14 Jul 2015

DEFINITION of ‘Grexit’
Grexit, an abbreviation for “Greek exit,” refers to Greece’s potential withdrawal from the eurozone, after which it would most likely revert to using the drachma, its currency until 2001.

Greece joined the European Communities, a predecessor of the European Union, in 1981 and enjoyed an average annual GDP growth rate of 1.7% for the subsequent two decades. It joined the euro in 2001, but the government of Prime Minister Kostas Karamanlis revealed in 2004 that its predecessor had falsified economic data, claiming the deficit was less than 1% of GDP, when in fact it was well over the eurozone’s 3% threshold.

Karamanlis’ New Democracy party, in power from 2004 to 2009, oversaw the structural decay of Greece’s finances. The debt-to-GDP ratio swelled from 97% in 2003 to 130% in 2009. Spending on pensions edged up from 11.8% of GDP to 13%, reflecting a culture of clientelism in the civil service, which grew by around 150,000 positions. Tax evasion was rampant. Lawmakers took no action to fight it, in part because they were likely among the worst offenders and in part because lax enforcement was seen as a way to earn votes.

Spending on the 2004 Olympics, which drove the deficit up to 6.1% of GDP, created the illusion of prosperity. Media outlets, run at a loss by powerful business figures who profited from government patronage and thus sought to influence the electorate, also masked the underlying vulnerability of Greek finances.

When the global financial crisis struck, this rickety structure collapsed. Greece’s GDP shrank by 4.7% in the first quarter of 2009, and the deficit ballooned to over 12% of GDP. The big three credit rating agencies initiated a string of downgrades that culminated in Standard & Poor’s demoting the country’s debt to junk status the following year. At their peak in March 2012, Greek 10-year bond yields exceeded 44%.

Austerity and Bailouts
The socialist Pasok party took control of the government in snap elections in October 2009 and passed the first of several austerity measures the following February. These cut public sector wages and spending by 10%, raised the retirement age and increased fuel prices. Subsequent austerity packages, passed over the following three years, included further public sector pay cuts, public sector lay-offs, minimum wage cuts, tax increases, cuts to pension payouts, cuts to health and defense spending and changes in the labour code to make it easier to lay off workers.

Implementation of these measures has been uneven. In many cases, those that affect powerful interest groups have been stalled, while those that affect the poor have gone ahead. Unemployment skyrocketed from just over 10% to nearly 28% in September 2013, when the eurozone’s average stood around 11%. About 50% of Greeks aged 15 to 24 remain jobless, and around 40% of Greek children now live in poverty.

While Greek leaders had initially hoped to stabilize their finances independently, the need for outside help became clear when investors did not respond to a second austerity package. Prime Minister Giorgios Papandreou requested a bailout in April 2010. The EU and the IMF responded with a three-year, €110 billion (at the time, $147 billion) package the following month, the largest sovereign bailout in history, in exchange for another round of painful austerity measures.

A second bailout package was finalized in February 2012, following the passage of a fifth batch of austerity legislation. It brought the total the European Central Bank, EU countries and the IMF – disparagingly called the “troika”– had diverted to Greece to €246 billion (the additional funding was worth $172 billion at the time). The terms required Greece to reduce its debt from 160% of GDP to 120% by 2020. As part of the deal, banks holding Greek bonds would take a 53.5% loss on the face value of their holdings, for an actual loss of perhaps 75%.

Little of this money ever actually went to Greece, but rather passed through it, as it was used to repay debt holders. This has contributed to the perception that foreign governments have not been bailing out Greece, so much as their own banks. Germany, for example, is the largest single contributor to the bailout package, at €56 million euro; its banks are also the largest investors in Greek bonds, at approximately €13.3 billion.

The result is a powerful sense among ordinary Greeks that they have been betrayed by their leaders and by leaders in other eurozone countries, particularly Germany’s Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble.

This feeling of betrayal has led to violent protests and political uncertainty. Protests following the first bailout package in May 2010 turned violent, and three people died when rioters burned a bank branch. General strikes and rioting also accompanied parliamentary votes on the nation’s fourth and fifth austerity bills, in June and October of 2011. By November of that year, Prime Minister Papandreou felt compelled to call a confidence vote. He won narrowly, but resigned soon after.

A short-lived unity government oversaw the second bailout agreement in February 2012 and the return of violent protests, when a pensioner’s suicide in Athens’ central square led to clashes between police and firebomb-throwing protesters that April. The following month’s elections failed to form a government and saw increased fragmentation, as support grew for far-left parties like Syriza and the neo-fascist Golden Dawn. In June, New Democracy’s Antonis Samaras became prime minister as citizens’ anger at austerity and investors’ fears of default< deepened.

Greece got off to a relatively good start in 2014, posting a primary (before debt payments) surplus for fiscal 2013, the first in a decade. The country had met one of its creditors’ key conditions ahead of schedule, and its return to the markets in the form of a sovereign bond issue the following April seemed to herald a new beginning for the country.

All was relatively quiet until a snap election swept the anti-troika Syriza party into power in January 2015. The new prime minister, Alexis Tsipras, promised to reverse years of austerity policy and to renegotiate Greece’s bailout terms.

The result was considered a snub to Greece’s creditors. Angela Merkel had hinted in the run-up to the election that Germany could accept a Greek exit from the single currency if it elected Syriza. Markets were similarly displeased with the outcome, and the euro fell as close to parity with the dollar as it had been in 11 years.

Syriza’s boisterous finance minister, Yanis Varoufakis, ended up creating so much tension in dialogues with eurozone partners that he was sidelined in April. Negotiations ultimately broke down on June 27, when Tsipras announced a referendum on the agreement the negotiators were supposed to be finalizing. The next day Tsipras closed banks and imposed capital controls, allowing Greeks to withdraw only €60 ($66) per day. On June 1, Greece became the first developed country to miss a repayment to the IMF.

While the referendum was not clear on specifics, the vote represented a clear rejection of austerity policy. Over 60% of those who turned out said “no” to the bailout agreement. Varoufakis resigned the next day, clearing the way – Greek leaders hoped – for more productive negotiations with their creditors.

July 2015
Negotiations continue in July 2015. In the mean time, the ECB continues to provide liquidity to keep Greece’s banks from tanking. It is difficult to predict what the outcome will be, but it is not encouraging that Varoufakis’ replacement, Euclid Tsakalotos, reportedly showed up to a preparatory meeting with no new proposals.

Greece has not received any external capital since August 2014. It has already failed to meet its loan obligations, and if it cannot pay salaries and pensions, it will have to resume printing IOUs and effectively exit the euro. Alternatively, Greece and its creditors could continue to strike temporary deals at 5am, rattling markets. The reality is that, at 180% of GDP, Greece’s debt may not be payable. What effect a default would have though, is unsure.

Covid-19 – Johns Hopkins University

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