World·In Depth

The trouble with Greece

As Greece hunkers down and takes on another round of loans and austerity measures meant to bring the country out of an ever-deepening financial crisis, an expert on European economic policy reviews the origins and implications Greece's debt problem.

Origins and implications of the Greek debt crisis

After months of unrest and contentious debate over how far Greece should go to avoid defaulting on its massive debt and getting kicked out of the eurozone, the Greek government agreed to impose additional austerity measures to secure €130 billion ($172 billion) in loans from the European Commission, European Central Bank and International Monetary Fund.

The bailout, approved on Feb. 21, 2012, follows an earlier €110 billion ($146 billion) aid package in 2010 that was not enough to pull the country out of an ever-deepening economic crisis. 

Greece owes €350 billion ($463 billion) to lenders around the world, the equivalent of 160 per cent of the country's GDP. France, Germany and the U.K. are some of its biggest lenders.

The aim of the bailout is to reduce the debt burden to 120.5 per cent of GDP by 2020. To help achieve that target, Greece's private sector creditors, including banks and other financial institutions, have agreed to write off 53.5 per cent of the nominal value of the Greek bonds they hold.

Greek economy by the numbers

  • Total debt: €350 billion ($463 billion).
  • Debt-to-GDP: 160% of GDP. 
  • GDP growth: -6.8% (2011, not seasonally adjusted).
  • Unemployment: 20.9% (48% among young people), up from 7.7% in 2008.
  • Inflation: 2.3% (January 2012) compared to 5.2% in January 2011.

In return, Greece has agreed to enact a further €3.3 billion ($4.4 billion) worth of austerity measures, a reduction in government spending equivalent to 1.5 per cent of GDP. The measures include:

  • 150,000 public sector jobs cut by 2015.
  • €300 million ($397 million) in pension cuts, equal to a 20% cut in monthly pensions, applied only to the portion that exceeds €1,300 ($1,700).
  • 22% cut in minimum wage to €560 ($741) a month (32% cut for those under 25).
  • Privatization of land, utilities, ports, airports, mining rights and other state assets to raise €19 billion ($25 billion).
  • €3.38 billion ($4.47 billion) increase in taxes.
  • 5% cut in social security contributions
  • Opening up of labour market and lifting of restrictions on professions such as health care workers, stevedores, accountants, tourist guides and real-estate brokers.

Greece is now in its fifth year of recession. By the end of 2011, industrial output had fallen 11.3 per cent from a year ago, GDP fell 6.8 per cent (non-seasonally adjusted) and unemployment had risen to 20.9 per cent, the highest it has ever been.

CBC Radio's The Sunday Edition spoke with Queen's University professor Grant Amyot, a specialist in European politics and economic policy, about the origins and implications of the Greek crisis in June 2011. The interview has been edited and condensed.

Why does Greece scare bankers and borrowers all over the world?

International Monetary Fund managing director Christine Lagarde outlining a 130 billion euro bailout programme for Greece in Brussels on Feb. 21, 2012. (Yves Herman/Reuters)

If Greece were to default on its national debt, the lenders that have advanced it the funds would then be out of pocket by several billion dollars. The most important lenders to the Greek government are banks in other eurozone countries, particularly France and Germany. And this could unleash a kind of domino effect, which is what the financial markets and commentators are most afraid of.

The most important effect, though would be a general loss of confidence in the ability of banks and other financial institutions in general to honour their debts and repaying their obligations. There could be a freezing up of credit.

Has being part of the eurozone helped them or hurt Greece?

In general, it hasn't helped because the Greek economy is very different than the economies of the core countries of the eurozone, such as Germany. When Germany is booming, Greece still lags behind. When Greece needs a low value currency to help it export its goods cheaply, when it needs very low interest rates to help it stimulate its economy, other countries in the eurozone don't. And because there's only one currency that they all share, this currency can't be adjusted in value to suit the needs of Greece.

How did Greece wind up so badly in debt?

The Greek economy was very badly hit by the global financial crisis three years ago. It was already weak in the sense that it had a huge government debt. The eurozone was designed to have a one-size-fits-all currency and a one-size-fits-all interest rate and therefore when a real financial crisis occurred, the Greek economy was put in a position where it couldn't adjust.

The fact that Greece had such a large government debt already is really what's made it the first eurozone country to suffer from the effects of the financial crisis. And that has to do with Greece's political system, in which political parties have used patronage, subsidies and government jobs as ways of buying votes. In fact, the biggest way of buying votes is to tolerate tax evasion on a massive scale in Greece.

What role has the global financial system played in Greece's woes?

A protester holding a Greek flag shouts slogans during a rally in front of the parliament in Athens on Feb. 18, 2012. Public anger has been boiling over throughout the debt crisis as the government adopts ever tougher and wide-ranging austerity measures in order to secure international loans. (Yiorgos Karahalis/Reuters)

All the banks and other institutions that lent money to the Greek government between 2001 and 2008 were extremely imprudent. They should have realized that the Greek government had a very high debt, that there was a danger that if it hit any bump on the economic road it wouldn't be able to service it properly, but because Greece was in the eurozone, they just believed that it couldn't fail, it couldn't default. And so Greece was able to borrow money at almost the same low rate as Germany or France, even though they had this huge debt.

None of the financial institutions or the rating agencies picked up on it. These financial institutions do bear a lot of the blame for what's happened in Greece. After all, to make a bad loan, you need two parties — a borrower and a lender. From a moral point of view, they ought to be among those who pay.

Why are ordinary Greeks angry?

Ordinary Greeks are understandably outraged that they're being forced to pay for the imprudence of their government and international banks and financial institutions. Most of them didn't benefit from the excessive government deficits of the past 10 or 20 years. Certain privileged groups certainly did — and some of them are out there in the streets as well — but the majority of those demonstrating are youth who have less and less prospect of getting a job, pensioners who've seen their pensions cut, workers in the state sector who've seen their salaries cut.

Didn't a lot of ordinary people reap benefits from those deficits, like guaranteed pensions at a fairly young age? Was Greece subsidizing its own destruction?

There's a widespread image of Greeks as lazy people who were living off the state, which was in turn living off the foreign lenders. But, in actual fact, Greeks work nearly 50 per cent more hours per year than Germans. And while the official retirement age was 58 and certain groups were even allowed to retire earlier, the average retirement age for Greek workers is higher than the average retirement age for German workers.

A young man throws a stone at riot police during a demonstration in Athens against an earlier round of austerity measures on June 28, 2011. Unemployment among young people in Greece is around 48 per cent. (Petros Karadjias/Associated Press)

It's true that certain groups benefited disproportionately, but you can't generalize and say on average the Greek people were benefiting from this kind of spendthrift policies.

Which country would be the next in a row of dominoes?

Possibly Ireland. It has the largest public debt after Greece. The Irish government spent so much money propping up its banks, which were over-extended. After that, it's Portugal, which is in a similar situation to Greece. Not as serious, but going in the same direction.

How could Canada be affected if Greece defaults?

Canadian banks have a very small exposure to Greece. It's about $8 billion, which in these calculations is not too great. But they do have loans out to the big European banks that could be affected by a Greek default.

The major effect is probably one of confidence. In some ways these predictions that a Greek default will undermine confidence are self-fulfilling. As analysts and rating agencies have been telling us for months, that a Greek default will undermine confidence, then when it happens, investors will panic.