I, like many people, am wondering how it is that a tiny little nation like Greece, hardly an economic powerhouse in the best of times, managed to make such a mess of its finances that it is in danger of a default which could ultimately destroy the European Union. I would appreciate it if any economically inclined Dopers could give me the answers to the following questions.
How much debt was the Greek government in at the start of the European debt crisis?
How much money have they received from other EU nations in the form of bailouts?
How much money have they managed to save via the implementation of austerity measures? Here I’m looking for the net figure. I know that by implementing austerity measures, they will lose tax revenue, but I want to know how much money they’ll save once the tax losses from increased unemployment have been subtracted from the savings accrued via austerity.
How much of Greece’s debt has been just flat out cancelled?
How much money does Greece owe now, today?
Approximately how likely is a Greek default, now that the EU has taken the measures that it has.
Now that they’ve become the world’s foremost economic pariah, will they finally shut the fuck up about the Elgin marbles?
I’d like to add one to the list. How would this effect me, a currently underemployed worker in the Midwest? Will it make my situation or the situation in the USA worse?
In 2008, total Greek debt as a percentage of GDP was 113%, totaling 263 billion Euro. By comparison, US debt in 2008 was ~70% of GDP, or ~$10 trillion.
There have been two bailout packages. The first was a total of about 50 billion Euro paid over an 18-month period starting in May 2010 (although the initial target for this bailout was 110 billion Euro over 3 years, by the summer of 2011 leaders realized the bailout was insufficient, so they developed the new package). A second bailout was announced this month, and now Greece is slated to receive another 130 billion Euro in the form of a bailout loan.
Note that money for these bailouts is taken from two different sources: The European Central Bank and the IMF. So it’s difficult to figure each country’s liability. This hasn’t stopped some from trying–you can find estimates on the web–but it’s save to say Germany is on the hook for the biggest slice. Also Eurogroup leaders managed to impose an additional “haircut” on private bondholders (i.e. they trade their bonds for ones with lower face value or a longer term), relieving some 100 billion Euro of future debt payments.
This is difficult to measure directly, but projections show the Greek public debt increased to 162% of GDP (355 billion Euro) in 2011. If I owe more at the end of the day than when I started, I’d have to say 0 has been saved.
This is the 100 billion Euro haircut that was just negotiated. The debt ihasn’t really been cancelled, but re-negotiated on better terms for the borrower such that Greece, in the end, will save this amount in future debt payments.
The current Greek debt is a projected 355 billion Euro, but this isn’t all due now. To service the debt (i.e. pay off bondholders coming due now so they can borrow a matching amount the same day), Greece must pay ~14 billion Euro in interest on the old debt this March; failing to do this would cause them to default.
To amplify my answer to (3) a bit, austerity alone has resulted in a net gain to the Greek treasury: In the latter half of 2011, Greece increased tax revenue 1.4% and cut non-interest spending by 7.4%. But at the same time interest on Greek bonds has shot up substantially (it’s now in the 25-30% range, worse than credit cards!). So any savings was immediately eaten up by the debt service.
One problem I read about was that tax evasion was pretty much standard, with a nudge and a wink. One article mentioned that Athens property taxes were self-reporting; you report house sale price and pay extra tax for a swimming pool, for example, but there are almost no pools according to the tax rolls; except, flying in over the city you can see quite a few houses have them. Another article stated a lot of doctors and many other self-employed professionals reported income in the range of $25,000 which is obviously absurd. Due to political pressure tax collectors were forbidden from looking into these problems. As a result, simply enforcing the tax laws on the books will cause a sudden drop in living standards for a lot of the people… not even taking into account additional austerity measure.
This is one of the concerns by the groups bailing out Greece - the Greeks will promise the world but nobody has the political will to follow through.
It seems to me that in a society (or in a profession) where tax evasion is normal and expected, wages will (in an efficient market) drop to the point where take-home pay is the same as it would have been if tax had been paid. In other words, the worker does not benefit directly from not paying tax.
If you then start to collect tax in earnest, workers will be much worse off than they would have been had they been paying tax in the first place.
Another problem was the amount of paid holidays the average worker got. There was a law that said whenever a holiday fell on a Tuesday or Thursday, the day before (Monday) or the day after (Friday) automatically became a holiday as well. To compound this problem, guess what day of the week was most declared a holiday by the politicians when certain holidays had different dates throughout the calendar year? You guessed it, Tuesdays and Thursdays!
I’m guessing you read something like this article from last summer, which details the issue of wealthy professionals declaring ridiculously small incomes and Athenian homeowners using nets to conceal their pools from taxmen in helicopters. There is also this blog from a Greek expatriot who details some of the issues with Greek tax administration. It’s from 2010, but it at least shows the scale of the problem:
I just want to mention something related to this question.
What does and does not constitute a default may not be as obvious as you would imagine. I think most people affected by the so-called “renegotiation” of Greek debt would consider this a default. Yes, they are entering into this agreement “voluntarily” but it’s only voluntary in the same sense as one might call a shotgun wedding “voluntary.”
The organization which determines if a “credit event” has occurred is the ISDA. This is a group composed of market participants who may have a direct interest in the outcome of such negotiations and who may therefore be considered to have a conflict of interest.
A credit event by the way is an event which would trigger payment of things such as CDS’s (credit default swaps) on greek debt. And this is where the real problem lies. The amount of Greek debt is essentially insignificant on a global or even European scale. The problem is the potential cascade effect similar to what was experienced with the Lehman Brothers default that heralded our own credit crisis.
Default would obviously devastate the Greek economy–Greek banks hold a large share of that national debt, and default would basically lock up liquidity. And obviously foreign holders of Greek debt would suffer. The reasons this could be a world-wide problem are as follows:
[ul]
[li]A number of debt holders have credit-default swaps on Greek debt, which would be triggered at default. Remember how fun those were in the 2008 mortgage meltdown?[/li][li]Beyond the public debt issues, collapse of the Greek economy would also distress private debt held by Greeks, and much of that is held by European banks. Basically private debt distress is piled on top of the public debt problems.[/li][li]The greatest fear, however, is that this is the first domino. Economists fear that if Greece defaults, other PIGS nations will seize it as an opportunity to renege on some of their own bond payments (kind of a “hey, it’s just one more; we can hide it in the chaos” attitude). Like in Greece, this will also distress public debt, which will have a similar multiplier effect.[/ul][/li]It’s these cascading dominos that are the real problem. American banks (I hope) learned their lesson from 2008, and even with CDS’s in place are not that directly exposed to a Greek default. But European banks are, and that could indirectly hit US banks thru the process described above. If US banks then tighten up lending, the economy slows down, and we’re in recession.
To help people understand what happens when an entire economy deleverages, it can be imagined as the multiplier effect in reverse.
When you deposit $100, the bank only keeps 10% of that in reserves. The remaining $90 gets loaned out. The person who gets that $90 also deposits it and his bank only keeps $9 in reserve and lends out the remaining $81.
In this manner, $100 going into the economy gradually grows to $190 then $271, and so on and so on. Theoretically, that $100 can grow to $100 divided by the reserve ratio. If that ratio is 10%, then theoretical limit is $1000.
In deleveraging (i.e., when loans or obligations are called in prematurely, similar to a run on the banks), it’s precisely the same process but in reverse. That’s why it’s so devastating.
Basically, Detroit in 2009 winter-spring suffered from deleveraging. Almost all cars are bought on credit. When the banks (a) are not sure they still have the reserves to lend and (b) are not sure their customers will have the job to pay back the loan, they basically stopped making loans. Car manufacturers were most affecetd, their sales basically froze for a quarter or two. If not for the Obama bailout, the whole auto industry would have gone down the garbage chute too - factories closed, suppliers closed, everyone bankrupt and trying to sue everyone else for unpaid bills, no wages, no money for separation pay.
This is what the bailouts to Greece are also trying to avoid. Don’t just put a brick wall in the path of the economy, make the turn slower and gentler.
the article I read about tax evasion (Economist?) also mentioned that those in the Greek tax department who did try to do thier job were actively blocked by politicians trying to do a favour for whining constituents.
Expanding on the tax evasion comments, I recently listened to a NPR Planet Money podcast where they did a story on a dude who simply looked at the publically available salaries of officers in publicly traded Greek companies and then compared those salaries to the salaries claimed on their taxes. This absurdly simple technique uncovered thousands of tax cheats. He distributed these names to the various local tax collection offices and waited for the congratulations.
Hardly any cases were pursued.
So, he then collated all the tax cases that were closed by each individual office each week and sent this report to the Minister in charge of tax collection. Each week, he was able to show that many offices were closing just a handful of cases.
Again, nothing much happened.
He quit. That’s Greece. Tax evasion is just part of the culture and seemingly nobody wants to change it.