European Union is struggling to save Greece. It is a swan song to save Greece and hence save the world. The sovereign debt crisis that has brought Greece on the verge of complete collapse is the result of political misjudgments, lies and Greek profligacy.
Sovereign debt is the bonds a Sovereign country sells to the banks in foreign currency to finance its domestic financial requirement.
The first bail out to save the Greek economy has only left the country in deep trouble (so called austerity measures have increased unemployment) . The second bail out, many analysts say would only buy some time.
On Wednesday the Greek Parliament approved slew of measures in the hope of saving the country.
“They call for the privatization of 50 billion euros, or about $72 billion, in state assets, including ports, telecommunications concerns, real estate and stakes in the public power corporation.
They also include one billion euros, or about $1.4 billion, in cuts in the defense sector over the next five years; more than two billion euros, or $2.9 billion, in cuts to the health sector through 2015 by reducing regulated prices for drugs; tax increases on heating oil and the self-employed; and a shrinking of permanent and temporary public-sector employment.” (NYT)
Greece is a member of EuroZone which has 17 members having Euro as the common currency. When the group was formed, it was conditional that the aspiring country should have 3% or less budget deficit i.e. debt to GDP ratio. Greece was admitted because it was showing a robust GDP growth and all of its economic indicators were healthy. But later it was revealed that it was a lie:
Greece was accepted into the Economic and Monetary Union of the European Union by the European Council on 19 June 2000, based on a number of criteria using 1999 as the reference year. After an audit commissioned by the incoming New Democracy government in 2004, Eurostatrevealed that the budgetary statistics on the basis of which Greece joined the eurozone had been under-reported. (wikipedia)
That mistake is threatening the whole of Western Europe today. The main lenders to the Greece are the big banks of Europian countries. If Greece defaults, these banks will collapse just as Lehman Brothers went bankrupt causing the 2008 Global economic crisis.
Usually IMF comes to the rescue when there is a crisis like this. But, the very size of debt (150% of GDP) and negative growth of 4.5% is so much to do anything now.
One major factor attributed to present state of affairs is the inability of the Greek government to collect taxes from its rich people. It’s again attributed to its complex tax code. It is estimated that nearly half of its population have not payed taxes to the government.
So, a partial solution to the problem may be collecting taxes. But, with austerity measures in place, people are up in arms against the state.One can hardly expect people to pay taxes when unemployment rate is all time high (youth unemployment 37%)
Christine Lagarde has been appointed as new IMF chief – we have to see how she tames the PIGS (Portugal, Ireland, Greece and Spain – countries facing sovereign debt crisis). Will EU and IMF avert the impending tragedy?
Only time will tell.