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Grexit - A Modern Day Greek Tragedy

Updated on June 15, 2017
Alexis Tsipras - Greek Prime Minister
Alexis Tsipras - Greek Prime Minister
Junker and Tsipras - Junker doesn't take any more phone calls from Tsipras.
Junker and Tsipras - Junker doesn't take any more phone calls from Tsipras.
The Greek Parliament
The Greek Parliament
Round Table on Greece
Round Table on Greece
Olympic Stadium Athens - Built 1986
Olympic Stadium Athens - Built 1986
Merkel, Draghi (Head of ECB) and Junker
Merkel, Draghi (Head of ECB) and Junker
Merkel and Tsipras
Merkel and Tsipras

Background - The Magician

Greece adopted the euro in January 2001. Anyone who knew anything about economics in the months before Greece joined the Eurozone would have not believed that they would be ready in time. The induction criteria was a budget deficit less than 3% of GDP and overall debt less than 60% of GDP. Greece was adamant that they were within the criteria others including major economists around the world were certain that the numbers the Greek government’s statistics department gave were wrong. Their published budget put the deficit as 1.8% and the debt as 35%.

The head of the Greek government’s statistics department was called ‘the magician’ because he could make everything disappear. So even though Germany knew that Greece were massaging their economic statistics, their dream of a unified monetary Europe was not to be thwarted and a potential market for their products was not to be allowed to get away. So they turned a blind eye and Greece became a member of an elite club. The Eurozone with the help of Goldman Sacs engineered a financial swap which showed that Greece was within the limits set by the entry criteria. Greece entered the union and when the swap unwound the budget deficit was nearer 8% of GDP and the debt nearer 90% of GDP.

Why did the Eurozone turn a blind eye? The monetary union was Germany’s dream. They wanted a united and unified Europe with a single currency regardless whether the poorer countries like Greece sustain a strong economy without being able to manipulate the exchange rate. Also Germany wanted a market for its products and Greece was willing to buy all things German including duff submarines that listed in the water. Greece for its part saw a way of borrowing cheap money and fuelling their economy through high consumer consumption. For a while it worked, people borrowed and spent, the Greek government did the same and took enormous bribes in return for buying German goods. The Greek economic miracle lasted until just after the Olympic Games in 2004.

After the Olympic Games it was revealed that much of the infrastructure funds from the EU had not gone into the designated projects but into government minister’s pockets. So the EU had to provide additional funds for the infrastructure projects to enable the influx of tourists to be able to travel and stay near the Olympic stadiums. Roads, trams, metros, new buses, fresh tunnels and a new international airport were built. The debt to GDP ratio shot up to well over 100%.

In 2008 when the global economic crisis struck Greece was bankrupt. It had a debt to GDP ratio of 170% and a budget deficit of 15% and rising………However the interesting thing is that over this period both France and Germany broke every economic rule they had imposed on the other Eurozone countries.

What happened next?.............

Since joining the EU the Greek GDP per capita has fallen.
Since joining the EU the Greek GDP per capita has fallen.

A Guide to Greece's Woes

Greece in numbers

Greek Tragedy Acts 1 and 2

In the spring of 2010 Greece the right wing government collapsed under the debt mountain and George Papandreou won the subsequent election and PASOK the left centre party took office. A short few weeks later the whistle was blown and Greece went cap in hand to the IMF. In May 2010 the European Union and International Monetary Fund sanctioned the initial bailout of €110 billion, under the form of severe austerity measures. This initial rescue package missed all its forecasted targets as lenders’ were too optimistic on their economic plans for Greece and the Greek government procrastinated on certain reforms. So, in February 2012 the Troika (the Euro group, the ECB (European Central Bank) and the IMF (International Monetary Fund) confirmed the second salvage package worth a cool €173 billion provided by the then newly created European Financial Stability Facility. This agreement implied strong and to many unfair austerity measures but it did include the extension of the settlement period to 15 years, a reduction in the interest rate to 3.5 percent and a 53.5 percent haircut by the private bondholders. The write-down was done on €198 billion worth of Greek bonds, creating the largest debt default in the history of finance.

As the austerity measures took hold the Greek pensioners found that their spending power was cut by 50 percent because their pension was slashed by 50 percent. Taxes were raised and as the consumers stopped spending money, businesses closed and the unemployment rate soared. One third of the population landed on the bread line and food lines sprung up in every major city in the country. Salaries were slashed too, also by as much as 50 percent, so people could not pay their mortgages and had to default. There were so many defaults that the banks could not afford to auction off the defaulters houses and so gave them a mortgage payment indefinite holiday. The construction industry crashed as major infrastructure projects were cancelled, house values plummeted to zero and rents the same. Only the tourist industry managed to keep people employed and bring in much needed cash. Pharmacies ran out of medicines as the government ran out of money to pay the suppliers. Hospitals too were running out of medicines and staff as the government didn’t have the money to pay civil servants, doctors and teachers. The very fabric of the country started to crumble. Firemen and police were seen knocking on doors and begging for money for their families and to maintain their vehicles. The Troika had applied far too much medicine and the patient was slowly dying. Austerity only works to a certain level and if you don’t have a way of devaluing your own currency like the UK, the devaluation occurs through the population by reducing the GDP. Greece’s GDP has been reduced by 26 percent and its debt to GDP ratio has risen to 180 percent. The prescription was totally inappropriate.

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Austerity Bites

Greek Tragedy Part 3

The final fragment of the Greek tragedy started when Syriza secured the general election in January 2015 on an anti-austerity ballot. This radical-left party sought to contest the logic of the bailout deal and didn’t want the bailout program that finished on February 28 to be extended. However, the bailout program was extended – in return for Greece’s pledge to respect its debt responsibilities and make structural reforms –by the end of June 2015, just weeks before Greece is to make some large debt repayments.

Greece does not have sufficient income to pay its bills. It has to pay over €1.5 billion to the IMF in June and €7 billion to the ECB to repay government bonds (including the interest), which mature in July and August. The last €7.2 billion tranche of the current bailout program will not be paid if Greece doesn’t comply with the Troika’s demands. However, this tranche doesn’t cover what Greece has to pay back in June, July and August and its obligations to suppliers, pensioners and civil servants over the same period. It will probably have to postpone payments and who will take the brunt of that? The people of course. Also the deferment of state payments to suppliers will definitely hurt the economy even further. Greece’s economy is in recession again in the first quarter; it’s GDP contracted by 0.2 percent; as well as shrinking 0.4 percent in the previous period. To make the last payment (June 2015) to the IMF, Greece had to borrow money from diverse parts of the state administration, public enterprises and pension funds.

Christine Legarde Head of IMF
Christine Legarde Head of IMF

What Now?

Greece will probably manage to survive until July 20, when the €3.5 billion payment to the ECB is due. Without another bailout of at least €38 billion Greece won’t survive. Perhaps Greece needs to leave the common currency and take back the drachmae. It will be hard for a few months but then with being able to devalue their own currency will enable them to get out of this mess. Of course they will still owe huge amounts of money but they could just shrug their shoulders and not pay it back. After all the dream of nirvana was rather put upon them by the greed of the German government in the first place.


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    • one2get2no profile imageAUTHOR

      Philip Cooper 

      3 years ago from Olney

      Thanks for dropping by ChRIS57 ....your comments noted and I will add the restructuring of debt issue. Thanks.

    • CHRIS57 profile image


      3 years ago from Northern Germany

      Yes, a very comprehensive abstract of the Greek economic situation. Very good.

      Could you please add that a major issue for debt restructuring in Euroland is simply that it is illegal, if this means that other Euroland countries pay for it.

      There are no rules for Euro exit, it is not allowed to kick out a member. At the same time mvoing debt obligations from one member to the others is forbidden.

      So - if the IMF wants a haircut, no objection by the Eurozone, but if same was asked from Eurozone - no way. Makes the whole matter kind of delicate, don´t you think?

    • one2get2no profile imageAUTHOR

      Philip Cooper 

      3 years ago from Olney

      Thank you for your kind comment. I am half Greek and take a keen interest in what goes on there.

    • Mel Carriere profile image

      Mel Carriere 

      3 years ago from San Diego California

      This is truthfully one of the best summaries of the Greek crisis I have read. I had no idea that the heads of the Common Market twisted their standards to let Greece in. Great hub.


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