There’s no doubt that a small country in the southern part of Europe has garnered quite a bit of attention this year. How did we get here, and what’s going on?
After the creation of the Eurozone in 1999, Greece was one of the fastest growing Eurozone economies for several years, as foreign capital poured into the country newly backed by the Euro’s creation in 2001. Greece already had relatively high levels of debt, and the government continued significant deficit spending on military and social programs. Prior to the Euro’s introduction, the Greek government was able to keep a lid on things, in part, due to currency devaluation. This disappeared as a tool when the Euro became the common currency of the Eurozone.
So the spending side of the equation was rising at an imprudent rate, but on the income side, Greece has suffered for many years to collect the taxes owed by its citizens. Tax evasion and corruption is reported to be widespread, with some sources indicating that 2012 tax collections were less than half the revenues due, with remaining taxes accepted to be paid by a delayed payment schedule.
The global financial crisis of 2008 ushered in a crisis for Greece. Not only were their significant tourism and shipping exports hurt, but in 2010 the European statistics agency, Eurostat, finally (at least publicly) accused the Greek government of falsified (or at least flawed) data and political interference. One might equate this to a public company “cooking the books.” These revelations essentially restated previous years’ deficit spending from 6-8% of GDP to as high as 15.7%, and pushed their end of 2009 debt to GDP ratio of 130%, a figure beyond what most would consider sustainable. (The public debt to GDP ratio eventually topped 175% in 2014, the world’s third highest behind only Japan and Zimbabwe.)
Yields on Greek bonds skyrocketed, further pinching an already strapped Greek budget. Eventually, to prevent a sovereign default, the European Commission, European Central Bank (ECB), and International Monetary Fund (IMF) responded by launching a bailout fund to cover needs through mid-2013. This bailout was contingent on the implementation of structural reforms and austerity measures, which were implemented only after delay by Greece and a worsened recession. This led to a second bailout in 2012.
Fast forward to a December 2014 election of an anti-austerity government, and we had ourselves a good ol’ fashioned stare down for the first six months of 2015… Greeks wanting continued bailout funding and debt relief, with more modest austerity measures. By June of 2015, negotiations between the Greek government and European creditors were at a standstill, and Greek’s citizenry voted overwhelmingly not to accept the proposals of creditors for continued funding.
By mid-June, it was clear that the possibility of Greece exiting the Euro currency (a “Grexit”) was a very real possibility. Recognizing that Euros would likely be worth more than any new Greek currency that might be formulated, Greeks began rapidly withdrawing cash (Euros) from Greek banks. Because further bailout funding and liquidity for Greece’s banking sector was unavailable, and the country was quickly becoming insolvent, capital controls were put in place by the Greek government to prevent the collapse of Greece’s banks. This included shutting down the banks and limiting account withdrawals to the equivalent of $66 a day.
With the Greek government having taken a hard line on negotiations (described by some as an epic miscalculation), European creditors also took a hard line. The question for creditors has become: Would it be more economic for them to provide further bailout funding, renegotiated terms and debt restructuring, or to provide what would inevitably be humanitarian relief to the people of Greece following a Grexit.
With Greek Prime Minister Alexi Tsipras seemingly having lost a game of chicken, and with his back in a corner, new bailout terms have been presented by Eurozone creditors. The hard part for Mr. Tsipras, will now be to get the terms of a new bailout through Greek parliament. These new terms include austerity measures reportedly much more punishing than those that were previously rejected by his citizenry, and which he himself had campaigned against.
Could the acceptance by Mr. Tsipras simply be another stalling tactic? Perhaps. Only time will tell, and only time will provide clarity as to whether Greece is to remain a member of the Eurozone or take a Grexit. I, for one, would not be surprised if Greece eventually charts its own course, creating a national currency and leaving the Eurozone.
The economic and social effects for Greece have been staggering through this crisis. Greek unemployment is over 25%, and unemployment among youth is over 50%. Businesses are shuttering, and widespread poverty is taking hold throughout the country. One thing is certain: The people of Greece are likely going to experience financial hardships and suffering for many years, and I would anticipate it to be a decade, or even a generation (or two), before they are able to work their way out of the mess they seem to have created.
And yet, while the consequences of a Grexit would make headlines and cause some ripples, the sky is not falling. The total public debts of Greece amount to roughly $300 billion. The vast majority of this debt is held by the IMF and Eurozone countries, which are much more capable of sustaining loss on these debts than individuals and businesses might be. The GDP of Greece is about that of the state of Oregon, so even if it falls apart, the world economy should have the ability to get through such collapse with relatively little pain. Most US companies would not change their long-term outlooks based on any situation in Greece, though one should expect short-term volatility, particularly in this age of sensational headlines and never ending press coverage.
– Barry Nelson