GREEK DEBT CRISIS

The Greek debt crisis originated from heavy government spending and problems escalated over
the years due to slowdown in global economic growth. When Greece became the 10th member
of the European Union on Jan. 1, 1981, the country's economy and finances were in good shape,
with a debt-to-GDP ratio of 28% and a budget deficit below 3% of GDP. But the situation
deteriorated dramatically over the next 30 years because fiscal profligacy, which is defined as
wasteful and excessive expenditure, caused deficits and debt levels to explode.

The crisis led to a loss of confidence in the Greek economy, indicated by a widening
of bond yield spreads and rising cost of risk insurance on credit default swaps compared to the
other Eurozone countries, particularly Germany. 

How it started:
The Greek crisis started in late 2009, triggered by the turmoil of the world-wide Great Recession,
structural weaknesses in the Greek economy, and lack of monetary policy flexibility as a
member of the Eurozone. The crisis included revelations that previous data on government
debt levels and deficits had been underreported by the Greek government: the official forecast
for the 2009 budget deficit was less than half the final value as calculated in 2010, while after
revisions according to Eurostat methodology, the 2009 government debt was finally raised from
$269.3bn to $299.7bn, i.e. about 11% higher than previously reported.

Key Takeaways:
 The Greek debt crisis is due to the government's fiscal policies that included too much
spending.
 Greece's financial situation was sound when it entered the EU in the early 1980s, but
deteriorated substantially over the next thirty years.
 While the economy boomed from 2001-2008, higher spending and mounting debt loads
accompanied the growth.
 By the time of the 2007-2008 financial crisis, the jig was up and Greece's debt loads
became too big to handle—austerity measures were put in place shortly thereafter.

Causes:
EXTERNAL FACTORS:

 The Greek crisis was triggered by the turmoil of the Great Recession, which lead the
budget deficits of several Western nations to reach or exceed 10% of GDP. In the case of
Greece, the high budget deficit (which, after several corrections, was revealed that it had
been allowed to reach 10.2% and 15.1% of GDP in 2008 and 2009, respectively) was
coupled with a high public debt to GDP ratio (which, until then, was relatively stable for
 several years, at just above 100% of GDP- as calculated after all corrections).Thus, the
country appeared to lose control of its public debt to GDP ratio, which already reached
127% of GDP in 2009. In contrast, Italy was able (despite the crisis) to keep its 2009
budget deficit at 5.1% of GDP, which was crucial, given that it had a public debt to GDP
ratio comparable to Greece's. In addition, being a member of the Eurozone, Greece had
essentially no autonomous monetary policy flexibility.
 Finally, there was an effect of controversies about Greek statistics (due the
aforementioned drastic budget deficit revisions which led to an increase in the calculated
value of the Greek public debt by about 10%, public debt to GDP ratio of about 100%
until 2007), while there have been arguments about a possible effect of media reports.
Consequently, Greece was "punished" by the markets which increased borrowing rates,
making it impossible for the country to finance its debt since early 2010.

INTERNAL FACTORS

 In January 2010, the Greek Ministry of Finance published Stability and Growth Program

2010.The report listed five main causes, poor GDP growth, government debt and deficits,
budget compliance and data credibility. Causes found by others included excess
government spending, current account deficits, tax avoidance and tax evasion.

GDP GROWTH

 After 2008, GDP growth was lower than the Greek national statistical agency had
anticipated. The Greek Ministry of Finance reported the need to improve competitiveness
by reducing salaries and bureaucracy and to redirect governmental spending from non-
growth sectors such as the military into growth-stimulating sectors.

GOVERNMENT DEFICIT

 Fiscal imbalances developed from 2004 to 2009: "output increased in nominal terms by
40%, while central government primary expenditures increased by 87% against an
increase of only 31% in tax revenues."

GOVERNMENT DEBT

 The debt increased in 2009 due to the higher-than-expected government deficit and
higher debt-service costs. The Greek government assessed that structural economic
reforms would be insufficient, as the debt would still increase to an unsustainable level
before the positive results of reforms could be achieved. In addition to structural reforms,
permanent and temporary austerity measures (with a size relative to GDP of 4.0% in
2010, 3.1% in 2011, 2.8% in 2012 and 0.8% in 2013) were needed.
BUDGET COMPLIANCE

 Budget compliance was acknowledged to need improvement. For 2009 it was found to be
"a lot worse than normal, due to economic control being more lax in a year with political
elections". The government wanted to strengthen the monitoring system in 2010, making
it possible to track revenues and expenses, at both national and local levels.

DATA CREDIBILITY

 Problems with unreliable data had existed since Greece applied for Euro membership in
1999.In the five years from 2005 to 2009, Eurostat noted reservations about Greek fiscal
data in five semiannual assessments of the quality of EU member states' public finance
statistics. In its January 2010 report on Greek Government Deficit and Debt Statistics, the
European Commission/Eurostat wrote (page 28): "On five occasions since 2004
reservations have been expressed by Eurostat on the Greek data in the biannual press
release on deficit and debt data. When the Greek EDP data have been published without
reservations, this has been the result of Eurostat interventions before or during the
notification period in order to correct mistakes or inappropriate recording, with the result
of increasing the notified deficit."

BANK RECAPITALIZATION

 The Hellenic Financial Stability Fund (HFSF) completed a €48.2bn bank recapitalization
in June 2013, of which the first €24.4bn were injected into the four biggest Greek banks.
Initially, this recapitalization was accounted for as a debt increase that elevated the debt-
to-GDP ratio by 24.8 points by the end of 2012. In return for this, the government
received shares in those banks, which it could later sell.

 HFSF offered three out of the four big Greek banks

(NBG, Alpha and Piraeus) warrants to buy back all HFSF bank shares in semi-annual
exercise periods up to December 2017, at some predefined strike
prices. However Eurobank Ergasias failed to attract private investor participation and
thus became almost entirely financed/owned by HFSF.