendum saw 62.5 <g data-gr-id="128">per cent</g> of 9.5 million registered voters participating in the process, out of which, 61.31 <g data-gr-id="129">per cent</g> voted against the bailout conditions imposed by IMF. 

Greek banks have just €500 million left in cash, i.e. £32 per person for the 11 million population, thereby, banks are expected to run dry by this week. Martin Schulz, the president of the European Parliament, said: “Without new money, salaries won’t be paid, the health system will stop functioning, the power network and public transport will break down, and they won’t be able to import vital goods because nobody can pay”.

 EU had expected Greece to submit any new plans post the referendum, but no new proposals <g data-gr-id="125">has</g> been sent by them as of now. There is full EU Summit planned this Sunday to decide the next course of action.

Furthermore, July 20 is keenly awaited when Greece must repay €3.5 billion to the ECB. If the ECB loan installment is defaulted on, which is highly likely, and then EU might cut off any supply of further funds, which will push Greece into deeper mess.

However, if EU decides to pay heed to Greece’s requests, it will face a significant issue. Other European countries such as Spain, Italy, Ireland and Portugal had made similar austerity measures. Though neither of the economies collapsed the way Greece’s did, but the rise in unemployment due to their respective crisis is quite high. Therefore, if EU decides to make one-off exceptions for Greece, then these countries might gain <g data-gr-id="137">courage</g> to demand similar treatment.  

If Greece decides to leave the EU and subsequently Euro currency, it would have to return to its own currency “Drachma”. Such a situation will devaluate its currency, cause inflation, pensions would be lower in real terms and wages will come down, but Greece would become more competitive for exports and tourism, which can set the economy back on track But, Greece has no intention to leave the Euro, or at least it hasn’t mentioned any such thing.

Though the crisis is unlikely to have a big ripple effect, stock markets opened lower after Greece’s referendum. With respect to India, it isn’t expected to have much of an effect. If a Greece exit happens, then rupee might depreciate but RBI governor Raghuram Rajan has said, the Indian economy will see through as robust forex reserves, which are at an all-time high of $355 billion, will cushion any possible impact of the crisis.

Finance secretary Rajiv <g data-gr-id="206">Mehrishi</g> said the economic crisis in Greece may trigger capital outflows from India and the government is consulting the RBI to deal with the situation.