greece debt crises - aditya aima

Greece Debt Crises: Build up to the Bust

Presented By:

Aditya Aima, 140041209

In partial fulfilment of the:

Full Time Master of Business Administration

Submitted For:

Business Mastery Project

Presented To:

Dr David Edelshain

Faculty of Management

Cass Business School

City University London

Date: 1st Sep 2015

Word Count: 13,292


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Table of Contents

TABLE OF CONTENTS ...................................................................................................................................... 2

LIST OF FIGURES ............................................................................................................................................... 4

LIST OF TABLES ................................................................................................................................................. 4

LIST OF CHARTS ................................................................................................................................................ 4

LIST OF ABBREVIATIONS ............................................................................................................................... 5

EXECUTIVE SUMMARY .................................................................................................................................... 6

1. PROJECT INTRODUCTION .......................................................................................................................... 8

2. EU TO EURO – 20 YEARS ............................................................................................................................ 9 2.1 1980-‐1985: MACROECONOMIC IMBALANCES AND STAGFLATIONARY TRENDS ............................................ 12 2.2 1986-‐1987 STABILIZATION PROGRAM .................................................................................................................. 14 2.3 1988 -‐ 1995 – INTERNAL AND EXTERNAL IMBALANCES .................................................................................... 15 2.4 THE MAASTRICHT TREATY ......................................................................................................................................... 16

3. EURO – 2000 TO 2008 .............................................................................................................................. 21 3.1 GREEK LOOTING – SCANDALS .................................................................................................................................... 25 3.1.1 Greek Olympics ...................................................................................................................................................... 25 3.1.2 J P Morgan Bond Scandal ................................................................................................................................. 25 3.1.3 Siemens Scandal ................................................................................................................................................... 25 3.1.4 The EOT: Greek Tourist Organization ........................................................................................................ 26 3.1.5 800,000 House without Planning Permission .......................................................................................... 26 3.1.6 Other Scandals ...................................................................................................................................................... 26

3.2 PROBLEMS OF GREEK ECONOMY ............................................................................................................................... 27 3.2.1 Enviroment for Investment and Scaling of Business ............................................................................ 27 3.2.2 Public Sector: Overinflated and Inefficient ............................................................................................... 28 3.2.3 Rigid and narrow use of Human Resources .............................................................................................. 30 3.2.4 Legal and Judicial System ................................................................................................................................. 31 3.2.5 Informality .............................................................................................................................................................. 31

4. THE BEGINNING OF THE FALL ............................................................................................................... 33 4.1 DISASTER MANAGEMENT ........................................................................................................................................... 33 4.1.1 May 2010 ................................................................................................................................................................. 33


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4.1.2 March 2012 ............................................................................................................................................................. 35 4.1.3 Current Scenario .................................................................................................................................................. 35 4.1.4 The Third Bailout Package .............................................................................................................................. 36

5. GREECE – RISK ANALYSIS ........................................................................................................................ 40 5.1 FACTORS DETERMINING SOVEREIGN DEBT RISK ................................................................................................... 45 5.1.1 Degree of Indebtness .......................................................................................................................................... 45 5.1.2 Pension/Social Commitments ......................................................................................................................... 46 5.1.3 Revenue/Inflow to Government ..................................................................................................................... 48 5.1.4 Stability of Revenues ........................................................................................................................................... 50 5.1.5 Political Risk ........................................................................................................................................................... 55 5.1.6 Implicit backing from other entities ............................................................................................................ 55

5.2 CREDIT DEFAULT SPREAD .......................................................................................................................................... 56

6. CONCLUSION ................................................................................................................................................ 59 6.1.1 Continue as Part of the Euro ........................................................................................................................... 63 6.1.2 Grexit : Adopt Drachma ..................................................................................................................................... 64

6.2 IMPACT OF GREECE EXIT ............................................................................................................................................. 66

7. RECOMMENDATIONS ................................................................................................................................ 68

REFERENCE: ...................................................................................................................................................... 69


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List of Figures

FIGURE 1 GDP GROWTH FROM 1981-‐2000 .......................................................................................................................................... 10 FIGURE 2 GREECE GOVERNMENT DEBT TO GDP 1990-‐2015 ............................................................................................................ 11 FIGURE 3 INFLATION RATE 1981-‐2015 ................................................................................................................................................. 12 FIGURE 4 GREECE CONSUMPTION AND INVESTMENT VERSUS EUROZONE ........................................................................................... 22 FIGURE 5 GREECE DEBT BURDEN AND CONSUMER LENDING BEFORE THE CRISIS COMPARED TO EUROZONE ............................... 23 FIGURE 6 BREAKUP OF PUBLIC EXPENDITURE ........................................................................................................................................ 24 FIGURE 7 BREAKUP OF TOTAL MANUFACTURING WORKFORCE ............................................................................................................. 27 FIGURE 8 BENCHMARKING THE GREEK PUBLIC SECTOR ........................................................................................................................ 29 FIGURE 9 PUBLIC SECTOR COMPARISON WITH EUROZONE ................................................................................................................... 30 FIGURE 10 GREECE CREDITORS ................................................................................................................................................................. 39 FIGURE 11 PAYMENT TIMETABLE 2015 ................................................................................................................................................. 42 FIGURE 12 DEBT TO GDP GREECE 2006-‐2014 .................................................................................................................................... 46 FIGURE 13 UNEMPLOYMENT RATE EUROZONE ...................................................................................................................................... 47 FIGURE 14 AGE OF FIRST PENSION EUROZONE ...................................................................................................................................... 48 FIGURE 15 GREECE TOURISM CONTRIBUTION TO GDP ......................................................................................................................... 51 FIGURE 16 BREAKUP OF TOURISM CONTRIBUTION 2009-‐2015 ........................................................................................................ 51 FIGURE 17 COUNTRIES WITH THE LARGEST SHIPPING FLEET ............................................................................................................... 52 FIGURE 18 CDS SPREADS GREECE 2006-‐2010 .................................................................................................................................... 57 FIGURE 19 GREECE CDS SPREADS AUGUST 2015 ................................................................................................................................. 58 FIGURE 20 EUROZONE CONTRIBUTION TO GREECE BAILOUTS .............................................................................................................. 66

List of Tables

TABLE 1 HARMONIZED UNEMPLOYMENT RATES, EUROSTAT 2008 .................................................................................................... 31 TABLE 2 PAYMENT SCHEDULE GREECE .................................................................................................................................................... 40 TABLE 3 DEFAULT SUMMARY ..................................................................................................................................................................... 44 TABLE 4 GREECE GOVERNMENT REVENUE 2006-‐2014 ...................................................................................................................... 49 TABLE 5 RECEIPTS FROM SHIPPING 2000-‐2014 .................................................................................................................................. 53 TABLE 6 RISK ANALYSIS SNAPSHOT .......................................................................................................................................................... 59

List of Charts

CHART 1 BUDGET DEFICIT AS % OF GDP ................................................................................................................................................ 10


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List of Abbreviations

Abbreviation Full Form

GDP Gross Domestic Product

EU European Union

PASOK Panhellenic Socialist Movement

OECD Organisation for Economic Cooperation and Development

FDI Foreign Direct Investment

ECU European Currency Unit

EMU Economic and Monetary Union

ECB European Central Bank

OTE Greece National Telecom

VAT Value Added Tax

CAGR Compounded Annual Growth Rate

UK United Kingdom

IMF International Monetary Fund

SBA Stand by arrangement

ESM European Stability Mechanism

PSI Private Sector Involvement

EFSF European Financial Stability Facility

SMP Securities Market Program

CDS Credit Default Spread

ELA Emergency Liquidity Assistance


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Executive Summary

Greece is a country that has a rich history and has been an institution of pride for the Euro

Zone. This report gives a detailed account of the debt crises in Greece and the possible

solutions that could help to avoid default. The current state of the Greece is due to number of

reasons: high corruption, high tax evasion, red tapism, overinflated public sector, excessive

borrowing, high unemployment and poor business environment.

To be able to understand the current crises in detail we begin with analysing the economic

growth and political environment of Greece from the time they joined the European Union.

As a country they had witnessed high growth and low inflation till the late 1970’s and from

then on they have seen various periods of erratic growth. This period was marked by high

inflation and low growth

The next part of the report looks at the growth of Greece once they joined the Euro. During

the period of 2000-‐2008 Greece was the fastest growing country in the Eurozone, their

growth was solely fuelled by the high borrowing at extremely low interest rates. There was

also an extensive debate at the time if the Government in Greece manipulated numbers to be

able to join the Euro.

We then move forward to the actually beginning of the crises and how the Euro zone had to

step in to save Greece from defaulting due to the fear of a contagion effect. We look at the

various bailout packages that were offered to Greece and also the contingency plans that

Euro zone members put in place in order to avoid a situation where other countries namely

Portugal, Spain and Italy would also default. I have also conducted the country risk analysis to

assess the risk of default for Greece based on their current fundamentals.

The last part of the report focuses on my recommendation to avoid the default by Greece

basis my research. I have drawn parallels to the debt crises of Argentina basis which I have

drawn conclusions. I would also like to point that towards my completion of this report

Greece underwent a political turmoil as the Prime Minister of Greece has resigned and has

called for a snap elections. Given that they are undergoing one of the major financial crises in

the history of Greece it would be highly beneficial to have a strong political leader who can


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guide them to overcome the mess of the huge unsustainable debt accumulated by the leaders

before them.


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1. Project Introduction

Greece is a country situated at the far south of the Balkan peninsula, combining the towering

mountains of the peninsula with over 1400 islands, with Crete being the largest. Greece has a

rich history, with the Greek civilization spreading from Greece to Egypt and the Afghanistan at

its peak. (Wikipedia, 2015). Greece has always been a matter of pride for Europe due to its high

cultural significance.

Greece is a capitalist economy with GDP of 182 Bn Euros (2013) and a GDP per capita of

16,491 Euro. (FocusEconomics | Economic Forecasts from the World's Leading Economists,

2015)

The top 2 sectors for the Greek economy are tourism, which contributed to 18% of the GDP.

(Theodora.com, 2015).

At the time of research the Greek economy has been in the news due to the unsustainable

amount of debt and near insolvency situation with debates over Grexit i.e. Greece exit from

the Euro. Will Greece be able to pay back its debt? Is being a part of EURO the most suitable

option? What are the alternatives for Greece? I will explore all possible options as we go

further in the report. The crises in Greece have a lot of similarities to the crises of Argentina

and hence I will draw certain references from that too.

Greece as a country has very high level of corruption (Red Tapism), over inflated public sector

and very high tax evasion, which is an obstruction for growth in any country. Between 2003

and 2007, Greece witnessed an average GDP growth of 4 per cent but went into recession in

the year 2009 due to world financial crises, which resulted in tightening credit conditions and

failure of the government to address growing fiscal deficit. As a result of which by 2013 the

Greek economy had contracted by 26% compared to 2007. (Theodora.com, 2015). To

understand the full extent of the crises i will explore the economic history of Greece in order

to understand what led to the situation that Greece has found itself in.


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2. EU to Euro – 20 years

The European Union (EU) emerged from the postwar initiatives at reconciliation and

partnership in Western Europe. The founding moment for the EU was the Schuman

Declaration. In a speech on 9th May 1950, the then Foreign minister of France, Robert

Schuman gave out the objectives for the European Union:

• All the member states of the European Union will never go to war.

• Promoting World Peace

• Unify Europe through a step-‐by step, including eastern Europe-‐ much of which was under

Communist control at the time

• Creating an international anti-‐cartel agency

• Creation of a single market community within the European Union for the free flow of goods

and services

(Manolopoulos, 2011)

Greece was the 10th country to join the EU in 1981. The period from the 1973 to 1995 saw

poor economic performance with the GDP growth in Greece slowing down to only on average

about 1.5 percent. The poor performance was mainly attributed to deteriorating economic

conditions in the period starting 1973. From the mid 1970’s the Greek’s ran large budget

deficits and a loose monetary policy, which resulted in a sharp acceleration in inflation, and

the high rates of wage inflation squeezed profit margins and weakened investment incentives.

From 1953 to 1973, the Greek economy enjoyed a period of high growth and low inflation,

followed by the period from 1973-‐1993, where the economy witnessed stagnation and

persistent and high inflation. (Bosworth and Kollintzas, 2001)

Amongst various reasons cited by scholars, the most important reasons for the poor

economic performance in Greece were believed to be the lifting of industrial protection

following the EU membership and the political cycle effect of a socialist party (PASOK) taking

over from the conservative party in 1981.


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Figure 1 GDP Growth from 1981-‐2000

(Greece GDP, 2015)

The macroeconomic environment totally collapsed in the Greece during the later half of

1970’s and remained like that in the 1980’s. The Greek government budget deficits went from

an average surplus of one percent of the GDP in 1960’s to an average of 9 percent in the

1980’s and peaked at 16 percent in the 1990. (Bosworth and Kollintzas, 2001)

Chart 1 Budget Deficit as % of GDP

(Source: Bloomberg)

-‐16

-‐14

-‐12

-‐10

-‐8

-‐6

-‐4

-‐2

0

Budget DeKicit % of GDP

Budget DeOicit % of GDP


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The late 1970’s and 1980’s also saw the emergence of strong cost pressures from labor

market as their bargaining power increased, and combined with control on many prices, led

to the real wages being raised well above the productivity and depressed margins severely.

The return on equity in Greek manufacturing sector fell from an average of 6 percent during

the period 1976-‐80 to -‐6.8 percent during the period 1982-‐86. (Bosworth and Kollintzas,

2001)

The fiscal position of Greece also deteriorated significantly during this period, the budget

deficit relative to GDP reached extremely high levels for an OECD member country, with the

public deficit rising from 27 percent of GDP in 1979 to 111.6 percent of GDP in 1993. This

coincided with a weak Drachma, which lost about 83 per cent of its value during this 15-‐year

period (Bank of Greece, 2001)

Figure 2 Greece Government Debt to GDP 1990-‐2015

(Greece Debt to GDP, 2015)

In order to tackle high inflation the Bank of Greece started using exchange rate as a nominal

anchor and by 1995 the exchange rate was explicitly adopted as an intermediate target

parallel to a monitoring range for the rate of growth of broad money (M3).


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Figure 3 Inflation Rate 1981-‐2015

(Inflation Rate, 2015)

It is important to look at the economic growth and policy reform initiated during this period

to understand how Greece was placed before the entered they Euro and what structural

reforms they initiated and the road blocks to them which caused the eventual debt crises.

For this sole purpose lets breakdown 1980-‐2000 into periods to get a snapshot of the

situation.

2.1 1980-‐1985: Macroeconomic Imbalances and Stagflationary Trends

The Greek’s adopted an accommodative macroeconomic policy during this period, to fuel the

growth of GDP. Despite the accommodative macroeconomic policies, the only impact it had

was on inflation, as real GDP fell during 1981 and inflation rose by 25 per cent in both 1980

and 1981. (Bank of Greece, 2001)

From the period of 1981 to 1984 the government followed accommodative macroeconomic

policies without any policy reforms towards tackling inflation. Such high levels of inflation not

only make the money less valuable but also cause the currency to depreciate causing the

imports to be more expensive. This would mean the Greek’s would had to pay more for the


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goods that they imported and with the oil price crises along the same time reflected in a

higher cost for the economy. The period also saw the rise in general government

consumption, primarily being pension expenditures and deficits of pension funds on the rise,

coupled with inadequate funding. To compensate partially for the large financing needs of the

public sector, the Bank of Greece restrained credit expansion to private sector by

implementing complex credit allocation systems. Thus, the private sector was increasingly

crowded out of the economic activity. (Bank of Greece, 2001)

Theoretically crowding out of the private sector hurts not only the efficient allocation of the

resources and employment opportunities but also impacts GDP growth.

Several other factors also impacted the growth of GDP during this period:

• According to a 1993 study undertaken at the OECD, “lack of transparency of the bureaucracy,

coupled with a lack of clear rules, exacerbated uncertainty” leading to low FDI in Greece

during the 1980’s. FDI contribute the growth in the any economy.

• The underdeveloped state of Greece’s infrastructure raised both the cost of business

transaction as well as hindered private investment.

• Public sector was heavily subsidized and not well managed.

• Regulations were introduced which were aimed at raising the purchasing power of workers

and protecting them from dismissal leading to labor market rigidities. This explains why the

strong bargaining power of unions in Greece and the low productivity. (Bank of Greece, 2001)

Greece’s economic performance further deteriorated in 1985. The lax fiscal stance was

coupled with sharp expansion in domestic credit and the money supply. As a result the

current account deficit increased from an annual average of 4 percent of GDP in the second

half of the 1970’s to 8 percent of GDP in 1985 and the ratio of external government debt to

GDP rose from 4.5 percent in the late 1970’s to 18 percent in 1985. (Bank of Greece, 2001)


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2.2 1986-‐1987 Stabilization Program

Looking at the deteriorating condition of Greek economy the government launched the

stabilization program with following being the measure:

• Drachma was devalued by 15 percent

• Introduced the temporary advance deposit for a wide range of imports

• Wage price index mechanism was modified to reflect projected inflation as opposed to past

rate of inflation

• Public sector borrowing relative to the GDP was to be reduced by 4 percentage point

• Tighter monetary policy established through a reduction in the growth of domestic credit and

gradual establishment of positive real interest rates for all borrowers (Bank of Greece, 2001)

This was primarily to reduce the high inflation rate in the economy at the same time

making sure that the Balance of Payment account doesn’t run too much into deficit as weak

currency only increases the cost of imports.

Yet nothing could have been done about the capital inflow because according to the

Impossible Trinity, only two of three objectives i.e. exchange rate management, inflation and

capital controls can be managed. The strategy of these objectives was centered on the firms

income policy, which was aimed at reducing the labor cost per unit of output and maintain

competiveness.

The European Communities with an ECU 1.75 billion loan, phased in two years, supported

the stabilization package. (Bank of Greece, 2001)

The program was a success as it led to the following results:

• During 1986 and 1987, the real wages fell and the business profitability rose for the first time.

• Public sector borrowing relative to GDP declined from 18 percent in 1985 to 13 percent in

1987.

• The current account deficit declined to 2 percent in 1987 from 8 percent of GDP in 1985


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Given the tight fiscal and monetary conditions to reduce inflation, the inflation rate reduced

from 20 percent in 1985 to 16 percent in 1987. But as we know that there is a direct

relationship between inflation and growth, the real GDP growth was 0.5 percent in 1986 and

fell by 2.3 percent in 1987 due to restraints in domestic demand. In other words, as the

supply of money reduced in the economy by 4 percent, it had an impact on wages that in turn

impacted the consumption in the economy.

2.3 1988 -‐ 1995 – Internal and External Imbalances

Some of the benefits of the stabilization package could be seen in 1988 and 1989 with

improvement in economic conditions, falling inflation, increase in export growth, falling

current account deficit but it was all short-‐lived. Also prolonged electoral uncertainty

associated with weak coalition government eroded confidence in Greece and further easing

of macroeconomic policies lead to loss of growth momentum. Inflation was again hovering

around the 15 percent mark and the public sector borrowing exceeded 18 percent of GDP in

1989. At the same time, the government debt increased to about 70 percent of GDP, which

imposed a heavy burden on the economy. (Bank of Greece, 2001)

At the end of 1990, the Greek government announced another adjustment program from

1991-‐93, with optimistic targets, notably being reduction in inflation to 8 percent and public

sector borrowing to 3 percent of the GDP. The European Communities agreed to support this

program with a balance of payment loan of ECU 2.2 billion over the 3 years. (Bank of Greece,

2001)

During this period Greece again experienced weak economic growth, the rise in the debt ratio

for the general government from 80 percent of nominal GDP in 1990 to about 110 percent of

GDP in 1993. There was a fall in inflation but that was primarily due to a weak domestic

demand.

In 1992, the Maastricht Treaty was signed which came into effect on 1st November 1993, and

provided a list of criteria’s that needed to be fulfilled for any country to join the Euro area.

Yet, at the beginning of the Stage 2 of Economic and Monetary Union (EMU) in Jan 1994,


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Greece found itself in serious divergence from the criteria’s of the Maastricht Treaty

particularly with regard to Public finances and inflation. (Bank of Greece, 2001)

2.4 The Maastricht Treaty

The Maastricht treaty defined the conditions for entry at least formally. The economic

rationale for EMU was that, by ruling out competitive devaluations, a major source of

economic instability, forces the countries to reform their labor markets and open up the

economies to greater competition. The Maastricht treaty set 5 rules of convergence that

every member had to comply by:

• The budget deficit must be kept below 3 percent of GDP

• Total public debt has to be less than 60 percent of GDP

• Inflation rate in any country should be within 1.5 percent of the three EU countries with the

lowest inflation

• Long term interest rates in any country must be within 2 percent of the three countries with

the lowest long term interest rates

• Exchange rates of any country must be kept within the normal fluctuations margins of

Europe’s Exchange Rate Mechanism. (Manolopoulos, 2011)

Greece did not meet these criteria’s and had set themselves the target of achieving the

necessary convergence by 1997. The adoption of a common currency and the common

monetary policy was seen by the Greeks as a means to end the long national mismanagement

of the monetary and fiscal policy. The Greek’s didn’t want to be left behind, in a second-‐class

group of countries. (Herz and Kotios, 2000). Acoording to Mundell (1961) “Optimal Currency

Area” , the closer a country is to the common currency, following are the benefits :

• larger is the bilateral trade with other members of the currency area relative to its total trade

• The external shocks that hit the country and the currency area are similar


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• Labor mobility is higher between the country and the rest of the countries in the currency

area

• Effective fiscal redistribution mechanism across the country and the rest of the countries in

currency area in response to an asymmetric shock. (Hardouvelis, 2007)

The problem with being in a common currency area is that you lose monetary independence.

For example if the domestic investment is to drop because of the pessimistic enterprenuerial

expectations, the domestic monetary authority cannot reduce the interest rates. Also if the

consumers go on a borrowing spree, driving up the aggregate demand resulting in the

economy overheating, the monetary authorities can only use regulatory tools to contain the

excitement, but not the interest rate.

After having failed to converge, due to the criteria’s listed above in 1998, Greeks in another

attempt to converge with the criteria requested for a re-‐examination in 2000. After carefully

monitoring the then situation in Greece, the ECB made the following observations :

• Average Inflation in Greece was in the year 2000 was 2% which lower than the reference

value.

• The government deficit had fallen to 1.6 percent of GDP which was below the reference value

of 3 percent. The government debt ratio was 104.4%, which was still higher than reference

point of 60%, although it had reduced by 6.9% since 1996.

• Greece had participated in the Exchange Rate Mechanism for atleast 2 years without any

severe tensions. The Drachma was revalued by 3.5% in Jan 2000.

• Greece’s nominal long term interest rate was 6.4% , which was below the reference value.

(Banque de France, 2001)

It was important to look at the economic build up to joining the Euro for Greece, as it clear

enough that the Greek economy couldn’t have suddenly improved on the criteria’s in two

years.

There was huge debate about whether Greece had fiddled around with the figures to be able

to join the EMU. The true nature of the Greek government’s structural deficit did not become

clear until after the elections in 2009, when the incoming PASOK announced that the


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government deficit was not around 6% of the GDP but around 12% of the GDP. This market

the beginning of the current crises. (Manolopoulos, 2011)

(Willis, 2009)

Greece in a bid to join the EMU hid a part of its debt with a help of bankers like Goldman

Sachs and Societe General. Goldman took the debt issued by Greece in dollars and yen and

swapped it for Euro at historical exchange rate, which made the debt looker smaller than it

actually was. The swaps made 2% or Euro 2.37 billion of the Greece debt disappear from its

national accounts. (The Independent, 2015). Although this swap backfired on Greece a few

years later. After the 9/11 attack, bond yields plunged, and due to the formula used by

Goldman to calculate the debt repayments, resulted in a huge loss for Greece. By 2005,

Greece ended up owing almost double of what it had put into the deal, with the off book debt

rising to 5.1 billion euros from 2.8 billion euros. As a result the deal was restructured and 5.1

billion euros in debt was locked in. (Truthdig, 2015)


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In other practices adopted by the Greeks, they took the loss making railways out of the

national accounts, by the way of government buying shares issued by the railways, so that it

shows on the books as an asset instead of an expenditure. (BBC News, 2012)

So clearly, Greece meeting the conditions of the Stability and Growth Pact was as a result of

falsification of accounts. As they managed to do that, they had the same credit risk as

Germany and so they kept borrowing even more, leading to the current debt crises. They

could borrow at extremely low interest rates and with a lot of ease and none of it was spent

of development of infrastructure or to fuel supply side growth. The money helped the

politicians offering jobs in the overinflated public sector in return for votes and increasing the

ever inefficient pension system.

Before the dwell into the period of 2000 to now, we need to look briefly at the reforms

initiated and possible improvements. There were some reforms that contributed to the

growth :

• Financial market liberalisation, that started in the beginning of 1990’s, led to the increase in

the private credit between 2000 and 2009

• Improvement in product markets regulation, which did reduce but was still high as compared

to other OECD countries

• The fiscal stimulus and the associaied improvement in certain infrastructure created by the

2004 Olympic Games

• Influx of funds from European Union, which contributed to the improvement in infrastructure

facilities. (Mētsopoulos and Pelagidēs, 2011)

Yet Greece did retain certain severe weaknesses that undermined its growth. These included

low domestic supply of goods and services, as the expansion of private credit and fund from

EU, increased the domestic demand, but the demand was met by competitive and available

imported goods, Unattractive business environment, which was the reason for low FDI into

the economy, still highly regulated product market, excessive government intervention, high

levels of corruption and use of command and control as a mechanism for hindrance to


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entrepreneurial activity. As we will explore more in detail later in the paper, Greece has the

potential to gain most from rectifying these proven deficiencies.


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3. Euro – 2000 to 2008

Greece joined the EU in 2002 and outgrew most other European countries and even the US

during this period. The once the crises unfolded it turned out the most of that growth in

Greece was as a result of government and consumer spending resulting from easy and low

interest credit.

It was clear from the debt crises that the Greek had a flawed economic model. The Chronic

overconsumption in the public sector spilled over to the private sector, exposing the major

structural gaps in the economy in terms of competitiveness and productivity. The large public

and private sector spending between 2000 and 2008 (97% of the cumlative GDP growth was

driven by consumption) created a deteriorating trade balance, as the demand could not be

met by foreign and domestic investment. As a result of this, Greece’s debt burden was

phenomenally high (214% of GDP in 2008) with public debt (111% of GDP) and consumer

lending (15% of GDP) the highest in Europe, which was again due to the fact that since joining

the EU, Greek’s had easier access to funds both internally (due to maintaining low interest

rates in line with the rest of the countries in EU) and the externally because of enjoying credit

ratings similar to Germany. (Mckinsey & Company, 2012)


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Figure 4 Greece consumption and investment versus Eurozone

(Mckinsey & Company, 2012)

As you can see from the figure above Greece as compared to peer had high consumption,

which resulted in an increase in the GDP, whereas the investment was the lowest and

negative growth in exports.


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Figure 5 Greece debt burden and consumer lending before the crisis compared to Eurozone


As you can see from the figure 6 the total country debt for Greece was 214 per cent in 2008,

the public debt was at 111 per cent of GDP, Private debt was at 104 per cent of GDP and

Consumer lending was at 15 per cent of the GDP, which explains the growth in GDP.

Despite being in the European Union since 1981, and Euro since 2002, Greece had never

managed to managed reap economic benefit from the membership. The exports never

managed to pay for the imports. Private consumption in Greece was very high-‐ almost 20% of

the GDP higher than the most of the European countries (Mckinsey & Company, 2012). Even

export oriented sectors like tourism had mainly demand from Greek consumers. Over the

same period, Greece’s real GDP had an average annual growth rate of 4.2%, against the 1.9%

average annual growth rate in GDP in the euro. (Athanassiou, 2009) Although the growth was

higher than the euro zone average, the domestic investments and a high level of domestic


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demand, which was inflated by ample available credit and an overleveraged public sector,

fueled Greek growth.

The government spending during the period had to increase by 6.5% (2000-‐2009) to keep up

with the accruing expenses, mainly in the form of increase in public employee salaries and

pensions. Over the same period, the government income reduced by 5 percentage point of

the GDP, as the majority portion of the revenue due form sales tax was vulnerable to evasion

and difficult to audit. (Mckinsey & Company, 2012).

Figure 6 Breakup of Public Expenditure

(Mckinsey & Company, 2012).

Figure 6 presents the breakup of Public expenditure incurred during the period 2000-‐2009.

We can clearly see that most of the expenditure was allocated towards social benefits,

instead of supply side reforms.


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3.1 Greek Looting – Scandals

To understand how the poor regulatory and judicial framework was exploited by the

politicians and corporates we look at some of the scandals during this period.

3.1.1 Greek Olympics

The final cost of the Olympic games for the Greece was almost 3 times of what was initially

estimated, which was at 9 billion euros. It was regarded as one of the most expensive Olympic

Games ever held, and looked as one of the least successful in creating benefits for the host

country. (Manolopoulos, 2011) Within days of the closing ceremony, the 2004 deficit numbers

came in at 6.1 per cent of GDP, which was more than double the euro-‐zone limit, while debt

to GDP was at 110 per cent. As a result of which Greece was the first country in the Euro Zone

to be placed under fiscal monitoring by European Commission 2005. (Malkoutzis, 2012)

Although for any country building of infrastructure is also a useful expense as it can be utilised

later, but in case of Greece the overpriced infrastructure has been underutilised ever since

and also shows the inefficiency of the governments to capitalise on the opportunity.

3.1.2 J P Morgan Bond Scandal

In 2007, it was brought to light that four Greek pension funds had significantly overpaid for

the 280 million euro Greek government bonds. JP Morgan initially sold the bonds at 92.95

cents on the euro to North Asset Management, London. On the other hand, it bought the

bonds from the Greece at 100 cents on the euro, and the bank and the government entered

into a swap transaction, to exchange fixed rate payments for those based on floating rates.

The very same day, it bought the bonds; North Asset sold them to Hypo Vereinsbank, part of

UniCredit, for 99.9 cents, which sold them to Athens brokerage Acropolis Axepey at 99.95

cents, who then sold it to the pension funds at 100 cents on euro. (Manolopoulos, 2011)

3.1.3 Siemens Scandal


26

The investigation by Greek authorities in 2007-‐2011 revealed that the Siemens officials bribed

government officials during 1997-‐2002 to get telecoms as well as during 2004 Olympics to get

security contracts. Investigations into the Siemens scandal also found that the company had

an annual slush of some 15 million euros, just to pay for commissions for securing contracts.

To secure that 500 million euro OTE (Greek national telecom) contract, Siemens made a

payment of 35 million euros in miza in the late 1990’s. Also it is believed that it is only due to

the bribes that the Greek state ended up paying 57 million euros more for the telecom

equipment. (Manolopoulos, 2011)

3.1.4 The EOT: Greek Tourist Organization

The EOT has a long history of waste, corruption and scandals. According to prosecutor in

Athens, the EOT had been accused of misappropriation to the tune of more than 70 million

euros in funding destined for tourism promotion campaigns in 2008 and 2009. Also in one of

the audits it emerged that 20,000 community holidays – holidays given to people who can’t

afford it-‐ worth about 1.8 million euros were given to people who did not fit the criteria.


3.1.5 800,000 House without Planning Permission

In one such case that reached the court in August 2010, it was discovered that some 157

illegal properties were built in the Cycladic islands, with bribes to the tune of 15000-‐20000

euros paid officials (Manolopoulos, 2011)

3.1.6 Other Scandals

Other scandals include the secretary general and the special secretary having 64 phone lines

between them, with a phone bill for the period 2006-‐08 amounting to 20 million euros,

Macedonian Protein owned by three offshore companies with a turnover of 250,000 euros

and zero employees getting a development grant of 8.5 million euros under Development Law


27

3299/04. (Manolopoulos, 2011) There are countless more scandals throughout this period

due to the availability of ample credit at extremely low interest rates

3.2 Problems of Greek Economy

3.2.1 Enviroment for Investment and Scaling of Business

The Backbone of the Greek economy is mostly the small and micro enterprises. For eg 30% of

the manufacturing employment in Greece is in firms which have less than 10 employees. As

you can see in the figure below the same figure stands at 5% in Germany and 11% in

Netherlands.

Figure 7 Breakup of total manufacturing workforce



28

Also according to the OECD regulation database, the World Economic Forum competitiveness

survey, the World Bank Doing Business reports and estimates of the European Commission

(2006), the administration burden is high, excessive regulation in the product market, high

intervention by the government which is a hurdle to competition as well as the efficient

allocation of resources and pricing decision in important industries and high regulation for

professional services firms as far as entry and pricing is concerned. (Mētsopoulos and

Pelagidēs, 2011). Apart from the above Greece also has a rigid labor market and tax laws that

hinder investment.

3.2.2 Public Sector: Overinflated and Inefficient

The Greek public sector is clearly large and highly inefficient, as compared to the other

countries in the euro zone. The public sector has also been used as a tool to win political

mileage. This has been a major point of debate even during the bailout packages offered. To

give a snap shot for a country of 10 million people, there were 768,009 civil servants

according to a census conducted in July 2010. According to a story covered by Kerin Hope of

the Financial Times, a Greek public sector rarely complains of workload. Amongst a few

interviews that he conducted, a officer in her 40’s working at the office that records VAT

payments, said that “If a family member falls sick, she stays at home. She doesn’t feel bad

because there are plenty of people to cover for her. Nobody there has too much to do”.


Also according to Athens News columnist Mark Dragoumis, “if those employed in Greece’s

public administration were paid the market price for the services they actually offered, their

cost to the budget would be 27 percent lower than it is today. So Greek taxpayers overpay in

return for lousy service.” (Manolopoulos, 2011)

So huger amount of money is being spent on the public sector where the productivity is

extremely low. This is again an economic failure as there isn’t efficient utilization of resources


29

A report by a leading economist in 2010 noted that “ Employees in Greece could retire at 58

will full pension, provided that they had completed 37 years of work. The retirement age was

lower than the OECD average of 63.2 years. Also the average pension was higher than the

OECD average, it was 95.7 percent of an employee’s average lifetime earning as compared to

the OECD average of 60.8 percent”. Also if the Greece pension system were left unreformed,

it would create an additional deficit of 12.5 percent of the GDP by 2050. (Manolopoulos,

2011)

Figure 8 Benchmarking the Greek public sector


Figure 8 clearly states that the public sector employment as a percentage of total

employment was highest in Greece, at 22.3 per cent with the public sector having a CAGR of

8.6 for the period 2000-‐2008.


30

Figure 9 Public Sector comparison with Eurozone


As you can see from the figure above, Greece has the lowest quality outcome amongst the

other countries in the EU. The only countries that even remotely to Greece are also the

countries that are in trouble, like Spain, Italy, Portugal and Ireland.

3.2.3 Rigid and narrow use of Human Resources

Greece has still not capitalised its human resources and labor force potential. Although there

have been reforms have been introduced but still due to high legal requirement and

inflexibility associated with collective labor agreements, employers are still hesitant in hiring

more workers.

After Greece joined the EU, the average per capita GDP and average family earnings

converged towards the European average. The percentage of people employed started to rise

for the first time in 2000 after decades, as Greece in the past had high unemployment rates,

although the rate was slower than the rate of growth of GDP.


31

Table 1 Harmonized unemployment rates, Eurostat 2008

Greece Eurozone US

Males under 25 years 17 15.3 14.4

Females under 25 years 28.9 15.5 11.2

Total population, 15-‐65 years 7.7 7.5 5.8

(Mētsopoulos and Pelagidēs, 2011)

The failure of the labor market to create new jobs for those entering the labor market for the

first time, which seems to showcase the lack of dynamism of the supply side of the economy,

which results from excessive regulation and administrative burden. Also an economy that is

not able to expand its production base will not be able to offer jobs to the young who are

ready to join the job market. (Mētsopoulos and Pelagidēs, 2011)

3.2.4 Legal and Judicial System

Running business in Greece is hindered by a cumbersome legal system, which consists of a

large number of laws, which are ambiguous, obsolete and contradictory with multiple

overlaps. The resulting complexities create inefficient administration, excessive delays,

confusion and friction with businesses. (Mckinsey & Company, 2012)

3.2.5 Informality

The informal sector in Greece is approximately about 30 percent of the total economic

activity. This results into a huge gap in tax receipts: in 2009, between 15-‐20 billion euros was

lost in personal , corporate and sales tax with more than half in forgone revenue due to tax

evasion.This is equal to 7-‐9% of the GDP of Greece and 60-‐80% of 2010 fiscal deficit.

(Mckinsey & Company, 2012). Tax evasion as a habit is ingrained in the culture of the Greek’s.

According to the tax collection agency doctors, lawyers and businessmen had sent up to euro

million each to Swiss accounts while declaring only about euro 40,000 to euro 80,0000.

(Manolopoulos, 2011). The wealthy have been transferring money out of Greece since the


32

beginning of the debt crises because of the risk of bank runs, defaults and expulsion from

euro, which is effectively a drain in the consumption cycle. According to Knight Frank, in April

2010 Greek buyers compromised of 6 percent of all property purchases above 2 million

pounds in UK. The Greek government desperately needs some convictions or heavy penalties

on the high-‐income people so as to make sure that there is higher tax compliance, which only

contribute to the income of the country.


33

4. The Beginning of the Fall

Overreliance on the international capital markets to fund budget and trade deficits left the

Greek Government vulnerable to shifts in investor confidence. If the investors lost confidence

in the ability of Greek’s to pay back there debt, they would either not lend money or charge

high interest rates.

As the global financial crisis of 2008-‐2009 caused global economic downturn, the public

finances of many advanced economies, including Greece, started getting strained, as

government spending on programs such as unemployment benefits increased and tax

revenues decreased. Greece’s public debt increase from 106% of GDP to 126% of GDP in

2009. Also at the same time, as mentioned above as well, the actual budget deficit number

was revealed and finally revised upwards a number of times to 15.4% of GDP. This resulted in

the investors becoming increasingly nervous about the ability of Greek government to

payback, and staring asking for higher interest rates for buying and holding Greek bonds. As a

result of this , it drove up the borrowing cost, exacerbated its debt levels and forced Greece to

move towards default. (Congressional Research Service, 2011)

4.1 Disaster Management

European leaders, the IMF and the ECB agreed that a default by Greece could have a

contagion effect and would eventually lead to default by other countries with high level of

debt (this included Spain, Portugal, Italy, Ireland). The contagion effect would be due to the

fact that default by Greece would trigger a major sell off by financial markets of bonds of

other European countries with similarly high level of debts and that European banks exposed

to Greece debt and other European countries would not be able to sustain losses on these

investment.

4.1.1 May 2010

The first round of crises response was financial assistance by other members of the Euro and

the IMF in a bid to avoid triggering debt crisis other European countries. The European


34

countries agreed to provide bilateral loans (called “Greek Loan Facility”), which was a total of

80 billion euros that would be disbursed over a period of May 2010 to June 2013. The amount

was further reduced by 2.7 billion euros as Slovakia backed out from providing loan and at the

same time Ireland and Portugal as they asked for financial assistance too. Apart from the

amount the IMF agreed to commit an additional 30 billion euros under a stand-‐by

arrangement (SBA). (European Commission, 2015)

In a bid to prevent the crisis to spread beyond Greece, EU created a temporary European

mechanism to provide financial assistance to Eurozone member states under the pressure

from market. The mechanism consisted of two three-‐year lending facilities each that could

make loans totalling 500 billion euros. In 2011, they agreed to create a permanent lending

facility, the European Stability Mechanism (ESM). (Congressional Research Service, 2011)

As part of the condition for the financial assistance the Greeks, had to follow austerity

measures. The had set a target of reducing the government deficit from 14% of the GDP in

2010 to under 3% by 2014. This was to be achieved through reduction in public spending

which was initiated by freezing civil service compensation and civil service hiring freeze as

they had an overinflated public sector and increase revenue which was initiated by increase

average Value Added Tax and tax on certain commodities. The ECB also during this started

buying European bonds in the secondary market as a way increase the confidence and lower

bond spreads. ECB bought between 2010 and 2011 bought government bonds worth 78

billion euros and most analyst estimate that about 45 billion euros worth of bonds amongst

the total were Greek bonds. Private banks in Greece were also provided liquidity by ECB,

which increased from 47 billion euros in Jan 2010, to 98 billion euros in May 2011, which was

roughly at about 40% of Greece’s 2011 GDP. (Congressional Research Service, 2011)

In 2011, it became more the evident that the Greek economy was contracting more severely

at a fast pace and hence there was a need for a second bailout package to avoid Greece from

defaulting on its debt.


35

4.1.2 March 2012

Considering the severity of the situation the Euro zone member approved the Second

Adjustment Program for Greece, which included the pending amount from the first program

plus an additional 130 billion euros for the years 2012-‐2014. Additionally, private sector

involvement (PSI) to improve the sustainability of Greece’s debt was agreed upon. As a result

there was high participation in Greece’s debt exchange offer in the spring of 2012. Out of the

total of 205.6 billion euros in bonds up for the exchange offer 197 billion euros were

exchanged. (European Commission, 2015)

As part of the second adjustment program for Greece, it was agreed that the fiscal

adjustment would involve reduction of Greece’s debt to 124% of the GDP. The ministers of

the Euro zone also agreed to the following measures:

• Lowering of 100 basis points of the interest on the loans provided under the Greece Loan

Facility

• Guarantee fee on EFSF loans to be lowered by 10 basis points

• Bilateral and EFSF loan maturities extended by 15 years and interest payments on EFSF loans

deferred by 10 years

• Commitment by the member states to pass on to Greece’s segregated account, amount

equivalent to the income on the Securities Market Programme (SMP) portfolio accruing to

their national central bank as from budget year 2013.

(European Commission, 2015)

4.1.3 Current Scenario

Even after the policy measures introduced there was limited success towards recovery,

forcing the need for another bailout. Due to lack of growth in the Greek economy there was

lack of debt sustainability. Moreover, there was unrest in the economy due to the

introduction of austerity measures. The period from Sep 2012 to July 2015 saw a lot of

protests against the austerity measures, referendum, elections and then agreement of

harsher terms to be able to save the country from bankruptcy. This period also


36

unemployment peak at 26.8%, the highest in EU (2013), and youth employment peak at

almost 60% (April, 2013). (BBC News, 2015). For any economy to grow out of recession and

the austerity measures to be a success, you need to have low unemployment as it has the

following effects on the economy:

• It creates disposable income, which can then be spent on goods and services, contributing to

GDP.

• It also leads to higher tax revenue for the government.

• The government has to pay less in unemployment benefits.

The Greeks requested for a third bailout package from the EU as they realised they will not

be able to make future payments. The final nail in the coffin came at the point when Greece

missed the 1.6 billion euro payment due to the IMF. Although the Greek voters had refused

the stricter bailout terms that were attached to the third bailout package, but eventually

started negotiating the new deal as even the banks in Greece needed to be capitalised.

4.1.4 The Third Bailout Package

The third deal is still in the process of being finalised with the lenders getting even tougher

with the conditions. There has been a loss of confidence in the ability of Greece to pay back

the loan amounts and there have been a lot of talks of Grexit (Greece Exit from EU). We will

explore more on the ability of Greece to pay back the loan amounts and move towards a path

of growth in the next section. Looking at the third bailout draft following are the key details of

the draft:

• A three-‐year bailout package for 85 billion euros has been agreed so that Greece doesn’t

default on its payments due and secure its future in the Euro.

• Primary surplus targets to be achieved: 0.25% GDP deficit in 2015, 0.5% surplus in 2016,

1.75% surplus in 2017 and 3.5% surplus in 2018.

• Reduction in fiscal surpluses for the next three years by 11 percent of the GDP


37

• Recapitalisation of the banking sector completed by 2015, with 10 billion euros being

immediately available.

• The deal will provide for a 35 billion euro development package, known as the Juncker

package

• Complete phase out the early retirement and a gradual increase in the pension age to 67 by

2022

• Review of Greek social welfare system and deregulation of Greece gas market by 2018

• Privatisation of ports of Piraeus and Thessaloniki

• Increase in the tax on shipping

(BBC News, 2015)

Greece has relied on bailouts worth 240 billion euros from Eurozone members and the IMF

since its high debt concerns locked it out of the bond market. To secure these loans, the

Greek government had to increase taxes and reduce spending. While the austerity measures

did reduce budget overspending, it compounded into a deeper recession and pushed

unemployment to record high. (British Telecom, 2015)

While the money was intended to help Greece in stabilizing its finances and reduce market

fears about the Euro union breaking down, the economic problems in Greece haven’t gone

away. The economy has only shrunk in the last 5 years and there has been unemployment in

excess of 20%. The problem is that the bailout money goes towards paying back the huge

debt that Greece owes to the international creditors, leaving very little for any economic

recovery. On top of it being part of the monetary union requires maintaining an inflation

target, whereas economic theory states that when a country moves from recession on the

path of growth, there has to be a certain tolerance for inflation, as inflation is directly

proportional to employment. While many economist blame the austerity measures for the

continuing economic problems, the international creditors like Germany blame the poor

adherence to economic reforms required under the bailout agreement. The problem being

the size of the inefficient public sector, leads to government expenditure being directed


38

towards salaries and pension payments, instead of investing in infrastructure, which can

create jobs and reduce unemployment.


39

Figure 10 Greece Creditors

Out of the total debt, Greece owes about 200 billion euros to the Eurozone bailout fund and

other euro member countries, on which no payment has to be made till 2023. The IMF has

proposed extending the grace period until mid-‐century. Although Greece does have to make

payments on the loans from the IMF and the bonds held by the European Central Bank which

amount to more than 24 billion euros in the middle of 2018. (Times, 2015)


40

5. Greece – Risk Analysis

Country risk problems occur when there is a breakdown in either willingness to pay or ability

to service debt. In case of Greece, the problem is the ability to pay back. With the size of the

debt being 319 billion euros (before the latest round of bailout), which stands at over 150

percent of the GDP, it is very difficult for Greece to pay back or sustain this level of debt. The

bailout money has just been used to service the current debt without building any

infrastructure or measure to increase the tax base. The need for the third bailout only arose

because of the fact that Greece missed the interest payment to IMF. Let’s look at the debt

repayment schedule for Greece, which will help us understand the situation better.

Table 2 Payment Schedule Greece

Payments (in Million Euros)

Period Total Bond Principal Term Loan Out Interest

Total 3,19,695 80,017 2,12,516 27,162

2015 27373 16562 10371 440

2016 11877 6257 3282 2338

2017 11422 8452 744 2226

2018 5562 1870 1827 1864

2019 14517 10596 2143 1779

2020 5439 1366 2849 1223

2021 5547 0 4217 1330

2022 7476 1312 4641 1523

2023 8694 1792 5456 1445

2024 8819 3077 4373 1368

2025 7081 1792 4058 1231

2026 7648 2435 4058 1154

2027 6568 1470 4058 1040

2028 6855 1725 4152 977


41

2029 6555 1504 4152 899

2030 6507 1520 4152 835

2031 6291 1368 4152 771

2032 9038 1374 6952 712

2033 6258 1453 4152 653

2034 6467 1724 4152 591

2035 6110 1444 4152 514

2036 6109 1505 4152 452

2037 10931 1529 9015 387

2038 5855 1382 4152 321

2039 5751 1337 4152 262

2040 6022 1372 4446 204

2041 6886 1363 5378 145

2042 18862 1433 17342 87

2043 7625 0 7600 25

2044 1425 0 1400 25

2045 3325 0 3300 25

2046 32026 0 32000 26

2047 5926 0 5900 26

2048 2526 0 2500 26

2049 2016 0 1990 26

2050 12826 0 12800 26

2051 26 0 0 26

2052 26 0 0 26

2053 2026 0 2000 26

2054 6326 0 6300 26

2055 26 0 0 26

2056 26 0 0 26

(Bloomberg)


42

As we can see from the above table Greece has to make payments of close to 27 billion euros

in 2015 itself. With high tax evasion, falling exports, rising imports, high unemployment and a

large social sector, it seems impossible for Greece to be able to make these payments. We will

in the next few sections look more in detail, at whether Greece can find a way to avoid a

default while being a part of Euro.

Figure 11 Payment Timetable 2015


43

The table above shows the breakup of the payment to be made during the year of 2015. The

third bailout of 85 billion euros that has just been approved by the EU would end up servicing

the loan debts only. They need a debt restructuring and haircut on the loan so that the money

can be utilized towards stimulating growth in the economy, so as to avoid any default.

The most direct measure of assessing country risk is to measure the sovereign default risk of

the country. Sovereign default risk is of two types: Foreign currency debt and local currency

debt. In case of Greece, it is the foreign currency debt, as Greece doesn’t have the foreign

currency reserves to service the debt and being a part of the Euro union cannot print currency

to service the debt, even though it leads to higher inflation, higher interest rate and inflation

of the total debt. If we look at the history of Sovereign defaults over the last 14 years (2000-‐

2014), most of them have been due to foreign currency debt.


44

Table 3 Default Summary

Default

Date Country

Value of Defaulted

Debt Details

Jan-‐00 Ukraine $ 1064 mil

DM and US dollar denominated bond

defaults. Offered rollover in the form of

longer term, lower coupon bonds to

lenders

Sep-‐00 Peru $ 4870 mil Missed payment on Brady bonds

Nov-‐01 Argentina $ 82,268 mil

Foreign currency debt payment default.

Debt was restructured

Jan-‐02 Moldova $ 145 mil

Although missed payments on the

bonds, yet bought back 50 percent of the

bonds

May-‐03 Uruguay $ 5744 mil

Currency and debt crises due to

contagion effect from default in

Argentina

Jul-‐03 Nicaragua $ 320 mil

Replaced high interest rate debt with

low interest rate debt

Apr-‐05

Dominican

Republic $ 1622 mil

Issued bonds with longer maturity in

place of existing debt

Dec-‐06 Belize $ 242 mil

Issued new bonds with step up coupons

in place of bonds it defaulted on

Dec-‐08 Ecuador $ 510 mil

Defaulted on interest payments of $ 30.6

million on the bonds

Feb-‐10 Jamaica $ 7.9 billion

Debt exchange leading to loss of

principal between 11 percent and 17

percent

Jan-‐11

Ivory

Coast $ 2.3 billion Defaulted on Eurobonds

Jul-‐14 Argentina $ 13 billion

US judge ruled that Argentina could not

pay current bondholders unless old debt


45

(Damodaran,2010)

5.1 Factors Determining Sovereign Debt Risk

Following factors help to determine the Sovereign Debt Risk:

• Degree of Indebtness

• Pension/Social Commitments

• Revenue/Infow to Government

• Stability of Revenues

• Political Risk

• Implicit backing from other entities

(Damodaran, 2015)

5.1.1 Degree of Indebtness

After joining the Euro union, Greece benefited from superior credit rating and lower interest

rates which led to heavy borrowing by the Greece from outside. As a result the Debt to GDP

as you can see in the figure below started increasing and gradually once the debt crises came

to surface,the figure touched extremely high numbers and with the bailout packages required

to avoid a default, it is only set to increase. The figure is currently at 177.1 percent which is

extremely high and not sustainable in the future.

holders also got paid


46

Figure 12 Debt to GDP Greece 2006-‐2014

(Greece Debt to GDP, 2015)

At the peak of the debt crises, Argentina’s Debt to GDP was at 166 percent and to avoid

default, they had to restructure their debt. Argentina’s problems were similar to Greece but

still was rich in resources. Although they managed to get the Debt to GDP ratio down, they

still have defaulted over payment to bondholders as can be seen from the table above. The

Debt to GDP ratio is set to rise for a couple of more years, but it starts to come down. This is

assuming that Greece is able to take all the structural reforms necessary and the is able to

generate revenue enough to start paying the creditor’s back instead of borrowing to do the

same.

According to the European commission, the European Central Bank and the Eurozone bailout

fund, Greece’s debt will peak at 201 percent of GDP in 2016. They are of the opinion that the

Greece debt burden can be made more bearable by waiving payments until the economy has

recovered instead of giving Greece more time to pay but are against the opinion of a haircut

or reducing the size of the debt. Greece’s debt to GDP ratio will peak in 2016 but will still be at

175 percent of GDP in 2020 and 160 percent of GDP in 2022. The IMF views a debt to GDP

ratio of anything above 120 percent as unsustainable. (Elliott and Henley, 2015)

5.1.2 Pension/Social Commitments

The Greek pension system has long been the sticking point as far as negotiations with the

IMF, European Commission and the ECB are concerned. According to Eurostat no country in


47

the EU spends as much as Greece, where the pension expenditure has been 17.5 percent of

the GDP. (Nardelli, 2015) The reason for the pension system being unsustainable is not the

size of the individual pensions but grossly inefficient and badly funded system. Due to a law

introduced by the then King of Greece, Paul I, which required pension funds to keep a

minimum of 77 per cent in Government Bonds, the pension funds took a 8.3 billion euros hit

following the restructuring of sovereign debt. Also the high unemployment rate of 26.6 per

cent, youth unemployment above 50 per cent, 20.5 per cent of the population above the age

of 65 and old-‐age dependency ratio of over 30 per cent, there will be huge pressure on the

pension funds as the young will clearly not be able to support the old. (Nardelli, 2015) The

Greek pension system was the weakest in the world in the year 2011 and due to the reform

introduced has managed to be a little better but due to unfavourable demographics and high

sovereign debt is still a cause of concern. (Allianz, 2014)

Figure 13 Unemployment Rate Eurozone

(Davis, 2015)

Although as part of the reforms introduced in 2012, the average age for eligibility of pensions

was increased to 67 for both sexes, still the average age for a Greek to receive his first

pension is 57.80.


48

Figure 14 Age of First Pension Eurozone

(Davis, 2015)

As we can see from the chart above, this figure is lower than the Eurozone average of 59.6

and considerably lower than Germany where the average is 61.1.

Looking the current debt crises situation in Greece, still more reform will be required both to

reduce the unemployment and the burden of the pension funds, otherwise the pension

system will not be sustainable.

5.1.3 Revenue/Inflow to Government

The Greece Government revenue for the

year 2014 was 82.015 billion euros which

was 5.85 per cent less than the revenue

collection in the year 2013. The table below

shows the revenue collections for the

government from 2006-‐2014.

Year Revenue (Mil Euros) % of GDP

2006 84346 38.7

2007 93583 40.2

2008 98407 40.6

2009 92000 38.7

2010 92912 41.1

2011 90991 43.8

2012 88723 45.7

2013 87120 47.8

2014 82015 45.5


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Table 4 Greece Government Revenue 2006-‐2014

(Eurostat, 2015)

The major portion of the government revenue is in the form of taxes. The Tax system in

Greece also needs reform. According to the current tax system individuals are taxed between

22 percent and 42 percent on their income, the standard rate for Corporate tax is 26 percent

and for Greek partnerships is 26 percent. (Inc., 2015). The Greek government loses at least

half of its revenue due to large scale tax evasion and inefficiency of the tax system. Following

is the structure of tax receipts in Greece as compared to the OECD average:

• Taxes on Goods and services and social security contributions, have highest

contribution in Greece

• Lower proportion of revenues from taxes on personal income and corporate income

• Taxes on property the same as the OECD average

• No revenue from payroll taxes.

(OECD, 2014)

As you can see from the tax collection a lot of it is dependent on the consumption in the

economy and when there is a recession or a crises situation in the economy, households tend

to delay consumption of luxury goods and services till the point the economy recovers. Also

due to negative consumer confidence in the sustainability of the economy, households tend

to delay consumption. This has led to a fall in tax revenue collections apart from the fact the

tax evasion in Greece is high. To further explain the above fact, once capital controls were

implemented in May to avoid Bank runs and a complete collapse of the Banking system, the

people Greek citizens delayed paying taxes as they believe a default was inevitable. The Greek

government revenues in May 2015 were 900 million euros, 24 per cent short of the monthly

target. (Shedlock, 2015). In order for the Greek government to be able to service the debt and

get on the path of recovery, they need to introduce tax reforms that encourage higher

number of citizens paying taxes and lower tax evasion. This can happen through a better

business enviroment, lower tax rates and better regulatory environment.


50

5.1.4 Stability of Revenues

The essence of Debt is that it gives rise to fixed obligations that have to be paid whether there

is a recession or a boom period. Any country which has a stable revenue stream should be

able to meet its obligations. In case of Greece, Shipping industry and Tourism Industry are the

two largest contributors to the GDP. In case of the tourism industry, the current debt crises

that started in 2008, has affected the revenues, and on the contrary the sector has been

growing, which will eventually put more pressure on the current infrastructure and create a

need to add to it. The total contribution of Travel and Tourism to the GDP of Greece was 29.4

billion euros in 2014 which is 17.3% of the GDP and is expected to grow by 3.2% to 30.3 billion

euros in 2015. The forecast for 2025 is for the contribution of the tourism and travel sector to

be 43.8 billion euros which is 19.8% of GDP. The total contribution of the sector to

employment in 2014 has been 700,000 jobs which is 19.4% of the total employment and is

expected to rise by 3.9% to 727,000 jobs in 2015 and subsequently to 951,000 jobs in 2025.

Also the visitor exports generated 12.2 billion euros which is 24.5% of the total exports in

2014 and is expected to grow by 3% per annum to 16.7 billion euros by 2025. (World Travel

and Tourism Council, 2015)


51

Figure 15 Greece Tourism contribution to GDP

Figure 16 Breakup of Tourism Contribution 2009-‐2015


52

As you can see from the table above , the contribution of the tourism sector is increasing even

during the debt crises. So although it can be categorised as a stable income, but the income

from this sector is vulnerable to global recessions, natural calamities or terrorist activities. The

Greek shipping industry has the largest international merchant fleet capacity in the world,

and accounts for 16.16% of the world’s total transport capacity. (Eurobank Research, 2014)

The shipping industry has a great combination to the Greek economy and along with tourism

is the largest two industries in Greece.

Figure 17 Countries with the largest shipping fleet

The Greece shipping industry has over 200,000 people employed and contributes to 7.5% of

the Greece GDP. The shipping industry along with tourism has also grown despite the debt

crises and has contributed to the growth and revenue generation in the government. Also the

future opportunities for the Greek Shipping industry are positive due to greater globalisation

and increasing number of developing countries getting involved in the world production

process. The Greek ship owners can profit of these opportunities as they have a young and


53

cost effective fleet, high expertise and close business relations around the world which will in

turn support the Greek economy through direct and indirect of high

Table 5 Receipts from Shipping 2000-‐2014

Receipts from Sea Transport 2000-‐2014

billio

n

Euro

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

201

4

GDP

(Curr

ent

Price

s)

13

6.7

14

5.1

15

5.2

17

0.9

18

3.6

19

3.1

20

8.6

22

3.2

23

3.2

23

1.1

22

2.2

20

8.5

19

3.4

18

2.1

179

.08

Trade

Balan

ce

-‐

21.

9

-‐

21.

6

-‐

22.

7

-‐

22.

6

-‐

25.

4

-‐

27.

6

-‐

35.

3

-‐

41.

5

-‐

44.

1

-‐

30.

8

-‐

28.

3

-‐

27.

2

-‐

19.

6

-‐

17.

2

-‐

17.

84

Servi

ces

Balan

ce 8.7 9.2

10.

8

11.

5

15.

5

15.

4

15.

3

16.

6

17.

1

12.

6

13.

2

14.

6 15 17

19.

68

Recei

pts

From

Sea

Trans

port 8.2 8.5 8 9

12.

4 13

13.

3

15.

7

17.

6

12.

3 14

12.

7

11.

8

10.

7

11.

44

Paym

ents

for

Sea

Trans 3.6 4.3 4 3.8 4.5 4.6 5 5.4 6.5 4.8 5.9 5.1 4.4 3.1 2.9


54

port

Net

Recei

pts

From

Shipp

ing 4.6 4.2 4 5.2 7.9 8.4 8.3

10.

3

11.

1 7.5 8.1 7.6 7.4 7.6

8.5

4

as %

of

GDP

3.4

%

2.9

%

2.6

%

3.0

%

4.3

%

4.4

%

4.0

%

4.6

%

4.8

%

3.2

%

3.6

%

3.6

%

3.8

%

4.2

%

4.8

%

as %

of

Servi

ces

Balan

ce

52.

9%

45.

7%

37.

0%

45.

2%

51.

0%

54.

5%

54.

2%

62.

0%

64.

9%

59.

5%

61.

4%

52.

1%

49.

3%

44.

7%

43.

4%

Annu

al %

chan

ge of

net

recip

ets

from

Sea

Trans

port

-‐

8.7

-‐

4.8 30

51.

9 6.3

-‐

1.2

24.

1 7.8

-‐

32.

4 8

-‐

6.2

-‐

2.6 2.7

12.

40

(Source: Bank of Greece, Eurostat)

As part of the recent bailout package reforms, there has been talks about higher taxes on the

Shipping revenues, which may negatively impact the growth of the sector. Also if the recent


55

slowdown in China translates into a full blown crash, it might impact the revenue of the

shipping industry in Greece, as China is a major exporter.

5.1.5 Political Risk

The decision to default is as much a political decision as an economic one. Sovereign default

often exposes the political leadership to the pressure and a political backlash and hence the

probability of default is higher in case of autocracies. Incase of Greece, the current political

party won majority in the elections and came to power on the pretext of ending austerity

measures. They organised a referendum to reject the terms demanded by the creditors, but

ended up agreeing to harsher terms in order to secure the third bailout package. The final

terms of bailout package have to get voted in the parliament and there is little doubt that it

will get rejected but the risk is that it will not be voted by the current majority. This may

clearly set in a motion of political instability, that would lead, at best to a reshuffle/broader

pro-‐European coalition, and at worst to a bout of political instability, with new elections and

uncertainty at some point later in the year. Although, it is unlikely that another extremist

party might come into power, yet the political risk in Greece is high in the medium term.

(London, 2015) There is a split within the Syriza party which has resulted in a emergency

congress of the party being scheduled in September. The extreme critisim of the current

bailout program may even lead to creation of a new party led by the members of the party’s

left platform which may eventually lead to a snap elections being called in autumn. (House of

Commons, 2015) In order to successfully be on the path of recovery and avoid default, it is

very important that Greece has a stable political government at Athens, cause at this stage

they do have to take some decisions and initiate reforms that might not be populist in nature.

5.1.6 Implicit backing from other entities

When Greece entered the European Union, investors, analysts and rating agencies reduced

their default risk rating for Greece, as they assumed that the European Union countries i.e

Germany, France and the scandavnian countries will protect the weaker countries from

defaulting. However the backing is implicit and not explicit and the lenders may well find


56

themselves disappointed by the lack of backing and no legal recourse. (Damodaran, 2015)

Although the stronger countries in the European Union have supported Greece till now, but

due to the lack of reforms have been imposing harsher conditions on Greece as they have

been facing backlash in their own countries as it’s the tax payers money that is supporting the

bailout packages. If Greece is not successful in implementing the reform measures, there may

be a situation where the European Union may very well as Greece to exit.

5.2 Credit Default Spread

Credit default spread market allows the investors to buy protection against default in any of

the security. The buyer of the CDS on a specific bond payment makes payments of the spread

to seller of the CDS in return for the seller buying the whole issue if the entity defaults,

restructures or goes bankrupt. CDS basically are an indicator of the weakness of a country and

their ability in paying back there loans. This help to determine the credit ratings and the loan

spreads. A higher CDS spread would mean the risk of the entity/countries defaulting is high,

and the lenders would charge a higher interest rate in order to be compensated for the risk of

lending.


57

Figure 18 CDS spreads Greece 2006-‐2010

(Damodaran, 2015)

The figure above provides the movement of the CDS spread between 2006 and 2010. We can

see that as they news of the debt crisis came to the market, before the ratings were changes

the CDS spreads increased. Although CDS spreads are not most accurate in predicting

defaults, yet at the same time they are a way to signal the risk of default in a country.


58

Figure 19 Greece CDS spreads August 2015

(Source: Bloomberg)

A look at the current CDS spreads above , we can see the spreads for the short term bonds (6

months, 1 Year and 2 Years) are higher than spreads on the long term bonds, which signals

that the market believes the risk of a default is high in short term.


59

6. Conclusion

Table 6 Risk Analysis Snapshot

Aspect Figure Level of Risk Description

Debt to GDP ratio 177.6% High According to IMF

any of debt to GDP

above 120% is

unsustainable.

Pension/Social

Contribution

17.5% of the

GDP

High The pension

system is ineffcient

and promotes low

productivity. Has

been one of the

reforms asked by

the creditors

Government Revenue 82.05 billion

euros in 2014

Medium The revenue

consist majorly of

taxes. The tax

evasion is very high

amongst

individuals and

corporates. An

efficient tax system

will increase the

revenues by more

than half

Stability of Revenues Tourism-‐ 19.8%

of GDP

Shipping – 7.5%

of GDP

High Although the

toursim and

shipping industries

are growing


60

despite the

recession but are

vulnerable to a

global recession.

An economy which

is more diversified

has less default risk

Political Risk Medium in the

short term

Due to the harsh

conditions being

imposed by the

creditors may

create political

instability in the

medium term and

will increase the

risk of a default in

the short term

CDS 3500 bps for 6

months

High The CDS spread

being high over the

short term

indicates that the

market believes

that the risk of

Greece defaulting

is high in the short

run.

Total interest

payments/exports of

goods and sevices

15.35 High It is doubtful that

Greece will be able

to service their

debt through the

foreign exchange


61

generated

Reserves/Imports 48.44 days High The current level

foreign reserves

that Greece has

are only enough to

provide import of

48 days.

Cash Flow Ratio 39.95 High The cash flow ratio

determines the

ability of the

entity/country to

be able to service

short term and

medium term debt

(principal and

interest) payments,

with the foreign

exchange

generated. In case

of Greece , it is at a

critical level as the

reserves are not

enough to be able

to service the debt.

Oil imports/exports 30% High Oil imports were

30% of the total

imports for Greece,

so it makes them

extremely

vulnerable to the

oil prices. A rise in


62

the price of oil will

increase the

import bill and

have a worsening

effect on the trade

balance.

All the figures above point to the fact the Greek debt is unsustainable and although the third

bailout has been approved, it will still be used to service the debt in the near future and not

much of will be left to start the growth engine, which will be required in the long run for

Greece to be able to service the debt and not default. We have come to this conclusion by

looking at the traditional macroeconomic indicators.

More recently there have been models developed that analyse the sovereign risk by analysing

the health and aggregate default risk of a nation’s private sector – bottom up analysis. We will

looking at the result of one such test Risk Metrics Z-‐Metrics system. As a data set the test

included non-‐financial sector firm data over the period of 1998-‐2008, involving more than

250,000 quaterly and firm financial statements and associated market prices and

macroeconomic data observations, and used the multivariate logistic regressions structure to

construct the model. I couldn’t conduct the same test due to the lack of data available.

Also the Greek banking sector is weak and is plagued with very high level of non-‐performing

loans and as estimated by the IMF stands at 34% of the total value of all loans provided by the

Greek Banks at the end of Q4 2014. The Greek banks also hold large quantities of Greek

government bonds. (House of Commons, 2015) Since the beginning of the year the Private

Sector deposits in Greece have fallen by 42 billion euros or 25% by the end of June 2015.

(House of Commons, 2015)

No inter bank funding and trust in the banking sector, the Greek banks had to rely on the

Emergency Liquidity Assistance program and in order to prevent the banks to go insolvent had

to put capital controls.


63

6.1.1 Continue as Part of the Euro

Since Greece joined the Euro, it has lost competitive advantage as compared to Germany. For

eg the Greek real exchange rate vis-‐à-‐vis Germany is

q=eP*/P

e = the nominal exchange rate

P*= German general price index

P = Greece price index

Over time q has been falling because either P* is falling or P is increasing or both, and since

Greek adopted the euro, e is fixed at 1, so the fact that P* is falling and P is rising ultimately

reflects productivity differentials between the two countries. Hence Greece has become less

competitive internationally and a lot of these manufacturing units have shifted to countries

like Bulgaria, Turkey etc. Along with the reforms in the pension and tax system, Greece still

needs restructuring of the debt cause it cannot be repaid under any plausible assumption.

Looking at the recent performance of the Greek economy and the condition of the global

economy especially with China slowing down, it is hard to see where the investment is going

to come in from and the growth in net exports. The growth rate of gross fixed capital

formation in Greece in the first three quarters of 2014 was -‐3.3 per cent against the same

period last year. Also the improvement in net exports has been as a result of the recession

and a decrease in imports. So the continuation of the current policies with the single goal of

fiscal surpluses will lead in best-‐case scenario to stagnation in the Greek economy, with high

unemployment and a significantly higher Debt to GDP ratio. (Levy Economic Institute of Bard

College, 2015) The creditors have been adamant on the fact that they are not going to cancel

any debt although the cancellation of the German debt following the Second World War

provides a template for such arrangement. It was only because of the debt being cancelled

and the remaining being restructured is why, Germany has been able to rebuild itself into one

of the biggest economies in the world and certainly the biggest in Europe. Also being a part of

Euro Union also guarantees access to the European Financial Stability Facility (EFSF)


64

6.1.2 Grexit : Adopt Drachma

As I have mentioned this several times in the paper, since Greece joined the EU, they have

lost out on the international competitiveness due to the adopting the Euro. Also more so it

has been a disadvantage for the Greeks because it helped them be more irresponsible with

their fiscal policy, spending excessively to support an inefficient and large public sector.

Abandoning the Euro, would lead to huge devaluation of the drachma improving the Greek

trade balance, stimulate exports and eradicate the need to borrow large amounts of the

money. It will boost their tourism sector as well, cause it will be cheaper for tourist to visit

Greece. Historically, we know devaluation are known to stimulate exports in an economy

thereby contributing to the trade balance as well as the GDP of the economy. But in case of

Greece, due to a weak productive base, I don’t know if devaluation will have the same impact.

Yet at same time, devaluation will lead to the Greece debt inflation more for eg if the

exchange is the original one that Greece entered the euro zone with which was 1 euro =

340.750 GRD, then the Greece debt levels would go up to 350% plus levels of GDP. (The Rimni

Centre For Economic Analysis, 2015)

Also it would followed by high inflation, high unemployment, high interest rates and a total

breakdown of the banking system which is already very weak. The banking system at present

is being supported by the Emergency Liquidity Assistance (ELA) program. If Greece were to

adopt the drachma they have the privilege of their own monetary policy, through which they

can print currency in order to service the debt as well undergo the any other expenditure. Yet

at the same time as most of the private sector, has its financing activities in euro

denominated loans from non-‐Greek banks, they will not be able to service their debt

obligations.

In any case whether Greece is part of the EURO in the medium to long term or switches back

to its own currency, it will still need restructuring on the debt. The Euro zone will have to start

with forgoing to part of the debt and interest payments and restructing the rest, so that the

bailout money received by Greece is spent on building the necessary infrastructure to be able

to stimulate growth in the economy. Following are the key things that Greece will have to

address to be able to be back on the path of growth :


65

1. They would need a major overhaul in the tax structure to be able to avoid massive tax

evasion by individuals as well as corporates.

2. Introduce institutional and political reforms which will lead to reduction in corruption

and red tapism in the country.

3. Due to corruption and time lag in the administrative approvals required in setting up a

business in Greece, they do not have the most favourable business environment. They need

to introduce reforms that encourage setting up of new businesses cause not only do they help

in generating employment but also increase the government revenue in the form of taxes.

4. The public sector is over inflated with the excessive number of people. Also they are

given salary hikes every year without any measure of effciency. They need to start introducing

efficiency based compensation in the public sector to be able to make the most of the

resources.

5. Providing subsidies for setting up Industrial units in the country which can not only

help in creating employment but also help in improving the trade balance.

6. There is a need to adjust and reform in Judicial system with the new constitutional

settlement, with the judiciary having full independence and putting an end to immunity and

special treatment for politicians. There has to be a repeal of Article 62 of the constitution,

with politicians facing corruption charges in the regular courts, not special parliamentary

committees. Also the five-‐year Statute of Limitations must be withdrawn. Furthermore

penalties in a fair society for non-‐compliance need to be higher. (Manolopoulos, 2011)

In case Greece does default, there is a risk that it might have a contagion effect, which may

involve countries like Portugal and Spain which have a Debt to GDP ratio of over 130%.

Although growth is better in these countries, yet they are structurally weak. Also once one

country defaults, the financial markets become vary of lending to countries to similar weak

fundamentals which would make the cost of borrowing for these countries much more

expensive and in the end make it difficult for them to raise money in the future. Also of the

total money loaned out to Greece, private holders hold only 17 per cent. The rest 83 per cent

is held in the following proportion : Euro area governments (62 per cent), International

Monetary Fund ( 10 per cent) through its participation in the two bailouts, and the European


66

Central Bank (8 per cent), which purchased bonds in 2010 through its Securities Market

Program. The remaining 3 per cent is held by the Central Bank of Greece. (Bloomberg, 2015)

Figure 20 Eurozone contribution to Greece bailouts

As you can see above, of the euro area governments, Slovenia (3.06 per cent of GDP), Malta

(3.03 per cent of GDP), Spain (2.78 per cent of GDP) and Italy (2.75 per cent of GDP), have

much greater exposure than countries like Germany and France, so in case of a Greece

default, will have much more to lose.

6.2 Impact of Greece Exit

The impact of a Greece exit from Eurozone on the financial systems will depend on the

whether it was an orderly or a disorderly exit. In case of an orderly exit, the EU institutions

will make commitments to help Greece transition to the new currency at the same time

pledging support for the other Eurozone countries and banks who might come under

pressure. In case of a disorderly exit Greece will be forced to introduce the new currency,

shortly after the collapse of the banking system and with minimum intervention by the

European authorities will lead a prolonged reaction on the financial markets. (House of

Commons, 2015)


67

If Greece were to default they would not be the first country to default on their sovereign

debt, Argentina, who defaulted on nearly $ 100 billion in sovereign debt, poses a cautionary

example. Once Argentina defaulted on the debt and sharply devalued the peso, it faced a

period of social unrest and political instability. Yet the Argentinian economy stabilised in 2002

and the country was able to repay the IMF in full in 2006 and never entered the international

debt market again. In case of Argentina the economic growth was largely driven by the surge

in commodity exports driven by demand from fast growing economies like Brazil and China

and also from the fact that it has a vast shale oil and gas reserve that can make it self-‐

sufficient. In case of Greece, it’s heavily dependent on imports, with the only major home-‐

grown exports being fresh fish and cotton. The only benefit from devaluation in currency

would be increase in tourism but they have already cut prices and revenues haven’t gone up

much. (Nytimes.com, 2015)

So in order to facilitate growth and be able to generate revenues to be able to pack back the

creditors, Greece will have invest in infrastructure and adopt the necessary reforms to be able

to achieve the goal. Greece needs supply side reforms. After the debt restructuring and

implementing supply side reforms, they need to have a business plan. Greece needs to focus

on their comparative advantage. It can leverage on its natural beauty to focus on developing

on the tourism sector. Greece has numerous doctors and could use this opportunity to

develop high-‐end hospitals, also presents the opportunity to promote medical tourism. Being

the Country with the largest shipping transportation fleet, they can use the expertise to

develop a world-‐class shipping and training and management centre. Also the small

businesses and entrepreneurs should be allowed to flourish and not being strangled by red

tape and closed professionals who try to extract rent from them.


68

7. Recommendations

We have carefully studied the fundamentals of the Greece economy to be able to

substantially validate the ability of the Greeks to again be on the path of growth and be able

to prevent default. We have also drawn references to defaults in other countries wherever

possible as precedents to be able to showcase better and forecast the path for Greece. Due to

unavailability of data, we were not able to conduct the Risk Metric Z Metric test, for the

sovereign default risk of a country, which is being widely used to be able to predict the

probability of default. Although one cannot predict with full confidence the risk of default of a

country, fundamental analysis do help in signalling. Also during the writing of the paper, the

talk for the Third bailout package was going on, so there been intense discussions around the

terms of the bailout, which did make it easier in the availability of research material but also

required constantly updating variables. In order to be fully complete this research I would

been better placed, if I could have conducted some first-‐hand research which in a topic like

this becomes quite necessary to get a complete view.


69

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