Economic Growth & Development
The Crisis In Greece
The economy of Greece is the 34th or 42nd largest in the world at $299 or $304 billion by nominal gross domestic product or purchasing power parity respectively, according to World Bank statistics for the year 2011. Additionally, Greece is the 15th largest economy in the 27-member European Union. In terms of per capita income, Greece is ranked 29th or 33rd in the world at $27,875 and $27,624 for nominal GDP and purchasing power parity respectively.
The Greek government-debt crisis is one of a number of current European sovereign-debt crises. In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany.
The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets practically were no longer available for Greece as a funding source. On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points: 1. Implementation of austerity measures, to restore the fiscal balance. 2. Privatisation of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable. 3. Implementation of outlined structural reforms, to improve competitiveness and growth prospects. In January 2010 the Greek Ministry of Finance highlighted in their Stability and Growth Program 2010 these five main causes for the significantly deteriorated economic results recorded in 2009 (compared to the published budget figures ahead of the year.
GDP growth rates: After 2008, GDP growth rates were lower than the Greek national statistical agency had anticipated. In the official report, the Greek ministry of finance reports the need for implementing economic reforms to improve competitiveness, among others by reducing salaries and bureaucracy, and the need to redirect much of its current governmental spending from non-growth sectors (e.g. military) into growth stimulating sectors.
Government deficit: Huge fiscal imbalances developed during the past six years from 2004 to 2009, where "the output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues." In the report the Greek Ministry of Finance states the aim to restore the fiscal balance of the public budget, by implementing permanent real expenditure cuts (meaning expenditures are only allowed to grow 3.8% from 2009 to 2013, which is below the expected inflation at 6.9%), and with overall revenues planned to grow 31.5% from 2009 to 2013, secured not only by new/higher taxes but also by a major reform of the ineffective Tax Collection System.
Government debt-level: Since it had not been reduced during the good years with strong economic growth, there was no room for the government to continue running large deficits in 2010, neither for the years ahead. Therefore, it was not enough for the government just to implement the needed long term economic reforms, as the debt then rapidly would develop into an unsustainable size, before the results of such reforms were achieved. The report highlights the urgency to implement both permanent and temporary austerity measures that - in combination with an expected return of positive GDP growth rates in 2011 - would result in the baseline deficit decreasing from €30.6 billion in 2009 to only €5.6 billion in 2013, finally making it possible to stabilize the debt-level relative to GDP at 120%...