Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.– Hamlet Act I, Sc. III
It all began innocently enough.
Back in 2002, as Greece first adopted the Euro as its currency, the country’s economic forecast was overwhelmingly optimistic. With its new currency and fresh access to the privileges of EU membership, Greece began a bacchanalia of large-scale borrowing. This manifested in a wild period of high-profile projects that went well over budget, such as the 2004 Summer Olympics in Athens. Although the 2008 economic crisis was the straw that broke the camel’s back, Greece’s economic problems were well underway before the ghost of the global meltdown appeared.
Slow growth meant that the government had to shore out more in state benefits and received less through taxation. This was compounded by widespread tax evasion, government corruption, and some startling inconsistencies in Greece’s official economic statistics. By the time that Greece’s economic problems began to surface, lenders began charging higher interest rates and market speculation ran wild as many began to doubt Greece’s ability to repay its massive debt. Since then, Greece has been stalling off default, having accepted a bailout package in 2010 worth EUR 110 billion, with a second bailout package of EUR 130 billion currently on its way. The price has been increased austerity, which has resulted in many state entitlements being cut. This in turn has sparked massive protests and in some cases, riots.
A little more than kin, and less than kind
It would be poetic to call what is happening in Greece hubris. The country’s massive debt was accumulated over a period of shortsighted borrowing and an overestimated balance between taxation and entitlement programs. But beyond the poetic nature of the sovereign debt crisis, the country is on the verge of economic and social collapse. The austerity measures imposed as part of the bailout package have triggered unrest, most recently on February 12 when hooded youths torched and looted buildings across central Athens as lawmakers backed more than EUR 3 billion in cuts to wages, jobs, and pensions. Greeks are now bracing for a decade of hardship.
The most recent bailout averts a chaotic default next month, but does little to allay doubts over Greece’s long-term financial and social stability as the country faces spiraling unemployment and a recession in its fifth year. Moreover, the credit agency Fitch further downgraded Greece’s rating from CCC to C. It was the first of widely expected cuts from all rating agencies because Greece will pass into technical default on its liabilities once the transaction is completed, which finance minister Evangelos Venizelos said must take place by March 12. The complex deal reached on Tuesday buys time to stabilize the 17-nation currency bloc and strengthen its financial protection against a Greek default, but it leaves doubts about Greece’s ability to avoid difficulties in the longer term.
Meanwhile, tensions with the Eurozone are on the rise, particularly between Greece and one of its main lender nations, Germany. A draft enabling law for new budget cuts that was introduced into parliament on February 21 showed that Greece now sees a budget deficit of 6.7 per cent of gross domestic product, up from an original target of 5.4 per cent in its initial 2012 budget. The new figure retroactively reflected a more pessimistic view of the economy that already emerged last year as Greece and its lenders set out to work on the bailout package. Besides sending permanent foreign inspectors, the bailout plan requires Greece to set aside revenue to cover debt service into a special reserved account.
The plan reflects the mistrust between Greece and foreign lenders — in particular EU paymaster Germany. After years of backsliding on reforms by Athens, the EU is desperate to oversee a Greek recovery. But restrictive stipulations have riled Greeks whose sense of national pride has been hurt by the threat of bankruptcy. Laying the groundwork for political infighting within the EU and adding to growing anti-EU sentiment on the streets of Athens.
To default, or not to default, that is the question
As austerity measures continue to be imposed onto the Greek people through EU concessions, social unrest is destined to rise. This, combined with the ominous outlook for the Greek economy has prompted numerous suggestions of how best to deal with Greece’s sovereign debt crisis. One idea has been to let Greece default on its debt.
Both Argentina in 2001 and Iceland in 2008 have gone down similar paths and have managed to recover. Just last week Iceland’s credit rating was upgraded to BB+ by Fitch. The credit upgrade was a signal of Iceland’s course to recovery as Fitch once again labeled the country as safe to invest in. Nouriel Roubini, the chairman of Roubini Global Economics and an NYU professor has openly stated that a similar route would provide Greece with the best opportunity of rebuilding its economy.
By remaining in the Euro, which is still a strong currency, Greece is relinquishing the opportunity of letting its currency devalue and becoming more competitive. “A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets that abandoned their currency pegs,” said Roubini, while speaking at an economic summit at NYU last week.
Such a maneuver would see Greece leave the Eurozone and could be traumatic to the region, due to capital losses from financial institutions within the EU that are tied to Greek debt. However, this is not to say that these problems could not be overcome. Although dealing with capital losses would be a major hurdle to overcome, it is not without precedent. In 2001, Argentina “pesified” its debts, as it converted all debt incurred in U.S. dollars into pesos as a means of restructuring its debt and preventing capital flight out of Argentina.
A Greek default may prove to be inevitable. Therefore preventive means might be the most prudent way forward. “Like a broken marriage that requires a break-up, it is better to have rules that make separation less costly to both sides. Breaking up and divorcing is painful and costly, even when such rules exist. Make no mistake: an orderly Euro exit will be hard. But watching the slow disorderly implosion of the Greek economy and society will be much worse,” said Roubini during his closing statement at the NYU economic summit.
The rest is silence
At the Four Seasons Vancouver on February 17, the Fraser Institute hosted a talk with Greek parliamentarian, Kyriakos Mitsotakis about the growing debt crisis in Greece. At the event, Mitsotakis tackled the possibility of a default, but remained firmly against the idea. “The violent shake up of our reforms is starting to create new opportunities. A default is not the answer now,” said Mitsotakis.
This does hold some merit. Despite its recovery from the 2001 crisis, Argentina still remains politically and economically isolated and a similar fate would follow Greece most likely should Athens follow Buenos Aires’ lead. Moreover, the reintroduction of a new currency could cause a host of practical problems that could hinder economic recovery further. For the time being, the Hellenic parliament remains determined to tackle the familiar problem, rather than risk a whole new one.
However, the most pressing problem for Greece may be the Greeks themselves. While much of the attention has been focused on bailouts and the possibility of a default, more and more Greeks are taking to the streets in protest. On February 12, Athens experienced the worst episode of violence in years and as unemployment continues along with the deadly combination of austerity measures and a deepened recession takes hold, its safe to say that Athens hasn’t burned for the last time. Such dire circumstances could create a vile political climate, which Greece is already beginning to display symptoms of. Far-left and far-right political parties are gaining prominence, and soon the legitimacy of the political status quo will expire.
“We have about six to nine months to start and get some results. Otherwise, reform fatigue will set in and people will begin to question what their sacrifices have been for,” said Mitsotakis, who voted in favour of both bailout packages for Greece. Yet, despite the anger on the streets, Mitsotakis appeared cautiously optimistic, citing future legislation on tax reform, combatting unemployment, and reprivatizing the Greek banks. “We may be running a primary surplus by the end of this year.”
Even though such reforms may be worthwhile, Mitsotakis has failed to acknowledge that there is something fundamentally rotten in the state of Greece. Austerity measures and Greece’s debt tragedy will only continue and along with them comes social unrest on the streets, inflammatory rhetoric from Brussels, and an economy in desperate need of a jumpstart. The past few years have been filled with empty promises of reform in Greece and although the new bailout stipulations may help to achieve these reforms, much of the damage has already been done through inaction.
Indecisiveness coupled with hasty actions makes for a tragic ending. With elections slated for April, it is safe to say that many of the current political cast of characters will not make it to the next act. There is no happy ending here — just a country in need of repair.
