| I’ve been following the Greek debt crisis, but it seems like every day there’s a new development. As such, I wanted to take some time to step back and get some perspective on the unfolding of this crisis. I've outlined some of the major events listed by the NY Times as the major leading events culminating in this crisis. Some terminology: Austerity: In economics, the policy of reducing government budget deficits by means such as: spending cuts, tax increases, crackdowns on tax evasion. Austerity is often undertaken to demonstrate to government's creditors and to credit rating agencies that they are taking active measures to close the gap between revenues and expenditures. One economic theory claims austerity disproportionally hurts middle and low income class. European Central Bank (ECB): the central bank for Europe's currency, the euro. The ECB works to maintain the euro's purchasing power for the 19 European Union countries that have adopted the euro since 1999. International Monetary Fund (IMF): an organization of 188 countries that works together to secure global financial stability and cooperation and to promote high employment and sustainable economic growth. | Timeline: Greek Debt Crisis
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Greece's Gross Domestic Product (GDP). Once sailing, Greece's GDP has now declined about 30% since 2008.
National Debt by Country. Debt as a percent of total GDP. As can be seen from the graph, many countries carry a substantial national debt relative to GDP. However, this graph is from 2012, and the situation has only devolved for Greece. It is now estimated that Greece's debt is 180% of its total GDP. As you can see, in July 2012, and over the last several years, the overriding sentiment was to keep the eurozone together at any cost. A recent article in the NY Times likened the prospective response to Greece defaulting and exiting the eurozone to the Lehman Brother's bankruptcy: an almost apocalyptic event that had catastrophic rippling events. It was this fear that has led to numerous negotiations, renegotiations, and resolutions. However, the situation is only getting worse, and both sides are starting to get fed up, thus shifting the possibility of a Greek exit from impossible to within the realm of the possible.
Greek citizens are rightly upset because they have been under the most extreme austerity conditions that any industrialized country has suffered since the Depression. Most of the money that Greece has received has gone straight to creditors to repay loans. To compound matters, Greece's economy has just continued to decline: GDP has fallen by 30% since 2008, which drastically underperforms other nations, as can be seen in the above image. Usually when the IMF lends money to a financially troubled country, austerity measures are paired with relief measures such as debt write-downs and currency devaluation. However, no such relief occurred in Greece.
devaluation: downward adjustment on a country's currency (relative to other currencies.) Devaluation is a deliberate action by the government often used to combat trade imbalances: the nation's exports become less expensive, and thus more attractive on the global market. In addition, imports become more expensive, which thus favors domestic industries. However, such moves may aggregate demand and lead to inflation. Read more at Investopedia.
debt write downs: reducing the book value of a debt. Banks agreed to a 50% write down in October 2011, but my understanding is write downs have done little to provide relief for the people.
However, while Greek leaders and citizens feel they have been treated unjustly, European leaders also will rightly explain that they adjusted repeatedly to accommodate the Greeks, and that they could not just grant Greece exceptions it would not have awarded other countries. The IMF will also explain that they would have agreed with any sound plan that Greece and Europe had drawn up.
So now what? Greece must come up with a loan payment of $1.8 billion to the International Monetary Fund by Tuesday, June 30th to avoid a default. If a resolution isn't reached, there just may be a Greek exit. The speculations on the consequences of a Grexit take on quite a range. Lawrence Summers paints a dire picture for the future if Greece were to exit, forecasting imminent demise. He claims the economic situation will get far worse in Greece until the crisis culminates in leaving the nation as a failed state. If this happens, Europe will collect far less debt than it would have if Greece's debt had been restructured. In addition, he forecasts a migration out of Greece will strain budgets of other European countries, while Russia will gain a foothold in Greece. This opinion seems a little drastic to me, but USA Today also forecasts a rather dismal future following a Grexit, agreeing that Greece's economy will detract. This article forecasted Greek depositors will have trouble getting money out of banks, government services will become scare, and voters may have to find new leaders. Part of this forecast is already playing out: Greek banks are closed until July 6th, although some ATMS will be reopen and allow customers to me €60 (£42; $66) withdrawals.
However, not all predictions are so apocalyptic. Paul Krugman concedes that a sharp devaluation will likely spike inflation, but doesn't think hyperinflation must follow. He argues that Greece runs on a large cyclically adjusted primary surplus (or the surplus if the country was running at full employment). In other words, Greece is very financially efficient, approaching it's surplus potential better than any other eurozone country. Neil Irwin similarly contends less catastrophic consequences will follow a Grexit. One of his primary arguments is that Greek debt is overwhelmingly held by European governments and the Greek central bank, rather than private banks, so a default would not cause a continent-wide banking collapse.
One can't help but think about Argentina, which defaulted on nearly $100 billion in sovereign debt in 2001, the largest default at the time. Like Greece today, Argentina had been under harsh austerity measures and had borrowed heavily from the IMF. When Argentina defaulted on repayment targets, the IMF held payments. A bank run led the government to freeze deposits, which in turn set off riots and violent confrontations. Argentina sharply devalued its currency, the peso, and the country plunged into a depression ripe with staggering unemployment and political unrest. While Argentina has since been able to repay the IMF, the economy benefited from a somewhat fortuitously timed event: commodity export demands from Brazil and China surged in the early 2000s, and thus soybean meal, corn, and soybean oil shipments effectively stabilized Argentina's economy at a critical point. (The commodity boom is over, but Brazil and China still import heavily from Argentina.) There is no such guarantee Greece would fare so well, and moreover, Greece has been quite dependent on imports. Many point to Argentina as a cautionary tale, arguing that Greece's default would be much, much worse.
Although a negotiation will likely leave all parties dissatisfied, it still seems more positive than the results each side would experience following a Greek default and exit. We shall soon see.
Greek citizens are rightly upset because they have been under the most extreme austerity conditions that any industrialized country has suffered since the Depression. Most of the money that Greece has received has gone straight to creditors to repay loans. To compound matters, Greece's economy has just continued to decline: GDP has fallen by 30% since 2008, which drastically underperforms other nations, as can be seen in the above image. Usually when the IMF lends money to a financially troubled country, austerity measures are paired with relief measures such as debt write-downs and currency devaluation. However, no such relief occurred in Greece.
devaluation: downward adjustment on a country's currency (relative to other currencies.) Devaluation is a deliberate action by the government often used to combat trade imbalances: the nation's exports become less expensive, and thus more attractive on the global market. In addition, imports become more expensive, which thus favors domestic industries. However, such moves may aggregate demand and lead to inflation. Read more at Investopedia.
debt write downs: reducing the book value of a debt. Banks agreed to a 50% write down in October 2011, but my understanding is write downs have done little to provide relief for the people.
However, while Greek leaders and citizens feel they have been treated unjustly, European leaders also will rightly explain that they adjusted repeatedly to accommodate the Greeks, and that they could not just grant Greece exceptions it would not have awarded other countries. The IMF will also explain that they would have agreed with any sound plan that Greece and Europe had drawn up.
So now what? Greece must come up with a loan payment of $1.8 billion to the International Monetary Fund by Tuesday, June 30th to avoid a default. If a resolution isn't reached, there just may be a Greek exit. The speculations on the consequences of a Grexit take on quite a range. Lawrence Summers paints a dire picture for the future if Greece were to exit, forecasting imminent demise. He claims the economic situation will get far worse in Greece until the crisis culminates in leaving the nation as a failed state. If this happens, Europe will collect far less debt than it would have if Greece's debt had been restructured. In addition, he forecasts a migration out of Greece will strain budgets of other European countries, while Russia will gain a foothold in Greece. This opinion seems a little drastic to me, but USA Today also forecasts a rather dismal future following a Grexit, agreeing that Greece's economy will detract. This article forecasted Greek depositors will have trouble getting money out of banks, government services will become scare, and voters may have to find new leaders. Part of this forecast is already playing out: Greek banks are closed until July 6th, although some ATMS will be reopen and allow customers to me €60 (£42; $66) withdrawals.
However, not all predictions are so apocalyptic. Paul Krugman concedes that a sharp devaluation will likely spike inflation, but doesn't think hyperinflation must follow. He argues that Greece runs on a large cyclically adjusted primary surplus (or the surplus if the country was running at full employment). In other words, Greece is very financially efficient, approaching it's surplus potential better than any other eurozone country. Neil Irwin similarly contends less catastrophic consequences will follow a Grexit. One of his primary arguments is that Greek debt is overwhelmingly held by European governments and the Greek central bank, rather than private banks, so a default would not cause a continent-wide banking collapse.
One can't help but think about Argentina, which defaulted on nearly $100 billion in sovereign debt in 2001, the largest default at the time. Like Greece today, Argentina had been under harsh austerity measures and had borrowed heavily from the IMF. When Argentina defaulted on repayment targets, the IMF held payments. A bank run led the government to freeze deposits, which in turn set off riots and violent confrontations. Argentina sharply devalued its currency, the peso, and the country plunged into a depression ripe with staggering unemployment and political unrest. While Argentina has since been able to repay the IMF, the economy benefited from a somewhat fortuitously timed event: commodity export demands from Brazil and China surged in the early 2000s, and thus soybean meal, corn, and soybean oil shipments effectively stabilized Argentina's economy at a critical point. (The commodity boom is over, but Brazil and China still import heavily from Argentina.) There is no such guarantee Greece would fare so well, and moreover, Greece has been quite dependent on imports. Many point to Argentina as a cautionary tale, arguing that Greece's default would be much, much worse.
Although a negotiation will likely leave all parties dissatisfied, it still seems more positive than the results each side would experience following a Greek default and exit. We shall soon see.
Sources:
1. BBC: Greek Debt Crisis: Banks to Remain Shut all Week
2. IMF Website
3. ECB Website
4. NY Times: Greece No Closer to a Deal as Debt Deadline Nears
5. NY Times: The Upshot: Is Greece Lehman Brothers, or is it Radio Shack?
6. Financial Times Opinion: Greece is Europe's Failed State in Warning
7. The Guardian: One Way or Another, a Greek Writedown will Happen
8. BBC: Greek Debt Crisis: Banks to Remain Shut All Week
9. USA Today: Greek Debt Crisis: Everything you Need to Know
10. NY Times Blog: Conscience of a Liberal: Avoiding Apocalypse
11. NY Times: If Greece Defaults, Imagine Argentina, but Much Worse
1. BBC: Greek Debt Crisis: Banks to Remain Shut all Week
2. IMF Website
3. ECB Website
4. NY Times: Greece No Closer to a Deal as Debt Deadline Nears
5. NY Times: The Upshot: Is Greece Lehman Brothers, or is it Radio Shack?
6. Financial Times Opinion: Greece is Europe's Failed State in Warning
7. The Guardian: One Way or Another, a Greek Writedown will Happen
8. BBC: Greek Debt Crisis: Banks to Remain Shut All Week
9. USA Today: Greek Debt Crisis: Everything you Need to Know
10. NY Times Blog: Conscience of a Liberal: Avoiding Apocalypse
11. NY Times: If Greece Defaults, Imagine Argentina, but Much Worse
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