Remembering the Greek sovereign debt crisis (1)

ANTHONY KILA

Anthony Kila is a Jean Monnet professor of Strategy and Development. He is currently Institute Director at the Commonwealth Institute of Advanced and Professional Studies, CIAPS, Lagos, Nigeria. He is a regular commentator on the BBC and he works with various organisations on International Development projects across Europe, Africa and the USA. He tweets @anthonykila, and can be reached at anthonykila@ciaps.org

Sovereign debt refers to the obligations a country owes, and there is a common assumption that government-issued debt is secure. Consequently, the interest yields from such debt are typically low. Students of finance and investment management will be familiar with the expression, “the government always pays…” This belief holds true in most cases, with few instances where a government or country fails to meet its obligations. While rare, such situations can and have indeed occurred.
We are dealing with a sovereign debt crisis when a country’s government struggles to repay its debts, whether domestic or foreign, for reasons that may include poor public policies, excessive borrowing, or other economic challenges. In such circumstances, a country facing a sovereign debt crisis tends to default on its loans and may require external assistance. A sovereign debt crisis’s immediate and most visible effects include loss of investor confidence, capital flight, currency depreciation, and economic and social instability.
A sad yet fitting example that most readers will easily recall is the Greek sovereign debt crisis of the 2010s. Occurring at the heart of Western European civilisation and in contemporary times, the crisis attracted the attention of Western academia, media, and political circles, sparking fierce comments and reactions. The concept of the EU and the euro was openly questioned, and the IMF was perceived and treated in the West as it is in developing countries. Joseph Stiglitz, economist and Nobel Prize winner, remarked, “The Greek crisis is not a debt crisis — it is a crisis of the Eurozone’s flawed economic structure.”
For him, the Eurozone’s rigid financial rules were to blame more than Greece’s mismanagement. Fearing a contagion in Europe, The Guardian newspaper of the UK warned that “Greece has become the canary in the coal mine for the Eurozone crisis.”
In Greece, this sovereign debt crisis was referred to as (I Krísi) “the crisis.” Outside of Greece, most people associate the Greek debt crisis with excessive borrowing or, as some notable sections of the German and British press termed it, “living beyond their means”. The German magazine Der Spiegel described it this way: “A country that lived beyond its means now faces reality,” arguing that Greece was responsible for its own undoing.
However, in Greece, many quickly remember the link between the crisis and the Great Recession, which occurred from late 2007 to mid-2009 and marked a period of economic decline worldwide.
Regardless of one’s position on the issue, the facts indicate that the global financial crisis, which began in late 2007, significantly harmed two of Greece’s primary revenue centres, tourism and shipping, thereby weakening its economy. This loss of income resulted in lower tax revenues and rising debt, leaving Greece unable to borrow at sustainable rates.
Greece exhibited structural economic problems like other Mediterranean countries, including widespread tax evasion.
The country also tended towards high government spending, compounded by waste and leakages typical of systems with inefficient public sectors dominated by politics and politicians.
With a budget deficit exceeding 15 percent of GDP by 2009, primarily to finance public social programmes like public sector wages and pensions, the country stood out for the wrong reasons. It is worth noting here that during this period, the EU limit for budget deficits was three percent (3%).
The gravity of the inefficient public sector became a manifestly debilitating element when the issues of transparency and integrity of the system emerged: it turned out that to meet the rigid Eurozone entry requirements, Greece had misreported its financial data for years. The country was underreporting its debt and deficit figures. When, in late 2009, the actual financial situation of the country was revealed, investors panicked, leading to a loss of market trust.
The “Bild-Zeitung”, a Germany-based newspaper that is also the best-selling newspaper in Europe, asked, “Why should Germans pay for Greece’s mistakes?” to make a case against using Germany’s taxpayers’ money to bail out Greece. Such views, however, did not stop the bailout process.
Greece had to be bailed out to prevent it from defaulting and, very importantly, avoid Greece destabilising the euro and causing a contagion in Europe. In the words of Angela Merkel (German Chancellor, 2010-2021), “If the euro fails, then Europe fails.” The EU, IMF, and European Central Bank (ECB) came to the rescue. Between 2010 and 2015, they collectively provided three massive bailout packages totalling about €326 billion and an additional €100 billion in debt restructuring.
The conditions were severe, to put it mildly, but the helpers argued that was the only way to offer help. As Angela Merkel put it “Greece must take responsibility for its finances, but Europe must stand together.”
The conditions imposed on Greece included stringent austerity measures such as spending cuts, pension reductions, and tax increases. The sweeping reforms accompanying the bailout required bondholders to absorb losses, while Greece had to implement further financial reforms and privatisations. The Greek social and welfare structure suffered significantly, experiencing substantial reductions in public sector wages and pension cuts. Businesses of various sizes closed, and unemployment peaked at over 27 percent. The country’s GDP contracted by more than 25 percent, leading to intense social unrest and widespread protests. Capital controls were imposed, restricting cash withdrawals and international transactions, and banks were even shut down at one point. Despite these bailouts, Greece continued to struggle with economic recovery due to the harsh conditions imposed.

Life in Greece was punctuated by anger, despair and uncertainty. Reflecting public anxiety when banks were shut down and withdrawals were restricted, Ta Nea, a prominent Greek national newspaper, noted on its pages: “Our savings are locked. Our dignity is tested. Our future is uncertain.”
Chronicling and commenting on the painful austerity measures imposed in exchange for bailouts, Kathimerini, the widely read Athens-based Greek newspaper, commented: “Greece is being asked to bleed in order to survive.”
The severity of the conditions imposed on Greece and their impact on the lives of its people and the country’s economy reopened the enduring, intense and ever-fascinating debate about austerity versus stimulus among academics, analysts, and politicians. In arguing that harsh spending cuts worsened the economic downturn, Paul Krugman, economist and Nobel Prize winner, wrote: “Austerity in Greece is a complete failure. It is strangling the economy instead of helping it recover.”

Join me if you can @anthonykila to continue these conversations.