The Making of The Greek Fiscal Crisis

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Dr. Periklis Gogas is an invited contributor to The Business Thinker magazine. He is a faculty member at Democritus University of Thrace, Greece, teaching Macroeconomics, Banking and Finance

The public debate over Greek debt is in the headlines for months now ever since the first issues with regard to Greece’s fiscal problems were raised. Political and ideological confrontations on the subject are inevitable. Accusations over culpability are an everyday occurrence between members of the two major political parties PASOK and ND that ruled Greece by turns since democracy was restored in 1974. Academic economists in Greece follow these developments closely and they are often at the epicenter of heated discussions in the media with journalists and tax payers indirectly or directly accusing them for the current situation. People are wondering why all the economists that now stress the shortcomings of Greece’s fiscal policy remained silent or at least they did not criticize that strong the same policies in the past. The truth of course is that no politician ever asked them and no one ever listened to their warnings. Politicians were busy accusing each other for creating the debt. Thankfully, numbers can tell the truth impartially without subjective political judgments and deception: a simple graph like the one in Figure 1 depicts the truth.

Figure 1. Greek Debt to GDP Ratio  (click on the figure to enlarge)

A picture –not a thousand- but three words: whom to blame. Two governments managed to increase public debt from 25% of GDP in 1974 to 105% in 1993: The Andreas Papandreou (PASOK) government of 1981-1990, and the Mitsotakis (ND) government of 1990-1993. After that, the ingredients for a fiscal disaster were set for good. Debt rose to as much as 115% before declining over the next years mainly due to extensive privatizations and a moderate austerity program imposed by the Simitis (PASOK) government that reduced debt as a percentage of GDP. This trend continued with the first Karamanlis (ND) government from 2004 to 2008. After that, debt reached 110% of GDP mainly due to the global financial crisis of 2008-2009 and also due to the dysfunctions that arose in the Karamanli’s reelected government that led to failures and hesitations to deliver the appropriate legislation and fiscal policies during this term.

Figure 2. Debt as % of GDP – Various Countries   (click on the figure to enlarge)

Contrary to what public opinion in Greece wants to believe as an alibi to shed the responsibility to someone else, it is not the “corrupt politicians” that pocketed the money from the people. The fact is that we wasted all that money ourselves, or at least we must assume responsibility for the tolerance or even worst foolishness, letting our governments spend inefficiently and unproductively borrowed money with no prospects for real growth, development and prosperity. We are ones and not the politicians or other “crooks” that tolerated the creation of thousands of non-productive public jobs and government agencies such as the “Agency for the Exsiccation of Lake Kopaida”. This government agency still exists, apparently hiring people that along with the board of directors are paid by the Greek tax payers although Lake Kopaida was drained and converted to arable land back in 1931(!!!).  We are the ones to blame for doubling the number of schools buildings so that we would not have double shifts in public schools as if we had to, all of a sudden, meet the Norwegian or Canadian standards. We conceded privileges to a number of special interest groups creating private monopolies or oligopolies in the transportation of goods and passengers, in various other services and professions that resulted in increasing costs and low international competitiveness. It is less expensive to transport goods from Athens to Frankfurt (2500 km) than to Thessaloniki a mere 500 km north of Athens. We spent billions of euros to host a one month show –the 2004 Olympic Games of Athens- so that construction companies and the city of Athens would absorb a wealth sock at the expense of development and infrastructure funds that were diverted from the rest of Greece and a huge burden imposed to all Greek tax payers that will affect them for decades ahead. We have special high schools for athletics and music but no science and technology ones and we wonder why R&D is low and we are not productive and competitive.

The truth is that our governments are not elected by the Canadian voters; we Greeks are responsible as with our vote we approve all these market imperfections, unfair and dangerous fiscal policies and wasted taxpayers’ money undermining our future. We must assume responsibility even at this moment. We need to educate ourselves on basic economics principles:  fiscal policies and tax issues, deficits and debts, get informed and think twice before sending off to parliament parties that with their current policies will dictate our present and most importantly our future. We must understand the basic economics principle that there is no “free meal”.

In Figure 2 we have an international comparison of debt to GDP ratios from various countries. In the following figures we focus on the structure of the Greek debt.

Figure 3. Bond Series’ Maturities   (click on the figure to enlarge)

In Figure 3 we present for all current Greek debt issues the outstanding amount in euros and the date of maturity. There were two significant bond series maturities recently amounting to a total of €16 bln. At the time, the spreads for the Greek bonds were at a record high in international markets and in order to avoid refinancing the maturing bonds at 10% interest rates Greece was in need of the joint E.U. and I.M.F. mechanism to refinance them avoiding the open market. Now, there is a period of relatively low maturities up to March 2011 when another series of €8 bln expires. These three series correspond to bonds with initial terms to maturity of 5, 10 and 3 years respectively. For the year after that the total cumulative maturities amount to €37 bln! It is therefore very clear how critical the next two years are for Greece’s economy. Real progress must be achieved very fast in public finances in order to lower spreads and be able to borrow from the markets again.

In Figure 4, the cumulative annual bond maturities are shown for the current structure of Greek debt. Figure 5 graphs the year of issue and principal amount of all current outstanding debt. It is important to note here that these debt series issues do not necessarily reflect new debt but at the most part represent recycling/refinancing of older issues.

Figure 4. Cumulative Annual Bond Maturities  (click on the figure to enlarge)

Figure 5. Date and Amount of Issue of Current Greek Debt  (click on the figure to enlarge)

So far the current government reacted very slow to the problems, decisions were made almost too late and in most cases without any open consultation with academic economists, society and others outside the narrow partisan circle. Best example, the hike on the special tax on gasoline by 20% hoping to increase government revenue erroneously assuming that demand of gasoline is inelastic as it used to be. To the contrary, simple statistical analysis shows that in the last couple of years the demand for gasoline is elastic, something that is reflected in the decrease in the consumption by more than 20%. What we Greeks need to do now is to reflect on the mistakes made in the past, get a grasp of reality, and never make the same mistakes again.


About the Author:
Dr. Periklis Gogas is a faculty member at Democritus University of Thrace and an adjunct lecturer at the Greek Open University teaching Macroeconomics, Banking and Finance. He is also a Financial Consultant for Gerson Lehrman Group, Austin, Texas. He received his from the University of Calgary with supervisor Dr. Apostolos Serletis and worked for several years as the Financial Director of a multinational enterprise. His research interests include Macroeconomics,
Financial Economics, International Economics and Complexity and Non-linear Dynamics.

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