Lok Sabha TV Insights: Greek Crisis – The Referendum
Greece crisis has reached its boiling point with Greeks decisively rejecting conditions of austerity offered by Troika (EU, EC & IMF) in return for extension of debt repayment timelines. More worrying is the fact that as high as 61% people voted for ‘no’, which indicates unwillingness of debtors to repay their debt as per terms. This has sent shockwaves across capital markets of the world as they witnessed a notable fall in indices.
Greece adopted Euro (in place of Drachma) in 2001, that time it was agreed that it would observe canons of fiscal prudence as mandated by EU. Notably, that time too there was significant disparity in economy of Greece and richer EU countries like Germany and France. Global financial crisis of 2008 upset the economy of vulnerable Greek from which it has so far been unable to emerge. Now it has Debt to GDP ratio as high as 177%, which was below 100% couple of decades back. This means Greece owes 1.77 time its annual GDP. In actual terms its debt is above $ 300 billion. This is result of Debt trap.
Greece from long has been unable to raise taxes or control public expenditure, so that it can service its debt. Value Added Tax in Greece is lowest among EU nations. On top of it, tax evasion is severe. This prompted government to borrow fresh loans to repay old ones (along with interest). Major part of its revenue and borrowings went in interest payments. Borrowed money, unless invested in productive assets which yield return (profit) in excess of interest payable, is dangerous for borrower.
Consequently, Greece defaulted on repayment of Euro 1.6 billion to IMF on 30th June; another payment of Euro 4.5 billion is due on 13th July. To let this happen it will have to agree with conditions of lenders (Troika), in which Germany is main party. On one hand, people of Greece will have to pay high taxes, while on the other Government will rollback public expenditure significantly. Conditions of austerity are very detailed – for e.g. govt. will have to increase retirement age from 60 to 65 or Greece will have to reduce spending of military by certain amount. Problem is that, even if this is agreed by Greeks, it will take decades for them to revive. Otherwise they will have to break away from EU, which ironically Greeks don’t want either.
If Greece gets out of the Union, it will have to revive its own currency. Recent crisis has resulted intense outflow of currency (or capital funds) from Greece. In such scenario its own currency will be constantly spiraling downwards which will make its imports much expensive, which in turn will lead to wide ‘current account deficit’ and ‘balance of payment’. In normal circumstances, net importing countries like India, makes well their ‘Current account deficit’ good by utilizing their ‘capital account’ inflows through FDI or FIIs. But, as Greece is a big financial defaulter, big investors will treat this country as untouchable and stay away from it.
Greek leadership is obviously aware of consequences, so they are exerting moral pressure on lenders to ease the conditions. But Troika and interested countries (mainly Germany) fear that there are other vulnerable (but better) economies (Portugal, Italy, Ireland, Spain) and any relaxation to Greece will lure these countries to follow the suit. On the other hand, big fall out of the exit could be breakdown of European Union as a section in UK seems to be interested in it.
It should be noted that Germany is a very strong export led economy having huge current account surplus. In case it is not part of EU, value of its own currency will be much higher in comparison to euro, thus turning its exports uncompetitive and expensive in world markets. Having said that, at the first place strength of German economy owes much to peripheral European economies which were weaker. Same reasons which made Germany as strong export led economy turned Greece into an import dependent and uncompetitive economy. This fact justifies Greece’s expectation of some relaxation from European community.
Greece face emergency in 4 aspects –
- Sovereign Debt Crisis – Money owed by Greece government to International/ European lenders.
- Banking Crisis – Huge capital outflows has left very little with banks. They have stopped many of their functions.
- Capital Outflows – More and more money exiting Greece everyday
- Negative Trade Balance – Tourism industry is severely hit which was main source of Euros and Forex, now that too gone.
India has not so much to fear from the crisis. Fallout will be much less than 2008 crisis, which India withstood. But there are some lessons to learn – Regional disparities are threat to security of any union. We should expedite the process of integration of national markets. Main steps toward this will be implementation of GST and Integrating national agriculture markets.