The Greek Debt Crisis

Academics today argue that the Greek Debt Crisis took place in 2010’s, but to understand its roots we must start decades before. As the Cold War continued, countries caught in the middle saw rapid changes in the structure of their government and society, Greece was not an exception to this occurrence. Some nation-states turned to liberalism and appeased the West while communism broiled in Southeast Asia and Latin America, but in 1974, Greek democracy was restored as the military rule was destabilized following the Turkish invasion of Cyprus. Greece went from military rule to a democracy in a matter of days bringing forth a dramatic change in the country.

As Greece began its push into liberalism and democracy led by moderate-right Prime Minister Constantine Karamanlis, the country joined the European Economic Community in 1981, the forefather of the European Union. Greek politicians in the country vied for power promising lavish welfare programs cushioned by the country’s low debt to GDP ratio at the time. Greece began to run a deficit in order to promote economic growth.

In 1982, twelve member states from the European Economic Community signed the Treaty of Maastricht to establish the European Union. The treaty brought European nations together to share foreign policy and judicial cooperation as well as launching the Economic and Monetary Union “EMU” which would consequentially lead the way to the Euro. The Euro Currency was launched in 1999 with requirements for European countries to join which included benchmarks such as an inflation rate below 1.5%, a budget deficit below 3%, and a debt-to-GDP ratio below 60% as was outlined by the Treaty of Maastricht. At the time, Greece’s debt-to-GDP ratio was above 70% and was not able to join the EU. Although this was not a surprise to the Greeks who were aware of the threshold requirements, Greek politicians made it very clear of their intention to join the EU. Dmitri Papadimoulis, who was the spokesperson for the Opposition Party at the time said, “It is already a negative thing to be out of the 11…but if we stay out after 2001 the cost will be painful[1].” Greek debt began to soar and a path to the EU was needed. Unfortunately, for the Greeks, the pattern of bad decision making continued.

In 2001, instead of focusing on paying down the debt, Greece tried to disguise its deteriorating financial situation. Alongside Goldman Sachs, the Greeks orchestrated a loan of over 2 billion Euros which was structured as an off-the-book “cross currency swap”, where Greece’s foreign-currency debt was converted into a domestic-currency obligations with a questionable exchange rate[2].

Using this method, Greece’s debt was reduced by roughly 2% in what the former head of Greece’s Public Debt Management Agency, Christoforos Sardelis called a “very sexy story between two sinners”[3]. The “sexy deal” soon turned into a headache for the Greeks as the 9/11 attacks sent bond yields plunging resulting into a big loss for the Greeks. By 2005, the debt Greece “restructured” almost doubled. At this point, Greece’s debt was a house of cards and the looming global financial crisis was the wind the blew the house of cards into a rubble. A weakening Greek economy and falling tax revenues exacerbated the crisis.

As the Greek debt crisis became public, options to resolve the crisis were limited. Stabilizing the debt would have required increases in tax rates and spending cuts. This was not something Greek politicians were willing to put their name on. A 2010 poll found that over 75% of Greek citizens[4] disapproved of pension and salary cuts.

As options were limited, Greece agreed to a wave of debt rescheduling and restructuring, while agreeing to cut its deficit and run a surplus. The International Monetary Fund (IMF), European Council (EC), and European Central Bank (ECB), or as the media called them, the “Troika”, bailed the Greeks out but simultaneously enacted strict financial austerity in return, unlike the stimulus we saw in the United States during the Financial Crisis[5]. Greece also turned to Germany for help, and the Germans also pushed austerity.

The austerity included reducing the minimum wage, pensions, health care spending, and increasing the retirement age. People in Greece took to the streets to protest the planned cuts and soon riots broke out[6]. The move was devastating to the Greek economy, unemployment soared past 12% in 2010[7] and youth unemployment reached 30%. Greece felt the pressure and as a result of their debt, interest rates on Greek debt soared to the level financial markets became inaccessible.

As the austerity vs stimulus debate continued globally proceeding the Great Recession, Greece faltered as austerity continued. From 2009-2015, Greek GDP fell by 25%, the austerity policy which in theory was supposed to increase financial health, increased Greece’s debt-to-GDP ratio[8].

In conclusion, the Greek Debt Crisis came about because of reckless spending without regard to the high risk in leverage and a failure in austerity. Black Swan events such as the Great Recession and the COVID-19 pandemic have magnified the economic effects and Greek Debt-to-GDP continued to rise although in recent years we have seen some alleviation in debt pressures. In navigating the complexities of fiscal responsibility and economic stability, the lessons learned from Greece's tumultuous journey serve as a cautionary tale for nations worldwide.

[1] https://www.nytimes.com/1998/04/02/world/joining-euro-a-dim-hope-for-greece.html

[2] https://www.goldmansachs.com/m...

[3] https://www.bloomberg.com/news...

[4] https://econreview.studentorg....

[5] https://home.treasury.gov/data...

[6] https://www.cnn.com/2012/02/13...

[7] https://data.worldbank.org/ind...

[8] https://cepr.org/voxeu/columns...