The Greek Story
How and what of the Greek crisis
Author:
Mohammad Riazuddin
ZAD Research
Date: 6th July, 2015

Greece…the problem child
 Greece has never been a well managed economy running meaningful fiscal deficits, low economic diversification
and productivity and struggling with high unemployment rates (significantly higher than its neighbors)
 Greece has defaulted 4 times in last two centuries…(Sounds more like a South‐American‐European)
The Unemployed Greeks…

Greece joins EU, Adopts Euro in 2001………A curse in disguise
• The following two graphs more or less sum up what lead to or facilitated the current mess Greece is
in
• Greece entered Euro much weaker than other countries, however it’s borrowing rates dropped
massively to a level similar to that of rich Germany and UK
0
2
4
6
8
10
12
14
16
18
Fiscal Deficit (as % of GDP)
After joining EUBefore joining EU After first bailout
& austerity

The liquor of cheap funds….
• With borrowing rates down, Greece borrowed and funded
their ballooning fiscal deficit as their Debt to GDP kept
rising
• However, major part of public spending was directed
towards unproductive subsidies and transfer payments (
>40%) compared to productive Infrastructure and Capacity
building
174.5
40
60
80
100
120
140
160
180
200
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Greek Public Debt as % of GDP
175
132 130
109
98 95 89
75
92
Greece Italy Portugal Ireland Spain France Britain Germany Euro
Public Debt to GDP %37%
43%
37%
45%
9%
5% 8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Proportion of Expenditure‐ Productive Vs Unproductive
Subsidies & Social Benefits Fixed assets

Other not so obvious problems
Population decrease due to migration (esp. of qualified
and working populace)
Greeks fail at tax collections, with Tax debt (taxes due from
citizens) amounting to ~90% of tax revenues. Greeks owed
EUR 76 bn to govt. in taxes. Black market in Greece is
estimated to be 25% of GDP

2009 ‐ Dirty linens up for washing….
• In fall of 2009, the newly elected government reported that the deficit for that year was going to be 13.6 %
of GDP and that the deficits in 2007 and 2006 were also larger than what had been reported.
• This raised questions on Greece’s solvency and its ability to honor debt and interest commitments. Such
apprehensions lead to rise in Greek bond yields
• The text book response to such a situation for any country would be to devalue the currency, improve export
competitiveness, make tourism attractive and simultaneously do some belt tightening. However, being part
of Euro, they could do that.
Eur‐USD
Though Euro swung it held it’s ground and only
depreciated much later and the quantum of the
depreciation wasn't helping Greece.

The 2010 Bailout of Greece Banks
• After the GFC of 2008, the already fragile Greek economy began cracking. As unemployment and public debt rose, yield for
Greek bonds increased (as depicted in the graph earlier). There was a widespread fear that Greece would default again
• Most of the Greek debt then was owned by private sector banks outside Greece (see graph below)
• In May of 2010, the International Monetary Fund (IMF), led at the time by Dominique Strauss Kahn, opined that if Greece
undertook drastic reforms it could overcome its deficits and begin growing so that over time the debt (including the new
lending that was being provided) would be manageable. However the study itself was discovered and accepted by IMF to be
deeply flawed later
• Greece was lent money in 2010, however most of it went in buying the toxic Greek bonds/loans from the private banking
system into govt. backed organizations like ECB, IMF and European Financial Stability Fund. No debt was waived.

Why is Greece in trouble again?
1. Austerity that was conditional to bailout lead
to a lot of heartburn as govt. expenses
contracted and taxes were increased. The
govt. was finally able to collect more than it
spent in 2014, however, interest payments
ensured small fiscal deficit
2. The economy contracted for two more years
as reforms proposed with the bailout didn't
perform as expected to boost production. This
made the debt‐to‐GDP ratio inflate despite
significant reduction in deficits. Reduced govt.
spending was also instrumental in pulling
down the GDP in a very short period.
15.7
24
36
25
21
17
22
6
2007 2008 2009 2010 2011 2012 2013 2014
Greek Budget Deficit (Euro Bn)

3. Political Change – Greece voters fed‐up with austerity and high unemployment levels, in 2015
chose a coalition lead by leftist Syriza party. The new govt. planned to change the course and
intended to restore few spending cuts, reverse revenue hikes, expanding the fiscal deficit.
Besides it also wanted some outright debt waiver. It obviously didn't go down well with its
creditors
4. End of tax‐payer’s patience/tolerance
The tax‐payers of the countries invested in Greece
ran out of patience breathing down the neck of
their governments. The lender countries
themselves are in very poor economic state.
Among top 3 contributors (besides Germany )are
• France which hasn’t had a balanced budget
in last 40 yrs and itself suffering from
massive un‐employment.
• Italy is buried under a Debt‐GDP of 130%
itself and 10% smaller in real terms than a
decade ago.
• Spain too is reeling under Debt‐GDP ~100%
(which is meaningfully under‐reported) and
itself on brinks of default.

Who holds the Buck now….

Greece says ‘Nay’
• In a referendum which ended late Sunday evening, Greece voted for ‘No’ to austerity measures
demanded by its creditors
• We do not know if the negotiations are still possible further. However, EU leaders meet in Tuesday
to decide on new course of action
• Its fair to assume no bailout would come forth. The following seems to be likely what happens
next
• Greece banks run out of funds soon as no liquidity (Euro) comes in from ECB
• Banks remain shut for few weeks
• Greece introduces it’s old currency Drachma and makes it a legal tender and can work with dual
currency for few years
• Drachma would devalue significantly against Euro making its exports and tourism cheaper hence
triggering GDP growth
• Since this is unchartered territory, its not clear whether legally its possible to oust Greece from
European Union. However, its fellow members of the bloc would not make life and recovery easy for
them

Why should global markets worry
1. Collapse of Greece banking sector and collateral damage to other regional banks
Greece’s three largest banks with available public data—–Alpha Bank, National Bank of Greece and Eurobank
Ergasias—–have upwards of $60 billion of non‐performing loans, which represent nearly one‐third of their total book of
$180 billion

2. Precursor to what might happen to other member of PIGS
3. Political Impact ‐ Tsipras’s Leftist Syriza government, came into power as the people voted for handouts
over austerity and fiscal discipline. This was however not expected half a decade ago. If such parties are
to come to fore in other troubled countries, EU and ECB along with its rich members will have to shoulder
much of the losses from defaults as they might chose to go Greece way
4. Theatrical trailer of what might happen in other highly leveraged economies not excluding
US, Japan and even China on much grand scale
Other highly indebted EU countries might be facing
the same fate which might get triggered with what
happens to Greece. These countries have not cut
spending as Greece has.