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Greek lessons


Published: Jun 21, 2012

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Greece remains in a state of economic chaos due to its debt problems.  A new “pro-bailout” coalition government has been formed, which, for the time being, has prevented a probable disruption of global financial markets and at the same time saved the country from both bankruptcy and expulsion from the European common currency arrangement.

If Greece were to leave the European currency arrangement it would no longer be able to use the euro as the official Greek currency and it would signal to the world that Europe was unable to effectively manage the debt crises of its membership.

The Greek crisis is essentially a sovereign debt crisis where the debt-to-GDP ratio has exceeded 100 percent; its deficit had risen to 12.7 percent of GDP and the unemployment rate is amongst the highest in Europe.

Although the global financial crisis of 2008 adversely affected the Greek economy (revenue from its two major economic sectors, tourism and shipping, fell by 15 percent in 2009) questionable policy choices by the Greek government may have exacerbated the problem.

Much of the borrowed money by the Greeks was used to purchase unproductive assets and to fund generous programs such as the pension plan for Greek public service workers who can now retire at age 62 – the youngest retirement age in Europe.  Additionally, it was revealed that the Greek government had been issuing misleading economic statistics and had paid millions of dollars to a number of international banks to hide the true level of government borrowing.

If Greece is unable to pay its bondholders and the country defaults on its debt the repercussions could be worldwide, as international banks which hold the debt and other financial institutions which have insured the debt are forced to take losses and would have to drastically curtail lending activity.

Any reduction in lending would put a strain on any efforts by governments everywhere to stimulate their economies which in turn would put pressure on private companies and restrain any attempts at employment expansion.  Higher joblessness would lead to less disposable income placing a lid on consumer spending.  Countries, particularly developing countries like The Bahamas which are highly dependent on consumers from the developed countries, might experience another round of recessionary conditions similar to those faced in the 2008/09 period.

The European Union (EU) and the IMF (International Monetary Fund) have developed a bailout package for Greece in an attempt to ward off what could possibly lead to a second global financial crisis.  That plan, however, calls for unpopular austerity measures, negotiations with private lenders to cut their debt in half, privatization of some state-owned utility companies and downsizing of the public sector.

The Greek population is furious and blames the government for the crisis and argues that they, the people, should not have to bear the cost of the bailout; the streets are filled with protesters.  It is against that background that the Greek authorities must get agreement to proceed with the bailout plan in order to obtain funding from the EU and the IMF to settle its outstanding debts.

There is a clear and profound lesson in this Greek tragedy.  Simply put, countries both large and small must strive to live within their means; resist the temptation to pile on the public debt; and above all, keep the people informed using accurate data in a transparent and timely manner.

 

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