Greece – Small Country with Huge Debt Part II
5: Increasing debt
Already after a relatively short time, it was clear that Greece had joined the euro area on partly wrong terms . The Greek national accounts had been embellished by various Greek governments to meet the admission requirements ( convergence criteria, see facts) to join the eurozone. Both the debt ratio (the central government’s total debt as a percentage of GDP) and the central government’s annual budget deficit were far higher than the rules allowed (otherwise two requirements that have since been violated by other euro area countries, including Germany and France). However, the real size of the Greek deficit was not known until 2009 .
Despite the concerns of economists, the Greek state continued to incur increasing debt throughout the 2000s, without the money being invested sufficiently in infrastructure or business promotion. Instead, the growing Greek debt largely helped to finance an oversized public sector and the payment of pensions and salaries within it.
In modern times, the Greek state has shown great inclination to take out loans. Industrialization in Greece has never reached the same level as in other western countries, and the country has few natural resources with high export value. In order to finance the development of prosperity in line with other European countries, it became a long-standing habit for Greek governments to resort to government loans.
This effect has been amplified by a relatively inefficient state apparatus characterized by client-list schemes . This means, among other things, that positions have been created unnecessarily – as a social safety net, as friend services or to secure political supporters. Several Greek words refer to such practices in gray areas of the law, such as rousféti . This original Turkish word – meaning “status” – testifies to a heritage dating back to the time when Greece was under the Ottoman Empire (period about 1453-1821, depending on geographical area). At that time, goods often had to be obtained by bribing foreign officials or by relying on the goodwill of a conspirator or relative up in the state apparatus. Rousfétien and other inefficient schemes have helped prevent the Greek state from using its capital – own or borrowed – for productive investment in infrastructure and business.
6: Behind «singing an American crash»
As long as Greece had its own national currency in drachmas , it was not possible to borrow for large sums. Drakmen simply did not have sufficient confidence in the international financial market that banks were willing to provide large loans at low interest rates – even though Greece has been an EU member since 1981. This changed with Greek euro membership.
In short, the euro made it possible for Greece to take out loans with roughly the same loan terms as Germans, ie at low interest rates . In the financial market – among private lenders – the lending zeal was very large, not least driven by the lax practices of large American financial institutions throughout the 2000s. This led to a loan bonanza in Greece – a huge demand for loans, because “the money had become so cheap”.
In September 2008 , according to topschoolsoflaw.com, the US financial market collapsed . Investment bank Lehman Brothers went bankrupt. Prior to this, several other financial institutions and banks had major problems and confidence fell to zero in the financial markets. Loan packages that were intended to spread risk through risky lending also contained “rotten eggs” – loans that customers would hardly be able to repay. These packages – composed of both secure and highly unsecured loans – had been resold on the global financial market. In September 2008, everyone wanted to secure themselves and almost no one was lending money, and the problems spread with the domino effect. “Everyone lost all trust in everyone.” The crisis also spread to European banks, which were among the largest holders of Greek debt.
The financial crisis that followed became global; it hit hard in the United States, Europe and Asia, but the hardest hit of all was Greece . In April 2011, all Greek government debt was devalued (by rating agencies ) to so-called junk bond status , which meant that the international financial market regarded Greek debt as an investment with the worst security. The problem was that several of the banks had lent such large sums that they could risk going bankrupt if Greece failed to pay interest and installments on the debt.
To avoid even greater shock effects on vital parts of European industrial and real estate markets, several countries decided to nationalize (government, socialize) parts of the banks ‘debt – ie buy up the banks’ outstanding loans. In this way, the risk with the loans was transferred to state hands. Greece thus suddenly became a debtor to other EU states , such as Germany and France – and no longer to private banks in these countries.