This is most likely going to be a lengthy article. I’ll try
to keep it interesting with pictures, videos and metaphors that
hopefully are funny or clarify the issue. But I make no
promises, because the issues are not simple.
But, even so;
here’s a TL;DR.
TLDR: The Greek economy is fucked because
of persistent Government overspending since the GFC in 2008.
See, here’s the thing. Greece has just voted ‘no’ to the
terms of an international bailout (okay, not completely. At the
time of writing there were still some ballots to be counted. But
it was at 38% yes / 62% no. So I doubt there would be any
gameshifting votes left. There’s probably only like ten still
uncounted). But the issue is; they kind of need it. The ‘Syriza’
party were campaigning for a ‘no’ vote because the bailout terms
were humiliating. But with Greece in the position it’s in (we’ll
get there, don’t worry – I’m not going to assume that is
knowledge you already have. Fuck, I didn’t even know half of the
stuff before researching this. I’ve also included my sources).
So let’s start at the beginning.
The History
Global Recession: This issue is not a new one. It’s been
floating around since the global recession of 2008. Actually,
I’ll start there. The global recession of 2008 started in the
USA because banks and other financial institutions (probably not
so much banks, but y’know) were giving mortgages to people that
could not meet the repayment terms for those mortgages. And
banks or other financial institutions immediately invest money
that has been invested in them elsewhere; even if they don’t
have the physical cash to show for any of these transactions. If
you’re still with me, you may begin to understand the issue.
When the people began to default on their mortgage payments that
they didn’t have the means to meet, the banks began to have to
default on their repayments too. Because they’d never actually
had the cash they’d invested anyway. Then the cash problems
flowed through to those investments, then the investments on
those investments, and so on. Right, we can now move on to
Greece. After this break.
Economic forecasters assume everything, except
responsibility. Economists are people who are too smart for
their own good and not smart enough for anyone else's.
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Greece 2010 - 2014: In April 2010, there was news of adverse deficit
and debt data in Greece for 2008 and 2009. The same data also
revealed that Greece had been hit with three distinct recessions
(Q3-Q4 2007, Q2-2008 until Q1-2009, and Q3-2009 until then the
current time). This corresponded with credit rating agencies
lowering Greece’s debt status to ‘junk
bond’ status; below investment grade, as they found there
was growing risk that Greece would not be able to repay its
debts (clap clap clap). In May of that year, a bailout loan was
advanced to Greece in order to rescue it from the default. Then
a second bailout loan and adjustments to the terms accepted by
all creditors to Greece. This at least helped to bring the Greek
interest and debt rates down (a bit) as well as allowed Greece
to access the private lending market again, and lowering
unemployment, but a snap election in December 2014 caused a
fourth recession which made the private lending market
inaccessible again. As can be seen, interest and debt rates then
spiked again, and undid everything that had been done in the
last few years.
A 2011 piece of topical comedy by John
Finnemore (found
https://www.youtube.com/watch?v=9KUcu5HdhYI) analogises this
with respect to the whole Euro as up to 2011 (so including the
then-current plight of Ireland, Spain and Portugal – who have
largely recovered since). We’ll move on to the current situation
after some more jokes; On the first day, God created the sun. In
response, the Devil created sunburn. On the second day, God
created sex. In response, the Devil created marriage. On the
third day God created an economist. This was a tough one for the
Devil, but, in the end and after a lot of thought, he created a
second economist.
They say that Christopher Columbus was the
first economist. When he left to discover America, he didn't
know where he was going; when he got there he didn't know where
he was; and it was all done on a government grant.
The current problem
Greece 2015): This fourth recession continued into 2015 and
is exacerbated by a left-wing government that doesn’t want to
follow the austerity measures laid out by the Euro. Due to the
panic caused by the expiry of the current bailout plan’s terms,
Greeks frantically began withdrawing money as well as major cuts
to the standard of living because of electricity and hot water
cuts in parts of Greece. Basically, it’s not a pretty picture on
any level; economic or non-economic. So the Greek government
held a referendum on whether or not to renegotiate the bailout
terms; the net result of which was, seemingly, a ‘no’ vote.
The causes and solutions
The present crisis is at least in part attributed to the fact
that Greece joined the Euro in 1999 despite having a
significantly higher debt rate than the Euro average at even
that time (and it’s only got worse), see the diagram above. The
Government debt level has risen consistently, as well as the GDP
level being unsatisfactory. In fact it is argued that the only
way Greece can be certain to pay its debts is that Growth may
increase (so increase GDP).
Basically the Greek recession is
caused by persistent overspending causing budget deficits; as
well as Trade deficits. As well as all of this, the Greek people
and Government still seem to have a misplaced notion of dignity
in the matter, when in fact they really do not. This can be
evidenced by the current Government calling the terms
‘humiliating’. This is not the time for dignity and honour (or
even democracy in electing such a Government) to take precedence
over the fiscal validity of the country (and Union) as a whole.
So they held a vote, the result of which was negative, as said
many times before. The possible outcomes of this vote will now
be discussed.
If Yes: Although it seems unlikely this will happen
now, it is still possible and certainly worth considering. So
that’s what I’ll do here. This would most likely lead to a
bankruptcy within the Euro, and is not as good an option as it
perhaps seems. The Greek government would not be able to handle
a bankruptcy and the ECB would be unlikely to support them given
the circumstances that led to this bankruptcy. Sooner or later,
this would lead also to a Grexit.
Of course, they would try
to stall this for as long as possible by extending maturities of
the loand or lowering interest rates … but it would likely still
happen anyway.
If No: The vote looks to be swinging this way, so I’ll
discuss this too. A no vote would almost certainly mean Greece
is forced to leave the Euro (a Grexit). This would cause banks
to collapse in much the way they have begun to already as
creditors would withdraw Euros, not knowing if they would be
able to withdraw them later and at what rate. This would cause
the new Drachma to be very, very weak, and imports would be
very, very expensive giving the Greeks less purchasing power.
It’s also possible that more drachmas would be printed causing
inflation and making the drachma worth even less.
There really is no hope for Greece as they seem screwed no
matter what they do. Unless they use either solution to generate
Growth. Perhaps they could commission most of the country’s
workforce to build a giant wooden horse …
Source List:
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http://www.cnbc.com/id/102795653
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http://www.bbc.com/news/world-europe-33403665