Greek government-debt crisis

Click

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

1.0.8.9

Greece's debt percentage since 1999, compared to the average of the Eurozone.

The Greek government debt crisis is one of a few current European sovereign debt crises. Beginning in late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany. Downgrading of Greek government debt to junk bond status in April 2010, created alarm in financial markets. On 2 May 2010, the Eurozone countries and the IMF agreed on a €110 billion loan for Greece, conditional on the implementation of harsh austerity measures. In October 2011 and later in February 2012, Eurozone leaders agreed to offer a second €130 billion loan for Greece, conditional not only the implementation of another harsh austerity package, but also that all creditors should agree to a restructure of the Greek debt, reducing the debt burden to 120% of GDP by 2020.

Causes

File:HellenicOeconomy(inCurrentEuros).jpg

Combined charts of Greece's GDP and Debt since 1970; also of Deficit since 2000. Absolute terms time series are in current euros.

The Greek economy was one of the fastest growing in the eurozone from 2000 to 2007; during that period, it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits.

According to an editorial published by the Greek right-wing newspaper Kathimerini, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974. After the removal of the right-wing military junta, the government wanted to bring disenfranchised left-leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, customarily run large deficits to finance public sector jobs, pensions, and other social benefits. Since 1994, the ratio of debt to GDP has remained above 94.0%. In the turmoil of the Global Financial Crisis it rapidly grew above the unsustainable maximum level for Greece (defined by a majority of economists to be 120%). According to "The Economic Adjustment Programme for Greece" published by the EU Commission in October 2011, the debt level is expected to reach an unsustainable level of 181% in 2012.

Initially, currency devaluation helped finance the borrowing. After the introduction of the euro in January 2001, the devaluation tool disappeared. Throughout the next 8 years, Greece was however able to continue its high level of borrowing, due to the lower interest rates government bonds in euro could command, in combination with a long series of strong GDP growth rates. Problems however started to rise, when the Global Financial Crisis peaked with negative repercussions hitting all national economies in September 2008. The Global Financial Crisis had a particularly large negative impact on the GDP growth rates in Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn, with revenues falling 15% in 2009. Another consistent problem Greece has suffered from in recent decades, is the government's tax income. Each year it is several times below the expected level. In 2010, the estimated tax evasion costs for the Greek government amounted to well over $20 billion per year.

To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country's official economic statistics. At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing. The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU. As reported in the table below, the revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Euros stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3.0% of GDP, and also the debt level clearly exceeding the recommended limit at 60% of GDP.

In February 2010, the new government of George Papandreou (elected in October 2009), revised the 2009 deficit from a previously estimated 5% to an alarming 12.7% of GDP. In April 2010, the reported 2009 deficit was further increased to 13.6%, and at the time of the final revised calculation by Eurostat it ended at 15.8% of GDP, which proved to be the highest deficit for any EU country in 2009. The figure for Greek government debt at the end of 2009, was also increased from its first November estimate at €269.3 billion (113% of GDP), to a revised €299.5 billion (129% of GDP). This major upward revision of the deficit and debt level, was caused by flawed estimates and statistics previously being reported by the Greek authorities in 2009, resulting in the need for Eurostat to perform an in depth Financial Audit of the fiscal years 2006-09. After having conducted the financial audit, Eurostat noted in November 2010, that all "methodological issues" now had been fixed, and that the new revised numbers for 2006-2009 now finally was considered as being reliable.

Despite the crisis, the Greek governments bond auction in January 2010, had the offered amount of €8bn 5-year bonds over-subscribed by four times. At the next auction in March, the Financial Times again reported: "Athens sold €5bn in 10-year bonds and received orders for three times that amount". The continued succesful auctions and sale of bonds, was however only possible at the cost of increased yields, which in return caused a further worsening of the Greek public deficit. As a result, the rating agencies finally downgraded the Greece economy to junk status in late April 2010. In practical terms this caused the private capital market to freeze, so that all the Greek financial needs now instead had to be covered by international bailout loans, in order to avoid a sovereign default. In April 2010, it was estimated that up to 70% of Greek government bonds were held by foreign investors (primarily banks). The subsequent bailout loans paid to Greece, were mainly used to pay for the maturing bonds, but of course also to finance the continued yearly budget deficits.

History of government debt and deficit (1999–present)
Source: Eurostat, ELSTAT, MinFin

	1999	2000	20011	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011 (estimates)2	2012 (forecasts)2	2013 (forecasts)2
Public debt, billion €	122.3	141.0	151.9	159.2	168.0	183.2	195.4	224.2	239.3	263.1	299.5	329.4	354.7/356.5	371.9/384.9	388.5
Public debt, % of GDP	94.0	103.4	103.7	101.7	97.4	98.6	100.0	106.1	107.4	113.0	129.3	144.9	161.8/162.8	172.7/181.4	181.3
GDP growth, annual %	3.4	3.5	4.2	3.4	5.9	4.4	2.3	5.5	3.0	−0.2	−3.3	−3.5	−5.5	−2.8	0.7
Budget deficit, % of GDP	—	−3.7	−4.5	−4.8	−5.6	−7.5	−5.2	−5.7	−6.5	−9.8	−15.8	−10.6	−8.5/−8.9	−6.8/−7.0	−5.3
1 Year of entry into the Eurozone. 2 Estimates and Forecasts published in Oct-Dec.2011.

The first official flash estimate for GDP growth in 2011, based upon public accounts for all 4 quarters and calculated for the year in average, show that the GDP at constant prices declined -6.8%. This was worse, compared to the previous forecast at -5.5%, and could potentially call for a need to further increase the existing bailout packages.

Evolution of the crisis

In the early-mid 2000s, Greece's economy was strong and the government took advantage by running a large deficit, partly due to high defense spending amid historic enmity to Turkey. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries—shipping and tourism—were especially sensitive to changes in the business cycle. As a result, the country's debt began to pile up rapidly. In early 2010, as concerns about Greece's national debt grew, policy makers suggested that emergency bailouts might be necessary.

Danger of default

Further information: Sovereign default

Template:Greek governmental bonds 2 years graph

Without a bailout agreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring.

A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to €110 billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent. It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.

Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an “orderly default” on Greece’s public debt which would allow Athens to withdraw simultaneously from the eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate (essentially, coining money). Economists who favor this approach to solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighboring European countries even more.

At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy, as has happened with other economic zones, for example the U.S. Federal Reserve expanding its balance sheet over $1.3  trillion since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt, that money to be destroyed when the debt is paid back, later.

On 23 April 2010, the Greek government requested that the EU/IMF bailout package be activated, with an initial loan package of €45 billion ($61 billion).

Downgrading of creditworthiness

A few days later on 27 April Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amidst hints of default by the Greek government, in which case investors were thought to lose 30–50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement. Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts continue to question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would fail to get 30–50% of their money back. Stock markets worldwide declined in response to this announcement.

Following downgradings by Fitch and Moody's, as well as Standard & Poor's, Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear."

On 3 May 2010, the European Central Bank (ECB) suspended its minimum threshold for Greek debt "until further notice", meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier. As of 22 September 2011, Greek 10-year bonds were trading at an effective yield of 23.6%, more than double the amount of the year before.

Beginning of austerity measures

On 1 May 2010, the Greek government announced a series of austerity measures to persuade Germany, the last remaining holdout, to sign on to a larger EU/IMF loan package. The next day the eurozone countries and the International Monetary Fund agreed to a three year €110 billion loan (see below) retaining relatively high interest rates of 5.5%, conditional on the implementation of harsh austerity measures. Credit rating agencies immediately downgraded Greek governmental bonds to an even lower junk status. This was followed by an announcement of the ECB on 3 May that it will still accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating, in order to maintain banks' liquidity. The new austerity package was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece. On 5 May 2010, a national strike was held in opposition to the planned spending cuts and tax increases. In Athens some protests turned violent, killing three people.

Still the situation did not improve. It was originally hoped that Greece’s first adjustment plan together with the €110 billion support package would reestablish Greek access to private capital markets by 2012. However it was soon found that this process would take much longer. The November 2010 revisions of 2009 deficit and debt levels made accomplishment of the 2010 targets even harder, and indications signaled a recession harsher than originally feared. In May 2011 it became evident that due to the severe economic crisis tax revenues were lower than expected, making it even harder for Greece to meet its fiscal goals.

100,000 people protest against the harsh austerity measures in front of parliament building in Athens (29 May 2011)

Former Prime Minister George Papandreou and European Commission President José Manuel Barroso after their meeting in Brussels on 20 June 2011.

Following the findings of a bilateral EU-IMF audit in June, which called for even further austerity measures, Standard and Poor's downgraded Greece's sovereign debt rating to CCC, the lowest in the world. After the major political parties failed to reach consensus on the necessary measures to qualify for a further bailout package, and amidst riots and a general strike, Prime Minister George Papandreou proposed a re-shuffled cabinet, and asked for a vote of confidence in the parliament. The crisis sent ripples around the world, with major stock exchanges exhibiting losses. To ensure the release of the next 12 billion euros from the eurozone bail-out package (without which Greece would have had to default on loan repayments in mid-July), the government proposed additional spending cuts worth €28 billion over five years. On 27 June 2011, trade union organizations commenced a forty-eight hour labor strike, intended to pressure parliament members into voting against the austerity package, the first such strike since 1974. One United Nations official warned that the second package of austerity measures in Greece could pose a violation of human rights. Nevertheless, the second set of austerity measures was approved on 29 June 2011, with 155 out of 300 members of parliament voting in favor.

EU emergency measures continued at an extraordinary summit on 21 July 2011 in Brussels, where euro area leaders agreed to extend Greek (as well as Irish and Portuguese) loan repayment periods from 7 years to a minimum of 15 years and to cut interest rates to 3.5%. They also approved a new €109 billion support package, conditional on large privatization efforts. In the early hours of 27 October 2011, eurozone leaders and the IMF also came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt, the equivalent of €100 billion, to reduce the country's debt level from €340bn to €240bn or 120% of GDP by 2020.

Interim prime minister Lucas Papademos defends the austerity measures in parliament (November 2011).

On 7 December 2011, the new interim national union government led by Lucas Papademos submitted its plans for the 2012 budget, promising to cut its deficit from 9% of GDP 2011 to 5.4% in 2012, mostly due to the write-off of debt held by banks. Excluding interest payments, Greece even expects a primary surplus in 2012 of 1.1%. The unprecedented austerity measures of a scale far beyond any fiscal consolidation that any country has gone through in living memory have helped Greece bring down its primary deficit from €24.7bn (15.8% of GDP) in 2009 to just over €5bn (9.3%) in 2011 but they also dragged the country into five consecutive years of recession. Industrial output is more than 28% lower than in 2005 and unemployment rates are hitting a record high reaching almost 20 percent by 2011. Youth unemployment reached 48%, up from 22.4% back in 2008 when the financial crisis began. By 2011 more than a third of the nation had fallen into poverty and the number of 111,000 Greek companies that went bankrupt was 27% higher than one year before. In 2012 an IMF official negotiating Greek austerity measures admitted that excessive spending cuts were harming Greece.

Some of the economic experts argued in 2010, that the best option for Greece and the rest of the EU, would be to engineer an “orderly default” on Greece’s public debt, which would allow Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. Economists who favor this radical approach to solve the Greek debt crisis, typically argue, that an orderly default is unavoidable for Greece at the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just wind up hurting EU lenders and neighboring European countries even more. However, if Greece were to leave the euro, the economic and political impact would be devastating. According to Japanese financial company Nomura an exit would lead to a 60 percent devaluation of the new drachma. UBS warned of "hyperinflation, military coups and possible civil war that could afflict a departing country".

On 12 February, amid riots in Athens and other cities that left stores looted and burned and more than 120 people injured, the Greek parliament approved the austerity package and the post election guarantee, with a 199-74 majority. Forty-three lawmakers from the ruling Socialist PASOK and conservative New Democracy who voted against the bill were immediately expelled from their parties, reducing the ruling coalitions's majority in the 300-seat parliament from 236 to 193. The vote is now expected to pave the way for the EU, ECB and IMF to jointly release the funds, which are supposed to cover all the Greek financial needs in 2012 and 2013. According to the bailout plan, Greece should be stable enough for a return in 2014, to obtain economic funding from the private capital markets.

On 21 February 2012 the Eurogroup finalized the second bailout package (see below), which was extended form €109 billion to €130 billion. In a marathon meeting in Brussels private holders of governmental bonds accepted a slightly bigger haircut of 53.5% Creditors are invited to swap their Greek bonds into new 3.65% bonds with a maturity of 30 years, thus facilitating a €107bn debt reduction for Greece. EU Member States agreed to an additional retroactive lowering of the bailout interest rates. Furthermore they will pass on to Greece all profits that their central banks made by buying Greek bonds at a debased rate until 2020. Altogether this should bring down Greece's debt to 120.5% by 2020. The deal is expected to be finalized before March 20, when Greece needs to repay bonds worth €14.4bn or default on its debts.

International ramifications

Greece represents only 2.5% of the eurozone economy. Despite its size, the danger is that a default by Greece may cause investors to lose faith in other eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues. Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister José Luis Rodríguez Zapatero as "complete insanity" and "intolerable".

Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, and according to Standard & Poor's it does not risk a default. Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.

Countermeasures

Measures taken by the Greek government

Greece adopted a number of austerity packages since 2010. According to research published on 5 May 2010 by Citibank, the fiscal tightening is "unexpectedly tough". The first 3 austerity packages will amount to a total of €30 billion (equal to 12.5% of the 2009 Greek GDP), and consist of tightenings equal to 5% of GDP in 2010, with a further set of tightenings equal to 4% of GDP in 2011.

First austerity package – February 2010

The first round came with the signing of the memorandums with the IMF and the ECB concerning a loan of €80 billion. The package was implemented on 9 February 2010 and included a freeze in the salaries of all government employees, a 10% cut in bonuses, as well as cuts in overtime workers, public employees and work-related travels.

Second austerity package – March 2010

On 5 March 2010, amid new fears of bankruptcy, the Greek parliament passed the "Economy Protection Bill", which was expected to save another €4.8 billion. The measures include (in addition to the above): 30% cuts in Christmas, Easter and leave of absence bonuses, a further 12% cut in public bonuses, a 7% cut in the salaries of public and private employees, a rise of VAT from 4.5% to 5%, from 9% to 10% and from 19% to 21%, a rise of tax on petrol to 15%, a rise in the (already existing) taxes on imported cars of up to 10%–30%, among others.

On 23 April 2010, after realizing the second austerity package failed to improve the country's economic position, the Greek government requested that the EU/International Monetary Fund (IMF) bailout package be activated. Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. The IMF had said it was "prepared to move expeditiously on this request".

Shortly after the European Commission, the IMF and ECB set up a tripartite committee (the Troika) to prepare an appropriate programme of economic policies underlying a massive loan. The Troika was led by Servaas Deroose, from the European Commission, and included also Poul Thomsen (IMF) and Klaus Masuch (ECB) as junior partners. In return the Greek government agreed to implement further measures.

Third austerity package – May 2010

On 1 May 2010, Prime Minister George Papandreou announced a new round of austerity measures, which have been described as "unprecedented". The proposed changes, which aim to save €38 billion through 2012, represent the biggest government overhaul in a generation. The bill was submitted to Parliament on 4 May and approved on separate votes on 29 and 30 June. It was met with a nationwide general strike and massive protests the following day, with three people being killed, dozens injured, and 107 arrested.

The measures include:

• An 8% cut on public sector allowances (in addition to the two previous austerity packages) and a 3% pay cut for DEKO (public sector utilities) employees.
• Public sector limit of €1,000 introduced to bi-annual bonus, abolished entirely for those earning over €3,000 a month.
• Limit of €500 per month to 13th and 14th month salaries of public employees; abolished for employees receiving over €3,000 a month.
• Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month.
• Return of a special tax on high pensions.
• Extraordinary taxes imposed on company profits.
• Rise in the value of property (and thus higher taxes).
• Rise of an additional 10% for all imported cars.
• Changes were planned to the laws governing lay-offs and overtime pay.
• Increases in value added tax to 23% (from 19%), 11% (from 9%) and 5.5% (from 4%).
• 10% rise in luxury taxes and sin taxes on alcohol, cigarettes, and fuel.
• Equalization of men's and women's pension age limits.
• General pension age has not changed, but a mechanism has been introduced to scale them to life expectancy changes.
• A financial stability fund has been created.
• Average retirement age for public sector workers will be increased from 61 to 65.
• The number of public-owned companies shall be reduced from 6,000 to 2,000.
• The number of municipalities shall shrink from 1,000 to 400.

On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and the International Monetary Fund. The deal consisted of an immediate €45 billion in loans to be provided in 2010, with more funds available later. The first installment covered €8.5 billion of Greek bonds that became due for repayment.

In total, €110 billion have been agreed on. The interest for the eurozone loans is 5%, considered to be a rather high level for any bailout loan. The European Monetary Union loans will be pari passu and not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. The loans should cover Greece's funding needs for the next three years (estimated at €30 billion for the rest of 2010 and €40 billion each for 2011 and 2012). According to EU officials, France and Germany demanded that their military dealings with Greece be a condition of their participation in the financial rescue.

As of 12 May 2010, the deficit was down 40% from the previous year.

Fourth austerity package – June 2011 (Mid-term plan)

Further austerity was introduced in 2011. In the midst of public discontent, massive protests and a 24-hour-strike throughout Greece, the parliament debated on whether or not to pass a new austerity bill, known in Greece as the "mesoprothesmo" (the mid-term [plan]). The government's intent to pass further austerity measures was met with discontent from within the government and parliament as well, but was eventually passed with 155 votes in favor (a marginal 5-seat majority). Horst Reichenbach headed up the task force overseeing Greek implementation of austerity and structural adjustment.

The new measures included: raising €50 billion from privatizations and sales of government property; increasing taxes for those with a yearly income of over €8,000, extra tax for those with a yearly income of over €12,000, increasing VAT in the housing industry, an extra tax of 2% for combating unemployment, lower pension payments ranging from 6% to 14% from the previous 4% to 10%, the creation of a special agency responsible with exploiting government property, and others.

On 11 August 2011 the government introduced more taxes, this time targeted at people owning immovable property. The new tax, which is to be paid through the owner's electricity bill, will affect 7.5 million Public Power Corporation accounts and ranges from 3 to 20 euro per square meter. The tax will apply for 2011–2012 and is expected to raise €4 billion in revenue.

On 19 August 2011 the Greek Minister of Finance, Evangelos Venizelos, said that new austerity measures "should not be necessary". On 20 August 2011 it was revealed that the government's economic measures were still out of track; government revenue went down by €1.9 billion while spending went up by €2.7 billion.

On a meeting with representatives of the country's economic sectors on 30 August 2011, the Prime Minister and the Minister of Finance acknowledged that some of the austerity measures were irrational, such as the high VAT, and that they were forced to take them with a gun to the head.

In October, Greek Prime Minister George Papandreou got parliamentary backing for further austerity measures. These new measures would allow Greece to get an extra installment of international loans that would prevent a sovereign default and they would make possible the partial write-off of Greek debt, the so called Private Sector Involvement (PSI). As a result of this backing, Greece was granted by the EU a quid pro quo of further austerity for a €100bn loan and a 50% debt reduction through PSI. Within a week, Papandreou, backed unanimously by his cabinet, announced a referendum on the deal, sending shockwaves through the financial markets. This resulted in Germany's chancellor Angela Merkel and France's prime minister Nicolas Sarkozy issuing an ultimatum declaring that, unless the referendum resulted in the approval of the new measures, they would withhold an overdue €6bn loan payment to Athens, money that Greece needed by mid-December. Papandreou cancelled the referendum the next day after the New Democracy Party, leaders of the opposition, agreed to back the agreement.

On November 10 Papandreou resigned as prime minister following an agreement with the New Democracy party and the Popular Orthodox Rally to appoint a new prime minister of common acceptance promulgate laws associated with implementing the new measures that were agreed with the EU.The person chosen for this task was non-MP technocrat Lucas Papademos, former Governor of the Bank of Greece and former Vice President of the European Central Bank; his appointment was criticised by left-wing parties and branded "unconstitutional". By contrast, three separate polls taken when Papademos assumed office revealed that around 75% of Greeks thought that temporary, emergency technocratic rule was "positive". The EU insisted that whichever government was elected after Papademos in 2012, it must be bound to honour the agreed upon EU-IMF austerity strategy. It thus demanded that Greek party-political leaders sign legally-binding letters to this effect, as well as to any additional measures that might be required in future as part of the second rescue-package. Papademos argued in favour of signing, even in the face of opposition from major pro-austerity factions in his government. Such letters would bind Greek governments to austerity and structural adjustment through to 2020. At the end of December, it was announced that the general election to replace Papademos' technocratic administration was to be delayed until April 2012, as more time was needed to finalise plans for austerity and structural adjustment, as well as to complete negotiations over the Greek debt reduction.

Finalising the deal on the 50% PSI debt write-off, required by the troika as a condition for extending more aid, proved difficult in early 2012, with hedge funds being the most difficult to persuade. In an interview with The New York Times, Papademos said that if his country did not receive unanimous agreement from its bondholders to voluntarily write down €100bn of Greek's €340bn debt, he would consider legislating to force bondholder losses, and that if things went well, Greeks could expect "an end to austerity" in 2013. Others believed that even the proposed 50% would not be enough to prevent a sovereign default.

Fight against corruption and tax evasion

The rapid increase in government revenue is difficult, since the size of the Greek black economy is estimated to be around €65bn, resulting in €20bn of unpaid taxes. Greece has aimed at increasing the effectiveness of its tax authorities to get a hold of shady business practices and to push back Fakelaki, the practice of cash donations through the envelope. A rapid increase in government revenue is unlikely, given the restructuring of the tax authorities and legislative changes at most show a long-term success.

The Inspector General of Public Administration has started an online census of civil servants. In connection with this census he has uncovered a number criminal offenses, including an entire non-existent health authority.

In 2010 the government has implemented a tax reform. The year 2012 saw the introduction of a duty of non-cash payments for amounts over 1,500 Euros.

The Greek police have established a special unit, which deals exclusively with tax offenses. Germany has offered experts from its financial management and tax investigation office to help build a more efficient tax administration. However, months later it was not clear, whether Greek officials would accept the offer.

In November 2011, the new Greek finance minister Evangelos Venizelos called upon all persons who owe the state more than €150,000 to pay their outstanding taxes until November 24 or find their names on a black list published on the Internet. The government later revealed the list, which also includes a number of prominent Greeks, including pop stars and sportsmen.

Fifth austerity package – February 2012

In February 2012, facing sovereign default, Greece was in need of more funds from the IMF and EU by 20 March 2012, and was negotiating over the next lending package, worth €130 billion. On 10 February 2012, the Greek cabinet approved the draft bill of a new austerity plan, which has been calculated to improve the 2012 budget deficit with €3.3 billion (and a further €10 billion improvement scheduled for 2013 and 2014). The austerity plan includes:<

• 22% cut in minimum wage from the current €750 per month.
• Holiday wage bonuses (two extra months of full wage being paid each year) are permanently cancelled.
• 150,000 jobs cut from state sector by 2015, of which 15,000 shall be cut by the end of 2012.
• Pension cuts worth €300 million in 2012.
• Changes to laws to make it easier to lay off workers.
• Health and defense spending cuts.
• Industry sectors are given the right to negotiate lower wages depending on economic development.
• Opening up closed professions to allow for more competition, particularly in the health, tourism, and real estate sectors.
• Privatizations worth €15 billion by 2015, including Greek gas companies DEPA and DESFA. In the medium term, the goal remains at €50 billion.

The latest round of austerity measures means Greece will likely face at least another year of recession, presaging another round of business closures, before the economy will start to grow again.

Showing position of disagreement, the transport minister Makis Voridis from the Popular Orthodox Rally party, along with five deputy ministers from various ministries, decided to resign. On 11 February, caretaker prime minister Lucas Papademos warned of "social explosion and chaos" if the parliament would not approve the deal the next day. Speaking to members of Parliament before their vote, Papademos stated that if the majority of them chose to vote against the austerity measures there would be several onerous consequences, including that the government would not be able to pay the salaries of its employees. On 13 February, the Greek Parliament subsequently approved this latest round of austerity measures by a vote of 199 to 74. During the period of parliamentary debate, massive protests were witnessed in Athens that left stores looted and burned and more than 120 people injured. The riot was one of the worst since 2010.

Despite being one of the ruling parties, the Popular Orthodox Rally voted against the plan and withdrew itself from the government. Forty-three MPs from the other two ruling parties (socialist PASOK and conservative New Democracy) also voted against the plan and were immediately expelled from their parties. This reduced the combined power of these two parties from 236 to 193 seats, which is still majority for the 300-seat parliament of Greece. The vote was a major precondition for the EU and IMF to jointly release the funds, which are supposed to cover all financial needs in 2012 and 2013, with the hope that Greece can start lending again at the private capital markets in 2014.

The determination of the leaders of Greek ruling parties to implement the new austerity package was however doubted. For example, Antonis Samaras (leader of New Democracy) talked about renegotiating the deal, despite voting for the austerity package. Because of such uncertainty, the Eurozone finance ministers demanded Greek main politicians to sign a written assurance for their continued support to implement the austerity package, both before and after any elections.

After passing the new austerity package on February 13, there still remained four other hurdles for Greece, to receive the new €130 billion bailout loan:

• €325 million out of the total €3.3 billion austerity package still needed to be specified in the form of some exact "structural expenditure reductions", to be outlined and passed by a separate political bill.
• Written commitments from the main party leaders should be filed, to guarantee their continued support for the austerity program, both before and after elections in April 2012.
• The debt restructure agreement, with a debt write-off worth €107 billion, needs to be implemented by a bond swap in early March 2012, where the private creditors also need to accept the deal. Under the terms of the deal, banks, pension funds, insurers and other holders of €200 billion in Greek government bonds would write down their holdings by 53.5% by swapping bonds they hold for longer-dated securities that pay a lower coupon, although it is not clear how many will take the deal. Private sector holders of Greek debt will take losses of 53.5% on the nominal value of their bonds. They had earlier agreed to a 50% nominal write-down, which equated to around a 70% loss on the net present value of the debt.
• A debt sustainability report by the Troika, based upon the full implementation of the latest austerity package and the debt restructure agreement, needs to show a sustainable outlook for the Greek economy, with the debt relative to GDP being reduced to 120% in 2020.

As of February 19, Greece had managed to pass the first two hurdles. The debt restructure agreement and the result of the debt sustainability report was however still pending. Some of the newest calculations suggested that Greece would now need an enhanced bailout at €136 billion, and they were still likely to exceed the 120% debt level in 2020. It is now up to the Troika to decide if this can be accepted under the previous terms. Alternatively, the slightly worse outlook for the debt numbers can also be counterfeited, by some further debt restructuring and/or demands for additional austerity measures.

Measures taken by the EU and IMF

First rescue package - April 2010

Having had the credit rating agencies further downgraded Greece's ability to achieve and the risk premiums on long-term Greek government bonds first record levels, the Greek government requested on 23 April 2010 official financial assistance.

The European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) agreed on 1-2 May 2010 with the Greek government to a three-year financial aid program (loan commitments) totaling 110 billion euros. The Greek debt in exchange for household should be consolidated within three years, so that the budget deficit should be reduced by 2014 to below 3 percent.

Of the 110 billion promised by the IMF took €30bn, the Eurozone 80 billion (as bilateral loan commitments). Instrumental in determining the rates of the individual euro area countries in the €80bn of the Eurozone was the respective equity interest in the capital of the ECB, which in turn is determined every five years after the prorated share of a country in the total population and economic output in the EU. The German share of the €80bn was 28%, or about €22.4bn in three years.

In May 2010 Greece received the first tranche of the bailout money totaling €20bn. Of this total, 5.5 billion came from the IMF and 14.5 billion of Euro states.

On 13 September the second Tranche of €6.5bn was disbursed. The 3rd tranche of the same amount was paid on 19 January 2011. On 16 March the 4th tranche in the amount of €10.9 billion euros was paid out, followed by the 5th installment on 2 July. The 6th tranche of €8bn was paid out after months of delay in early December. Of this amount, the IMF took over €2.2bn euros.

Second rescue package

Early version - July 2011

Since the first rescue package proved insufficient, the 17 leaders of Euro countries approved a (preliminary) second rescue package at an EU summit on 21 July 2011. It was agreed that the aid package has a volume of 100 billion euros, provided by the newly created European Financial Stability Facility. The repayment period was extended from seven to 15 years and the interest rate was lowered to 3.5%.

For the first time, this also included a private sector involvement, meaning that the private financial sector accepted a voluntary cut. It was agreed that the net contribution of banks and insurance companies to support Greece would include an additional 37 billion euros in 2014. The planned purchase of Greek bonds from private creditors by the euro rescue fund at their face value will burden the private sector with at least another €12.6 billion.

It was also announced at the EU summit, a reconstruction plan for Greece in order to promote economic growth. The European Commission established a "Task Force for Greece" Declaration of the EU Commission President Jose Manuel Barroso at a special summit]

EU summit - 26 October 2011

On the night of 26 to 27 October at the EU summit, the politicians made two important decisions to reduce the risk of a possible contagion to other countries, in the case of a Greek default. The first decision was to require all European banks to achieve 9% capitalization, to make them strong enough to withstand those financial losses that potentially could erupt from a Greek default. The second decision was to leverage the EFSF from €500bn to €1000bn, as a firewall to protect financial stability in other Eurozone countries with a looming debt crisis. The leverage had previously been criticized from many sides, because it is something taxpayers ultimately risk to pay for, due to the significantly increased risks assumed by the EFSF.

Furthermore, the Euro countries agreed on a plan to cut the debt of Greece from todays 160% to 120% of GDP by 2020. As part of that plan, it was proposed that all owners of Greek governmental bonds, should "voluntarily" accept a 50% haircut of their bonds (resulting in a debt reduction worth €100bn), and more over accept interest rates being reduced to only 3.5%. At the time of the summit, this was at first formally accepted by the government banks in Europe. The task to negotiate a final deal also including the private creditors, was handed over to the Greek politicians.

In view of the uncertainty of the domestic political development in Greece, the first disbursement was suspended after Prime Minister George Papandreou announced on 1 November 2011 that he wanted to hold a referendum on the decisions of the Euro summit. After two days of intense pressure, particularly from Germany and France, he finally gave up on the idea. On 11 November 2011 he was succeeded as prime minister by Loukas Papadimos, who leads a new transitional government. The most important task of this interim government, was to finalize the "haircut deal" for Greek governmental bonds and pass a new austerity package, to comply with the Troika requirements for receiving the second bailout loan worth €130bn (enhanced from the previously offered amount at €109bn).

Final agreement - February 2012

The Troika behind the second bailout package, defined three requirements for Greece to comply with in order to receive the money. The first requirement was to finalize an agreement whereby all private holders of governmental bonds would accept a 50% haircut with yields reduced to 3.5%, thus facilitating a €100bn debt reduction for Greece. The second requirement was that Greece needed to implement another demanding austerity package in order to bring its budget deficit into sustainable territory. The third and final requirement was that a majority of the Greek politicians should sign an agreement guaranteeing their continued support for the new austerity package, even after the elections in April 2012.

On 21 February 2012 the Eurogroup finalized the second bailout package. In a thirteen hour marathon meeting in Brussels EU Member States agreed to a new €100 billion loan and a retroactive lowering of the bailout interest rates to a level of just 150 basis points above the Euribor. The IMF will provide "a significant contribution" to that loan but will only decide in the second week of March, how much that will be. EU Member States will also pass on to Greece all profits, which their central banks made by buying Greek bonds at a debased rate until 2020. Private investors accepted a slightly bigger haircut of 53.5% of the face value of Greek governmental bonds. The creditors are invited to swap their current Greek bonds into new bonds with a maturity of between 11 and 30 years and lower average yields of 3.65% (2% for the first three years, 3% for the next five years, and 4.2% thereafter), thus facilitating a €100bn debt reduction for Greece. Euro-area Member States have pledged to contribute €30bn for private sector participation.In case not enough bondholders agree to a voluntary bond swap, the Greek government has threatened to retroactively introduce a collective action clause to enforce participation.

The cash will be handed over after it is clear that private-sector bondholders do indeed join in the haircut, and after Greece gives evidence of the legal framework that it will put in place to implement dozens of "prior actions" - from sacking underperforming tax collectors to passing legislation to liberalise the country's closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June. In return for the bailout money Greece accepts "an enhanced and permanent presence on the ground" of European monitors. It will also have to service its debts from a special, separate escrow account, depositing sums in advance to meet payments that fall due in the following three months. This operation will be supervised by the troika: the International Monetary Fund, the European Union and the European Central Bank.

Objections to proposed policies

See also: 2010–2012 Greek protests

Protests in Athens on 25 May 2011

Economic and social effects of austerity measures

In exchange for European funding Greece was forced to impose strict fiscal austerity. As early as 2010 some economists have expressed fears that the negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. In a 2003 study that analyzed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth. US economist Joseph Stiglitz has also criticised the EU for being too slow to help Greece, insufficiently supportive of the new government, lacking the will power to set up sufficient "solidarity and stabilisation framework" to support countries experiencing economic difficulty, and too deferential to bond rating agencies.

According to an IMF official austerity measures have helped Greece bring down its primary deficit from €24.7bn (15.8% of GDP) in 2009 to just over €5bn (9.3%) in 2011 but they also dragged the country into five consecutive years of recession. Industrial output is more than 28% lower than in 2005 The number of Greek companies that went bankrupt in 2011 was 27% higher than the year before. Unemployment rates are hitting a record high reaching almost 20 percent by 2011. Youth unemployment reached 48%, up from 22.4% back in 2008 when the financial crisis began.

The social effects of the austerity measures on the Greek population have been severe, as well as on poor and needy foreign immigrants, with some Greek citizens turning to NGOs for healthcare treatment. By 2011 more than a third of the nation had fallen into poverty. On 17 October 2011 Minister of Finance Evangelos Venizelos announced that the government would establish a new fund, aimed at helping those who were hit the hardest from the government's austerity measures. The money for this agency will come from the proceeds made by tackling tax evasion.

In February 2012, it was reported that 20,000 Greeks had been made homeless during the preceding year, and that 20 per cent of shops in the historic city centre were empty. The same month, Poul Thomsen, a Danish IMF official overseeing the Greek austerity programme, warned that ordinary Greeks were at the "limit" of their toleration of austerity as he called for recognition of "the fact that Greece has done a lot, at a great cost to the population". Another IMF official admitted that excessive spending cuts were harming Greece. One United Nations official warned that the austerity measures could pose a violation of human rights.

Public opinion

On a poll by Public Issue and SKAI Channel, PASOK who has won the National Elections of 2009 with 43.92% has seen its approval ratings being decimated to a mere 8%, being placed at 5th place, after right-wing New Democracy (31%), left-wing Democratic Left (18%), left-wing Communist Party of Greece (KKE) (12.5%) and left-wing SYRIZA (12%). At the same poll, G.A. Papanderou, is the least approved political leader with 9% approval, while 71% of Greeks do not trust Papademou as a PM.

On a poll published on 18 May 2011, 62% of the people questioned felt that the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, while 80% had no faith in the Minister of Finance, Giorgos Papakonstantinou, to handle the crisis. Evangelos Venizelos replaced Mr. Papakonstantinou on 17 June. 75% of those polled gave a negative image of the IMF, and 65% feel it is hurting Greece's economy. 64% felt that the possibility of bankruptcy is likely, and when asked about their fears for the near future, polls showed a fear of: unemployment (97%), poverty (93%) and the closure of businesses (92%).

Call for debt audit commission

In the documentary Debtocracy made by a group of Greek journalists, it is argued that Greece should create an audit commission, and force bondholders to suffer from losses, like Ecuador did.

Speculation about Euro exit

Economists, mostly from outside Europe, and associated with Modern Monetary Theory and other post-Keynesian schools condemned the design of the Euro currency system from the beginning and have since been advocating that Greece (and the other debtor nations) unilaterally leave the eurozone, which would allow Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. Economists who favor this radical approach to solve the Greek debt crisis, typically argue, that an orderly default is unavoidable for Greece at the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just wind up hurting EU lenders and neighboring European countries even more. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.

However, German Chancellor Angela Merkel and French President Nicolas Sarkozy have said on numerous occasions that they would not allow the eurozone to disintegrate and have linked the survival of the Euro with that of the entire European Union. In September 2011, EU commissioner Joaquín Almunia shared this view, saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration".

See also

• European sovereign debt crisis
• The role of the Institute of International Finance in the Greek debt crisis

References

• Ronald Janssen, 'Greece and the IMF:Who Exactly is Being Saved?' (July 2010) CEPR