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Greek debt crisis: the ball is in the Troika's court

Manoj Pant | Updated on: 6 July 2015, 20:25 IST
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The crisis

  • Greece filed for bankruptcy in 2010, when the debt/GDP ratio had hit 146%. Now it is now around 175%.
  • The country was to undertake austerity measures, structural reforms and privatisation of public assets.
  • The Troika suspended all bailout payments till the Greeks kept up their end of the agreement.
  • The actual interest on the debt runs into a few billion euros.

The reasons

  • A huge chunk of Greece\'s GDP is tourism-based, and was hit badly during the 2007 global recession.
  • An economy facing such a crisis devalues its currency, but Greece couldn\'t do that because it uses the euro.
  • The 1992 decision to expand the EU and introduce the euro didn\'t consider cultural ramifications.

The bailout

  • As things stand, the ball is in the Troika\'s court, not Greece\'s.
  • The Troika could offer a bailout package disguised as imposition of austerity on Greece.

Greek citizens have overwhelmingly voted against the bailout package offered by the Troika, consisting of the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF).

As PM Alexis Tsipras himself argued, it is a political vote against excessive austerity and puts the ball back in the court of the Troika (and the Germans in particular), in that the final decision is a political and not an economic one.

Are the Greeks blackmailing the EC? Should they leave the EU? Is this decision something only the Greeks need to worry about? There are some of the issues to be addressed.

What is the crisis?

Greece had actually filed for bankruptcy way back in 2010. By then, the Greek debt/GDP ratio had hit 146% (and is now around 175%). A 110 billion euro bailout package was followed by a second one of 130 billion euros (which included bank capitalisation in Greece).

At the same time, all holders of Greek bonds would take a 53% cut in the value of their debt while the interest on the debt would also be reduced.

On the other side, Greece would undertake some austerity measures, structural reforms and privatisation of public assets.

By 2014, it was clear in subsequent reviews that the Greeks were reneging on their commitments. In 2014, a new government came to power on the issue of not implementing austerity measures.

The Troika then suspended all bailout payments till the Greeks agreed to their part of the agreement, leading to the current referendum by the Left-oriented Tsipras government and the current stalemate.

What, then, is the problem? The actual payments of interest on the debt runs into a few billion euros: chicken feed in terms of the size of the EU. Yet, there is already talk of the failure of the EU, end of the Euro, a Greek exit from the EU and so on.

So, a nation of 11 million, with a GDP less that 2% of the EU GDP, can bring down an edifice built over two-and-a-half decades? It sounds silly.

Dependence on tourism

But first the Greek problem. From 2000-2007, the Greece was, at 5 to 5.5%, one of the fastest growing economies of the EU.

Yet, by 2009, it was bankrupt, with the budget deficit hitting 10% of the GDP, even with the falsified figures given by the finance ministry.

To understand this, look at the structure of the Greek economy. About 80% of its GDP is made up of services largely related to its tourism sector, shipping and government employment.

It sounds silly that a nation of 11 million, with a GDP less than 2% of the EU GDP, can bring down the edifice

One of the first sectors (as also in the case of Spain and Italy) hit by the global recession of 2007 was the tourism industry. So the bottom just dropped out of the Greek economy.

Typically, an economy which faces such a crisis solves the problem by devaluing its currency and thus boosting competitiveness. Under the euro system, the Greeks could not do this. So, instead, they ran high trade deficits to be financed by the bailouts. But this is not a long-term solution, unless they undergo restructuring and cut government expenditure.

What about the EU?

The size of the Greek economy is inconsequential. Yet, there are two issues here. First, a Greek exit could lead to a contagion effect with economies like Denmark, Spain and Italy following, so that the EU experiment itself is under question.

Second, and probably more important, the Maastricht treaty of 1992 was meant to expand the EU-15 group to the EU-27, largely to expand the security frontier to the east after the collapse of the Soviet Union.

So, the EU-27 was essentially a political decision. At the same time, imposing a common currency (and fiscal deficits) implied that an economic instrument (the currency) was to sustain a political objective (the EU-27). This was impossible unless the EU also became a cultural union (which it hasn't) and people could freely move from the poorer to the richer countries (which they haven't). Something has to give.

The political decision here must dominate. Consider a simple example from India. Almost all the hill states of the North East are financially bankrupt and rely on grants from the Centre to survive. Yet, given security issues and the "idea of India", one doesn't hear of any complaints about why the rest of the country funds these states.

The Greek economy does not have the structure to weather the current crisis in the next few years. The Troika will have to worry about the "idea of Europe" and provide another bailout, although it would have to be disguised as imposing austerity on the Greeks. But, at this point of time, the ball is in the court of the Troika and not so much the Greeks.

The views expressed here are personal and do not necessarily reflect those of the organisation.

First published: 6 July 2015, 20:25 IST
 
Manoj Pant @catchhindi

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