by Ac. Krtashivananda
The economy of Greece is the 37th largest in the world at $312 or $309 billion by nominal G.D.P or purchasing power parity respectively, according to World Bank statistics for the fiscal year 2009–2010. Additionally, Greece is the 15th largest economy in the 27-member EU .In terms of per capita income Greece is ranked 29th or 33rd in the world at $27,875 and $27,624 for nominal GDP and purchasing power parity respectively.
Since the turn of the millennium, Greece saw high levels of GDP growth above the Eurozone average peaking at 5.9% in 2003 and 5.5% in 2006. Due to the late-2000s financial crisis and the European sovereign debt crisis, the Greek economy saw growth rates of –6.9% in 2011, –3.4% in 2010, –3.3% in 2009 and –0.2% in 2008. The country’s public debt-to-GDP ratio stood at 165.3% of nominal gross domestic product in 2011.
Since a change in government revealed the true size of the country’s massive deficits, Greece has been kept afloat by its fellow euro zone countries, but at a steep price: the austerity measures demanded by France and Germany in return for two massive bailout packages have ripped holes in the Greek safety net and plunged the country into a recession of near-Great Depression dimensions.
After long resisting the idea of a default, European officials in March 2012 helped Greece negotiate a landmark debt restructuring deal with the vast majority of its private sector lenders, who agreed to swap $77 billion in Greek debt for new bonds worth as much as 75 percent less. It was the largest default in history.
The deal cleared the way for the so-called troika — the European Union, the European Central Bank(ECB) and International Monetary Fund(IMF) — to begin releasing funds from the second, 130 billion euro ($163.4 billion) bailout package, avoiding an uncontrolled default. But many economists said it still left Greece saddled with unsustainable debts and little prospects for growth.
While Greece receives billions of Euros in emergency assistance from lenders overseeing its bailout, almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets.
The European bailout that was supposed to buy time for Greece is mainly servicing only the interest on the country’s debt — while the Greek economy continues to struggle.
In early May, voters upended the country’s political system in a parliametary election that saw Parties representing the left and the far-right made gains, as Greeks protested the austerity pact. After the leading parties failed to form a coalition, a caretaker government was installed until new elections in June.
Center-Right Party Wins a Critical Election
On June 17, Greek voters gave a narrow victory in parliamentary elections to the conservative New Democracy party, which had supported a bailout for the country’s failed economy. The vote was widely seen as a last chance for Greece to remain in the euro zone, and the results had an early rallying effect on world markets.
While the election afforded Greece a brief respite from a rapid downward spiral, it was not likely to prevent a showdown between the next government and the country’s so-called troika of foreign creditors — the European Commission, the European Central Bank and the International Monetary Fund — over the terms of a bailout agreement.
The day after the election, Antonis Samaras, the leader of New Democracy, began efforts to form a coalition government aimed at keeping Greece in the euro and renegotiating its loan agreement with the foreign creditors keeping it afloat. Mr. Samaras will try to persuade his party’s longtime rival, the Socialist Pasok party, to join forces in a pro-bailout coalition. Read More…
Spain’s Bailout Raises Worry Over Greece
A week before the Greek election, Spain became the fourth country in Europe to accept a bailout for its cash-starved banks as European finance ministers offered an aid package of up to $125 billion.
The Spanish rescue was well within the means of a European emergency fund already established for just such purposes. Far harder to calculate are the costs if, after the Greek elections, the new government there reneges on the terms of the bailout Athens negotiated with its European lenders only a few months ago. That could lead to an unprecedented withdrawal from the euro zone, threatening the structural integrity of a currency union that has largely benefited more prosperous members like Germany.
Lucas Papademos, the country’s former interim prime minister, said Greece’s departure from the euro zone would be catastrophic, pushing inflation in the country as high as 50 percent, putting extreme stress on Greek banks and reducing living standards.
And those problems would not be Greece’s alone. The big fear in Europe is contagion — an infection of financial panic that could spread far beyond Greece. Indeed, Spanish leaders have long said that Greek problems were contributors to the general market uncertainties that helped undermine Spanish banks.
The roots of the crisis go back to the strong euro and rock-bottom interest rates that prevailed for much of the past decade. Greece took advantage of this easy money to drive up borrowing by the country’s consumers and its government, which built up $400 billion in debt, much of it lent by banks in France and Germany.
When the global economy crumpled, those chickens came home to roost.
After the revelation of the true size of its deficit, Greece was quickly frozen out of the bond markets, and in May 2010 began to rely on an aid package of €110 billion, or $152.6 billion, agreed to by its richer European neighbors.
Throughout 2010 and 2011, investors continued to demand ever higher interest rates for Greek borrowing as the market appeared to conclude that some sort of default was inevitable. Mass demonstrations turned violent in October 2011 as Parliament barely passed additional austerity measures Europe demanded to keep the bailout money flowing.
Tensions in the Euro Zone
For Greece — and for Spain, Italy, Ireland and Portugal — the financial crisis has highlighted the constraints of euro membership. Unable to devalue their currencies to regain competitiveness, and forced by E.U. fiscal agreements to control spending, they are facing austerity measures just when their economies need extra spending. Other economies like Germany, the Netherlands and Austria have kept deficits down while retaining an edge in global markets by restraining domestic wage increases. France lies somewhere between the two camps.
The chief difficulty in working out a package to support Greece was the popular sentiment in Germany — deeply concerned about becoming the answer to the debt problems of all of Europe’s endangered economies — that Greece should pay a penalty for its former profligacy.
Since the euro’s inception in 1999, no member had sought support from the I.M.F., which typically comes to the rescue of emerging-market economies rather than developed countries. Beside unsettling the markets, Greece’s troubles have undermined the common currency it and 15 and other European nations share.
Bond Losses, Second Bailout Package
On Feb. 21, after more than 13 hours of talks in Brussels, European finance ministers approved a new bailout of 130 billion euros, or $172 billion, subject to Greece taking immediate steps to put the deep structural changes that they agreed to into effect.
The agreement included a reduction in interest rates on loans from Greece’s first rescue in 2010, and European central banks foregoing profit on their Greek bond holdings, that allowed the deal to satisfy a mandate set by the IMF that Greece’s debt come down to 120.5 percent of gross domestic product by 2020.
The bailout cash is likely to be paid into a special “escrow” account that will prioritize debt servicing before money is released to general government coffers.
The Debt Deal
In early March 2012, Greece announced that it had clinched a landmark debt restructuring deal with its private sector lenders. The deal clears the way for the release of bailout funds from Europe and the International Monetary Fund that will save the country from imminent default.
The Greek finance ministry said that 85.8 percent of private creditors holding 177 billion euros in Greek bonds participated in the bond swap. After invoking collective action clauses, provisions that will force the holdouts to accept the offer, the participation rate would rise to 95 percent and meet the target set by Europe and the I.M.F. for the release of crucial rescue funds.The value of Greek 10-year bonds had shortly before hit a record low of 16 cents on the euro. When the bailout was finalized on March 14, European officials said that if the reform program is successful, Greece’s debt level by 2020 could equal 116.5 percent of gross domestic product.
After the May 2012 Elections
Leaders in Germany and elsewhere in Europe made clear that as far as they were concerned, a Greek departure from the euro was no longer unthinkable — and far more likely than additional aid.
And depositors were voting with their feet, pulling billions from Greek banks to protect against the losses that would accompany a switch to a depreciated drachma. The head of the new caretaker government said the central bank had warned of “a great fear that could develop into a panic.”
Fear of ‘Drachmageddon’
In the weeks following the May 2012 elections, talk of “drachmageddon” could be heard in conversations all around Athens — despite the fact that 80 percent of Greeks said they wanted to stay with the euro.
Any departure from the euro, if it did occur, would not come quickly, even if a new government repudiates Greece’s bailout terms; orchestrating the exit would be legally complicated and lengthy. European leaders may also move to prevent a Greek default or exit at the 11th hour, considering the almost unending uncertainties.
But coming up with a Plan B is proving difficult for Greek businesses, especially smaller ones. There are so many unknowns involved that many of them cannot even conceive of how they would cope. Economists say the drachma would be devalued by an estimated 50 to 70 percent compared to the euro.
The depositors fears that with a devalued currency, inflation would rise rapidly, and Greek companies would struggle to pay the euro-denominated bills of their suppliers. Trade with other countries would slow sharply for a while, as suppliers halted deliveries, further crippling Greek businesses that depend heavily on imports.
On the other hand it may also happen that the weakened Greek currency lowers the cost of Greek labor and products like olive oil. As was the case in Argentina, businesses and consumers in other countries would eventually start buying Greek goods and services once they improved in value.
Today, Greek exports of manufactured products account for only 10 percent of GDP,, compared with a 30 percent average for the rest of the euro zone. In addition, Greece’s adoption of the euro hastened a steady shift away from agricultural production. Today, Greece imports nearly 40 percent of its food, most of its medicine and almost all of its oil and natural gas.
Greece may remain within Euro zone like Denmark, using Euro for external trade within Euro Zone instead of dollar and Drachma internally. But economic experts may think about Plan C that is to float 3 currencies. Euro, Drachma(1) as convertible currency with Euro for expternal trade with Euro Zone countries. The exchange rate controlled by the ECB. And Drachma(2) for internal trade only and exchangable only with Drachma(1). Its value can be determind by the National Government. There can be two price levels for the goods interal and external.
Besides this Greece must develope its agricultural potential and also labour intensive industries which can produce quality goods in competable price.