Investment loans Greece-EU-IMF. Is is fair?

(Rusu Clin-George)

The Greek government-debt crisis is one of a number of current

European sovereign-debt crises, which was triggered by the arrival of the
global economic crisis. It is believed that is has been caused by a
combination of structural weaknesses of the Greek economy along with a ten
year long high structural deficits and debts in GDP level on public accounts.
In 2009, because of the government debts, the investors feared to invest in
Greece due to their ability in meeting their debt obligations. This had the
outcome of a confindence risk which eventually would lead to the countrys
default.

How it started?
There several perios in the history in which Greece had to make huge
loans in order to sustain their integrity. Large public deficits were recorded
after their restoration of democracy in 1974. There were large spendings in
the military sector, public sector jobs, pensions or other social benefits. They
are the second biggest defense spender among the 27 NATO countries after
USA, according to NATO statistics.
Another major factor for their failure in surviving this crisis was the tax
evasion and corruption. In 2010, the estimated tax evasion cost were above
20 billion $. There were also misreports in the countrys official economic
statistics. In 2010 it was discovered that Greece paid Goldman Sachs and
other banks hundreds millions of dollars fees since 2001 for arranging under
the table transactions, which hid the actual level of borrowing. This
movement gave them the opportunity to continue spending, hiding the
actual deficit from the EU, which at that time, was a common practice
amongs European governments.
Furthermore, there were problems with the statistical credibility of
Greece. Unreliable data had existed ever Greeces entrance in the EU in
1999. There were reservations of EUROSTATs for Greeces fiscal statistical
numbers in the 2005-2009 period.
Greeces inability to recover from this situation was also due to the fact
that they never had a proper industry in which they would rely on minimizing

their deficits, besides tourism. It is obvious that Greece had to suffer great
losses when the crisis came because people were not willing to spend high
amount of money for their vacations.

Investment loans (first bailout May 2010-June

2011)
On 1st May 2010, the Greek government announced a series of
measures in pursuing the last remaining holdout, Germany, to sign a large
EU/IMF loan package. The next day, the eurozone countries and the
International Monetary Fund agreed to a three year 110 billions euros loan
with a relative high interest of 5,5%, conditioned on the implementation of
certain measures. It was hopped that this investment would reestablish
Greeces access to private capital markets at the end of 2012 but this was
not the case. On 5th of May 2010, a national strike was help in opposition to
the planned spending cuts and tax increases which in Athens turned violent,
having the final outcome the death of three people. In may 2011, became
evident that due to the severe economic crisis tax revenues were lower than
expected, making it harder for Greece in meeting the fiscal goals.

Investment loans (second bailout July 2011

present)
In 21st July 2011, the euro area leaders agreed to extend the Greek
loan repayment perios from 7 to 15 years, at lower interest rate of 3,5%. It
was also approved a new support package, with the value of 130 billions
euros in October 2011 in order to avoid the countries dafault. In 2011, the
GDP had a hude decline (-7,1%), 111000 Greek companies went bankrupt
(27%). As a result the unemployment grew from 7,5% in September 2008 to
a record of 19,9% while the youth unemployment rate went to 48,1%. In
February 2012, the IMF had an official negotiation with Greece regarding
their austering measures which they would have to implement.

The austering measures. Are they fair?

The IMF did admited at the negotiations that these measures would
harm Greece on the short-term and further spending cuts were still needed,
increase in the tax revenues and labour and pension reforms. However, it
became apparent that this would not be enough because of Greeces already

weak economic recovery. In other words, we can say that Greece is in a

economic deadlock. Its true that on the short-term the tax revenues will rise
but on the long term it will fall by a bigger percentage that the rise. And it is
obvious why. Why would a person invest in a country where the taxes are
high and the labour force is weak? On the contrary, the country would have
bigger losses due to the fact that it would harder to attract investors and,
giving the worst case scenario, more companies will go bankrupt. If Greeces
economy continues in this direction, it may not be able to cut its
overspending as much as planned and ultimately may not be able to repay
its debts. If the rest of Europe will not be willing to help, Greece may be
forced to leave the euro.
If Greece would leave the euro, the economic and political impact
would be devastating. They would introduce their former national currency,
drachma which would have a devaluation of 60%. This would lead to a
hyperinflation, military overthrow and finally to a civil war, making it
impossible to pay they debts. According to the Institute of International
Finance, Greeces departure from the EU will create losses estimated of at
least 1 trillion euros. This would also make investors nervous about the
likelihood of other highly-indebted nations like Italy or those with weak
economies like Spain, repaying their debts or even staying inside the euro.
Moreover, if the eurozone economy falls deeper into recession, the entire
banking system will undermine confidence. This means that savers and
investors would take their money from these countries and take them into
safer economies like Germany of Netherlands.

Refferences
http://en.wikipedia.org/wiki/Greek_governmentdebt_crisis#Meeting_requirements_for_activation_of_the_second_bailout_loan
http://el.wikipedia.org/wiki/%CE%95%CE%BB%CE%BB%CE%B7%CE%BD%CE
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.CF.82_.CE.B5.CE.BB.CE.BB.CE.B7.CE.BD.CE.B9.CE.BA.CE.AE.CF.82_.CE.BA.CF.81.CE.
AF.CF.83.CE.B7.CF.82_.CF.87.CF.81.CE.AD.CE.BF.CF.85.CF.82
http://www.bbc.co.uk/news/business-13798000