Research

GREECE AND ITS MODERN DAY TROJAN HORSE

The past 5 years have presented themselves with turmoil for Greece as it faces an economic crisis not seen since the years after World War II. Plunged deep into a recession, Greece has been in an ongoing debate with the European Union on how to save itself from financial strangulation and economic collapse. What led to the current situation in Greece, and how will this issue be resolved?

How did Greece get into this situation?

The economic crisis in Greece came to light in October of 2009 after it was discovered that the Greek government deficit figures had been understated. This prompted the European Troika, made up of the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), to develop the initial bailout and eventually a second bailout. These bailouts required Greece to adhere to harsh austerity terms, dividing the public opinion. The austerity terms attempted to address major issues within the government, such as taxation, the state pension system, and the worsening political situation, by cutting state spending.

How did the first two bailouts work?

Almost six years later, Greece’s government is now sitting upon a total debt of €320 billion (about $350 billion) including two bailouts at €240 billion, equaling 177% of Greece’s annual gross domestic product. The economy has experienced a 25% fall in GDP since the start of its recession, one of the worst falls of an advanced economy since 1870. On 6/30/15, the eurozone bailout for Greece expired and a missed payment to the International Monetary Fund (IMF) of €1.6 billion placed the country in arrears to the organization.

#1Greece GDP CollapseIn 2011, Greece collected less than 50% of the taxes owed, and this has not improved in subsequent years. Outstanding undisputed tax debt has only increased, positioning Greece in first place for the highest percent of uncollected taxes in the world. The above statistic does not account for tax evasion, an issue the Greek government also failed to address. This situation fared no better in 2012 and early 2015 when the New Democracy party and, after its dismissal, the Syriza government were elected. Both refused to adhere to the bailout terms laid out by the Troika. The combination of ineffective taxation, refusal to abide to austerity measures and division within the political system for over a decade has pushed Greece into an inevitable economic crisis.

#2Outstanding Undisputed Tax DebtSo what is the current situation in Greece?

Third International Bailout On 7/13/15, after 17 hours of negotiation, the eurozone leaders decided to offer a third international bailout of €86 billion over the next three years in exchange for much of the same prior concessions, including pension reforms, public sector spending cuts, and an increase in the value added tax (VAT). This third bailout demonstrates the commitment of European sovereign nations to keep Greece in the eurozone. However, this brings up the question of whether Greece is able to stay in the EU long term? It is urgent that the Greek economy experiences a turn of events. Debt relief is the priority, which is being addressed through the simple strategies of decreasing expenses and increasing revenues. A bridge loan to recapitalize Greek banks should allow the European Central Bank (ECB) to return to Greece’s aid if their efforts are apparent to other European nations. It is clear that Greece would like to stay in the eurozone, and the third bailout presents the chance for the troubled country to demonstrate their willingness.

Future Investments in Greece Should US investors be optimistic about Greek markets, with the assumption that the country adheres to the new bailout’s terms? In 2014, 33% of S&P 500 companies’ revenues were outside of the US, with 7% of revenues coming from Europe. With the US dollar strengthening relative to the euro, and the foreign revenue for US companies from Europe minimal, investors may lose confidence within the European markets, particularly in a country with an economic crisis. However, there are still investors that see potential investments within Greece. Wilbur Ross, a successful distressed asset investor, put €1.3 billion into Eurobank Ergasias last year, Greece’s third largest bank.

It is too risky for our taste.

#3Business Outside of US by SP500 companies

Pension Problem Greece’s pension system has faced much criticism for its unsustainability and requires major reforms. Despite pension benefit cuts, an increased retirement age of 67 to receive full benefits (the lowest being 57 in 2009), and penalties for early retirement, the system has not improved. This only spurred an increase in retirement requests, with workers set to retire within a few years receiving better benefits by retiring early as opposed to continue working. The unemployment rate for the age group of 55-64 years jumped from 6% in 2010 to 20% in 2015. Therefore, Greece still spends 17.5% of its GDP on pensions, the highest of any country within the European Union. Recently, lack of state pension funds has rendered millions of citizens unable to receive their payments and there has been a 35% decline in living standards since the start of the recession.

Implications if Greece were to fall out of the eurozone This is the phenomenon known as the “Grexit.” Could exiting the eurozone be beneficial for Greece? Although unlikely, it is interesting to discuss the impact if this event were to happen. Since its establishment in 1999, Greece would be the first country to ever exit the eurozone, making it challenging to anticipate the effect this would have. At only 2% of the eurozone’s gross GDP, Greece’s exit from the euro would seem nominal. The issue is that, to avoid Greece defaulting in 2010, bailouts were delivered to prevent the failure of financial institutions that had lent to Greece. Even though it was necessary for Greece to default, this did not happen. If Greece was to default now, European creditors such as the European Central Bank and International Money Fund would lose a tremendous amount of finances. These losses would also drive up borrowing costs for other debtor nations, potentially creating a domino effect that would affect the economies of other European Union nations.

#4Greece Tiny Part of Eurozone

Conclusion

In closing, the decisions that Greece makes in the latter end of this year will largely decide its economic future. While we cannot know how the nation will handle this situation, history often repeats itself, and it is likely that Greece will default on their debt payments again unless major changes are implemented. The effects of the Greek economic crisis upon itself and the European continent as a whole will become further apparent in the coming months of this year, but Argentina may be an example. Whatever the outcome, Greece on many measures, is all but bankrupt. As stated by Margaret Thatcher; “They’ve got the usual Socialist disease — they’ve run out of other people’s money.” The current Leftist government will still be paying back the IMF until 2030, and in total, its repayment schedule stretches out over the next 42 years to 2057. The Greek government faces the prospect of becoming the first developed nation to default on its international obligations since WWII. This would be a significant event, and the European Union does not want to play dominos.