|Type of paper:||Essay|
|Categories:||Finance Crisis management|
According to Kindreich (2017), the Greek financial crisis was a sequence of debt crises that began with the global financial crisis of 2008. However, its causes were mainly endogenous in essence, since its source sprung from mismanagement of the Greek economy and of government finances instead of exogenous international aspects (Kindreich, 2017). Moreover, Greece's membership in the Eurozone restricted it from exercising comprehensive control over its fiscal policy. Thus, interest rates remained low for too long relative to the inflationary coercions that were escalating in the Greek economy (Mantalos, 2015). The monetary policy was not in alignment with a booming economy and easy access to credit (Kindrech, 2017). Despite the country being plagued by misreporting of economic performance and economic mismanagement by successive governments, investors failed to act on an increasing set of warning signs. Thus, this paper seeks to identify key tipping points in the evolution of the Greek financial crisis, the mistakes committed in its handling, and lessons learned that can be applied in tackling other economies in distress.
Evolution of the Greek Financial Crisis
The Greek financial crisis has been the most critical crisis that a developed nation has encountered in modern history, regarding employment loss, output, and duration. Nikiforos, Papadimitriou, and Zezza (2016) recorded that, in 2016, the Greece's economy real Gross Domestic Product (GDP) was 30% below its 2008 level. In addition, over the same period, more than one million employees have lost their jobs (Nikiforos et al., 2016). Mainly, this crisis is a testament of the disastrous impact that austerity can have on an economy and the serious consequences it can bring to the social fabric.
The Greece economic crisis began after the financial crisis of 2007-2008, also referred to as the 2008 global financial crisis (Galenianos, 2015). Mainly, many economists consider the global crisis to have been the worst financial crisis since the 1930s Great Depression (Mantalos, 2015). The 2008 downturn was the economic activity that contributed to the 2008-2012 global recession. Similarly, it led to the Eurozone crisis, also known as the 'European Sovereign-Debt Crisis' (Mantalos, 2015). Greece, alongside Portugal, Ireland, Italy, and Spain comprised Eurozone members that were unable to repay, refinance their government debt, or bail out over-indebted financial institutions under their national supervision, such as the Cyprus Bank, without the help of third parties like the International Monetary Fund IMF) and the European Central Bank (ECB) (Mantalos, 2015). Evidently, the high government debts and the high government structural deficits made the states face a strong increase in interest rate spreads for government bonds, resulting from investor concern regarding future debt sustainability (Nikiforos et al., 2016).
Mantalos (2015) reports that, from the late 1990s, Greece's imminent membership in the Eurozone inspired investors to buy up large amounts of Greece government debt, which lowered interest rates as spreads tightened relative to key Eurozone states. The low-interest rates charged an economic boom that was also attributable to the huge inflows of foreign direct investment. According to Kindrech (2017), the private sector credit illusion that arose as a significant symptom of unsustainable growth. Still, in the years preceding the global financial crisis, the Greece government opted to debauch on increased spending, leading to a major rise in the budget deficit and comprehensive government liability levels. When Greece's fiscal shortages surged in 2008-2010, interest rates on private and government liability shot up remarkably (Galenianos, 2015). Shackled by the IMF and ECB, Greece was unable to devalue its currency or lower interest rates to trigger economic growth. In short, the country was unable to execute its monetary policy to complement its fiscal and political demands.
Thus, as Mantalos (2015) records, Greece opted for bailouts. Since 2 May 2010, the Eurozone member states, alongside IMF, have been availing financial support to Greece through an Economic Adjustment Program (Galenianos, 2015). The states and the IMF committed the undisbursed amounts of the first program, namely Greece Loan Facility, plus an additional PS130 billion for the years 2012-2014 (Mantalos, 2015). The third bailout increased the amount to PS246 billion. According to Kindrech (2017), the three bailouts together with stringent austerity measures partly stabilized the circumstance although at a huge human cost regarding high unemployment rates, dropping incomes, and predominant poverty.
Key Mistakes in Handling the Greece Financial Crisis
IMF head, Christine Lagarde, emphasized repeatedly grave errors in designing and application of the Greece program. Likewise, IMF chief economist, Olivier Blanchard, admitted twice in official statements of particular policy mistakes IMF made on the Greece program. First, IMF failed to recommend a debt restructuring for Greece. An earlier debt restructuring would have permitted remarkably lower primary surpluses and it would have improved the credibility of the program (Konstantinidis, 2018). In particular, a higher confidence in Greece would have availed more political and financial stability, crucial ingredients for growth. Thus, financial contagion was presumably a wrong argument for delaying debt restructuring.
Second, the IMF did not prioritize an approach for Greece to regain competitiveness. The initiative initially made an accurate diagnosis of Greece's primary competitiveness problem, which was a result of the pre-crisis Ponzi scheme characterized by ever-rising deficits financing higher public salaries and increasing pensions. Nevertheless, conditionality on enhancing the business arena and product markets, increasing competition and minimizing wages through the termination of the 13th-month salary were absent (Konstantinidis, 2018). Thus, there was a shift of the economy from an inflated state sector towards a bigger and impossible export sector. In particular, exports barely rose in Greece. Mostly, political and economic deliberations would have necessitated a allocation of structural reforms for which political energy was obviously lacking in 2013/2014, although MF later insisted on the reforms.
Dawkins (2018) adds that the Greece government also committed significant strategic errors and destructive negotiation tactics. In particular, the government was guilty of mismanagement of the nation's budgets, corruption, overspending, lack of innovation and productivity, and an inefficient public sector. Additionally, the government lost its fiscal and political autonomy and the ability to spend its income. Similarly, it was a mistake for Greece to take large IMF-EU bailout packages to cover the government's financial needs. Moreover, these debts came with a high long-run price tag, and since it was covered by international law, it was very difficult to restructure.
In light of this, EU imposed a series of remarkable structural economic reforms and a tighter governmental fiscal policy. However, the tightened fiscal policy was excessively strict because it produced high primary surpluses that suffocated the government's ability to avail targeted incentives in some sectors and basic economic help to the poorest members of the Greece society (Dawkins, 2018).
Application of Lessons Learned
Since 2007, many countries were affected significantly by the adverse shocks of the Great Depression, causing systemic banking crises despite extraordinary policy interventions. Countries such as Turkey, Argentina, and South Africa are examples of economies currently in distress. For instance, Turkey suffered and economic crisis with its currency declining by some 25% in August 2018. Similarly, Argentina fell back into emergency mode after stabilizing after a crisis in the year, raising interest rates to 60%. Argentina's currency has declined by 45% n 2018 (Hanley, 2018). Additionally, South Africa continues to struggle with shrinking growth, unemployment, and rampant poverty.
However, these countries can learn from the Greece financial crisis and avoid making similar mistakes that would worsen their current situations. The main lesson that these countries should draw from Greece's experience is that huge IMF bailout packages to cover the governments' financing needs come with a high long-run price tag. Evidently, the triggers for the economic crises in Argentina, Turkey, and South Africa have all been dissimilar. However, they have one thing in common, a disproportionate reliance on foreign funds for government deficits and trade. Such loans attract interests that cost the countries more money than initially borrowed, which increases their financial burden. Thus, the countries should rely largely on privately owned debt, which is relatively simple to restructure and repay. Another lesson the countries should learn is that delaying to clear such debts is an additional cost. Furthermore, the biggest cost of not paying off the liability is the interest the country pays to finance the previous debts.
To conclude, the Greece financial crisis has been the most critical crisis that a developed nation has encountered in modern history. Mainly, its causes were endogenous in nature, since its source sprung from mismanagement of the Greece economy and of government finances instead of exogenous international aspects. The country would have recovered from the crisis but the governments, EU and MF committed some mistakes. Although the triggers for the economic crises vary between countries, such nations can derive various lessons from Greece's experience and tackle their distress seamlessly.
Dawkins, D. (2018). Greece financial crisis: 'The EU has made mistakes' amid fears of TRIPLE-DIP recession. Retrieved from https://www.express.co.uk/finance/city/897395/Greece-financial-debt-crisis-EU-mistakes
Galenianos, M. (2015). The Greek Crisis: Origins and Implications. The Social Science Research Network. 1-21
Kindreich, A. (2017). The Greek Financial Crisis (2009-2016) - Financial Scandals, Scoundrels & Crises. CFA Institute. Retrieved from https://www.econcrises.org/2017/07/20/the-greek-financial-crisis-2009-2016/
Mantalos, P. (2015). Greek Debt Crisis "An Introduction to the Economic Effects of Austerity". Researchgate. DOI: 10.13140/RG.2.1.3985.5520
Nikiforos, M., Papadimitriou, D. B., & Zezza, G. (2016). The Greek public debt problem. Nova Economia, 25(spe), 777-802. DOI: 10.1590/0103-6351/3552
Konstantinidis, A. (2018). Tragedy of Errors: Timeline History of Greece's Decade-Long Economic Crisis. Retrieved from https://sputniknews.com/news/201808201067280649-greece-bailout-debt-crisis/
Hanley, M. (2018). What do the economic woes of Turkey, Argentina and Indonesia have in common? Retrieved from https://www.weforum.org/agenda/2018/09/turkey-argentina-indonesias-emerging-markets-economic-woes/
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