1. Financial Crisis in Greece
By Rosa Maria Panadero Martinez, Vaughn Mills, Nina Robinson and Edgar Khachatryan,
March, 2013
Greece, once a thriving and prosperous nation, with budget surpluses from the early 1960s to
1973, was one of the fastest growing nations in Europe. It boasted an average annual growth rate of
6%. Despite its extended period of strong economic growth, at the turn of mid-2009, Greece’s
economic posture pivoted and was subject to rising current account deficits and fiscal imbalances
reaching close to 16% of its Gross Domestic Product (GDP). Today, following a period of spiraling
deficits, uncertainty and a slow recovery, modern-day Greece faces unprecedented, massive financial
crises, which generated the European economic debacle leading to a rapid deceleration of global
growth in the region, a potential Eurozone debt crisis and the worst recession of the postwar period.
While extensive efforts have been instituted to change the economic environment, there are few
factors lending immediate relief to the devastating economic posture of the nation. The crisis, having
posed rippling impacts across the continent, generated hostile dispute and heightened angst among
neighboring European sovereign nations fearing the threat of a spill over due to financial contagion,
much like the Asian financial crisis in Thailand, Malaysia, Korea and Hong Kong in the 1990s.
While there are multiple factors contributing to the financial economic crisis, major factors
include: financial globalization; excessive government spending; tax evasion and corruption; high
ceiling deficits, accelerated debt to GDP ratios and flawed fiscal statistics.
Given the revelation of Greece’s financial demise and potential for default, Greece became
the recipient of three rescue “bailout” packages from the Troika (International Monetary Fund (IMF),
European Union (EU), and European Central Bank (ECB), allocating shortfall funding and
stipulating strict adherence to: long term structural reforms, fiscal budget restoration and government
privatization in an effort to repair the economy and maintain sustainable growth.
Causes
In the early 90’s, Greece was in an economic crisis, experiencing deficits in its balance of
payments, typified by both current accounts deficit and budget deficit. In the 80s, the total debt
(minus military loans) had quadrupled and the debt/GNP ratio tripled. Greece ranked 15th
overall in
debt. By the 90s, the budget deficit was 14.2% of GDP) and the debt to GDP ratio was 71.7.

2. Another factor included the chronic and continuous balance of trade (BT) deficit. From the
post WWII era to 1990, the BT/GDP ratio doubled from 9.2 to 18.1. The economy was increasingly
fueled by a takeover of foreign industrial products, matched by a corresponding increase in exports.
Despite increased exports, Greece’s e ratio of imports to exports was one of the lowest in the world.
Greece also experienced an increase of emigration and tourism in this time frame, but with
diminishing returns. It is interesting to note that in the 80s, income from the European Economic
Community (EEC) offset the BT deficit in the positive. Yet, debt service was already becoming a
serious outlay.
Postwar Greece moved from an agrarian economy with over half of the working population
employed in agriculture to a services economy with more than half the total income produced in this
sector. There was a very limited manufacturing base, greatly differing from other EEC nations. For
Greece, manufacturing was primarily dedicated to agricultural goods and textiles. Conversely,
greater portion of EEC was engaged in the production of machinery, transport and chemicals.
Moreover, in 1972, the EEC average labor productivity index was 80% higher than Greece and the
gap continued to rise. In the 80s, gross domestic investment was falling in Greece, although it was
on the rise in other industrialized nations.
As Greece entered the ECC, tariff protection was phased out. Following a civil war in 1974,
the liberalization of Greece had led to a growth in trade union power and labor costs. The
government attempted to recover a loss of competitiveness with a devaluation of the drachma, but
generated little impact on the BT, which later brought on inflation in the 80s. Greek export shares of
industrial goods were the lowest of EEC countries. At this same time the agricultural sector was low
in productivity due to the small size of farm holdings and overall under investment, especially in
comparison to other EEC countries relying on agriculture.
At the root of the lack of industrialization and manufacturing was the “hegemony” of elite
interests that have never allowed the Greek government an effective planning role in development.
Consequently, the government was left to induce foreign investment and financing of domestic
investment through an elite controlled banking system. The elite business leaders have always been
more interested in the shipping industry and speculative commercial/land deals despite any
significant investment in a relatively lower return industrial/manufacturing base.
Government borrowing and deficit spending continued through the 90s. By the late 90s, it
was clear that Greece was intent on entering the Euro Area and adopting the Euro. To this end,
Greece took measures to devalue the drachma to reduce interest and inflation rates and instituted
austerity measures, bringing the economy relatively under control from 1996-99. This was

3. evidenced with an increased GDP and the leveling of the Debt to GDP ratio. By 1998, Greece
achieved remarkable progress and its entry to the Euro Area and the single currency were well on the
way. At the same time, however, the EMU acknowledged Greece had not met Maastricht
convergence criteria for membership most notably given a Budget Deficit of greater than 3% GDP
and a Public Debt greater than 60% GDP. Yet, although forecasted to meet the budget deficit goal,
Greece never met it without creatively altering their accounting.
On January 1, 2001 Greece was admitted into the Euro Area. This was a positive move
forward for the Greek economy, generating a period of growth in GDP throughout the early 2000s.
Converting to the euro allowed for greater borrowing power, as interest rates were lower for
government bonds backed in the euro. However, in 2004, Eurostat, the statistical agency of the EU,
pointed out areas of “exceptional” inaccuracies with the financial numbers reported by the Greek
government. For the years 1997-99, Eurostat revised Greek figures for deficit (as much as 2.6%
higher in an overall year) for military expenditures, debt assumptions, capitalized interest, capital
injections, interest on bonds, DEKA (government owned company) reporting, EU grants and interest.
Debt figures were to be revised (as much as 7.1% higher) due to inaccurate consolidations and
erroneously classified bond share exchanges. Similar discrepancies were found for the years 2000-
03, for inaccurate reporting of Social Security funds.
Years later, it was revealed that during 2000-01, Greece had worked through Goldman Sachs
Bank to arrange a derivative transaction known as a currency swap. Given these transactions, Greece
assumed large sums of cash as a currency exchange rather than via a loan mortgaging airports,
highways and lottery. These transactions, although legal, denoted sales one balance sheets and not
debt, allowing it to be hidden from EU accounting. All of this creative financing required pay back
and consequently has since been restructured, adding billions to the current debt.
No less than five separate occasions from 2005-09, Eurostat expressed reservations regarding
fiscal data reports. As the worldwide economic crisis struck in 2008, Greece’s financial condition
was magnified. Reliance on foreign borrowing, coupled with long term internal economic
weaknesses, brought them nearly to default. With the submission of t the bi-annual financial report
to Eurostat in April and October 2009, it was clear that reported numbers were inaccurate. Given
that 2009 was an election year in Greece, the numbers were reported in two separate October reports,
with one reflecting data before the election and another thereafter under the new government,
reflecting drastically different numbers. The 2009 deficit ratio (reported in April) of 3.7% GDP was
revised to 12.5% of GDP in October. This actual number has since been revised to 15.8%. The

4. European Commission cited these enormous discrepancies as lack of governance and methodological
weaknesses of the Greek financial institutions.
Overview of the conditions IMF imposed on Greece during the crisis
Conditions imposed by the IMF targeted an endemic problem in the Greek economy,
addressing: privileges of public employees, high cost of the social services and tax
evasion. The structural reforms proposed were hard to accept, but were effective in making
the labor market more flexible, cutting public sector costs, reducing public worker privileges
and pensions, and generating a full revision of the tax administration to increase revenues.
The target was to reach a deficit below 3 % GDP by 2014 and control the public debt. The
fiscal deficit, in turn, should be reduced by 11 % of GDP, achieving a total reduction of 16%
over three years. The IMF contribution to Greece was 16 times more than its average to
any other country: it reached a 3200% of Greece quota to the IMF. The IMF concluded that
justified this amount.
The EU and the IMF joined efforts to refinance Greece from the first program with
the Greek Loan Facility. Under the first program, the EU lent €80 Billion on bilateral loans
and the IMF granted a €30 Billion loan. The IMF also proposed a standby arrangement
providing funds up to 36 months, with the IMF and the EU closely monitoring quarterly
results before disbursing ongoing tranches.
Under the second financial assistance program, Greece received a €164.5 Billion
loan. The European Financial Stability Facility (EFSF) granted €145 Billion and the IMF
granted €20 Billion until the end of 2014, as an Extended Fund Facility, with repayment in
four and a half years to ten years (via semiannual installments).
The IMF warned about the consequences that cuts in the government spending
would generate in Greece (particularly for its citizens). Regardless of the severe
consequences generated, the IMF conditions will establish a new platform for the Greek
economy, bringing about change in the culture and the structure of the business. The
conditions are:
Up until the IMF and-EU bailout, civil servants enjoyed certain privileges, such as
bonuses and special holiday pay entitlements. A drastic cut to these entitlements resulted
in a €1.1 Billion cost savings. Employees working at state-run companies had wages cut by
3%. For the workers earning less than €3,000 monthly, the payments for holidays (Easter,
summer and Christmas) amounted to €1000 vs. the full pay previous awarded. Pensioners,

5. also enjoying similar holiday payments, saw their privilege disappear, generating a saving of
an additional €1.5 Billion. Retirees, receiving less than €2,500 per month received €800 for
holiday payments. The second tranche of the solidarity bonuses remained in question,
resulting in a cost saving of €400 Million in 2010.
The new mission is to collect taxes and ensure tax evasion is no longer tolerated.
To date, enforcement of this policy has increased revenues up to 1.8% GDP. In December
2010, the managing director of the International Monetary Fund, Dominique Strauss-Kahn,
pointed at tax evasion and clarified the “richest should participate.” Additionally, the IMF
and the EU advised the Greek socialist government to arrest high-profile citizens suspected
of tax evasion. Mrs. Christine Lagarde, the former French finance minister, provided a list
of two thousands Greek citizens with bank accounts in Switzerland. The scandal jumped to
the front pages when the Greek minister of Finance, Mr. George Papaconstantinou,
supposedly tampered the so called “List Lagarde” and erased the names of three relatives.
The socialist party Pasok expelled him from the party and Evangelos Venizelos took over
the post of finance minister.
Indirect taxes, such as the Value Added Tax (VAT), significantly hit tobacco, fuel and
alcohol. The measure added €1Billion revenue between 2010 and 2011. The sales taxes
were increased up to 23% (vice 21%) and 11% (vice 10%) respectively, adding €1.8 Billion
to revenue. To further improve growth, the government lifted regulations found to undermine
efficiency, in areas such as Pharmaceutical industries, public investment social programs
and military expenses.
Impacts of IMF/EU conditions on the countries’ business environment.
Implementation of both the IMF and EU reforms is a painful experience for Greece’s general
public, but given execution, it is designed to generate long term benefit to Greece’s economy as well
as the citizens. Major sacrifices need to be made by the people of Greece.
Greece has agreed to reduction in tax evasion, according to 2011 Case Harvard Business
School Case study in 2011 “The Greek Crisis: Tragedy or Opportunity?”, two thirds of the working
class declared an income of €12,000, which exempted them from income taxes, but the average
income in Greece including children and the unemployed was over €20,000. Along with crackdown
of tax evasion Greece has also agreed to increase VAT on commodities (i.e. cigarettes and alcohol).
If or when the government imposes strict laws on tax evasion and enforces the law, it will be very

6. unpopular, particularly by those who have not been paying any taxes at all up until now. It will also
slow down the economic growth because of reduction of disposable income as a whole.
On average, Greeks retire earlier than citizens of other EU members and receive higher
income and higher pensions. To incorporate reform, one of the conditions to which Greece agreed is
the increase in retirement age, reduced income after retirement, and heavy cuts in pension. While
necessary, this will not be readily received l by the retirees and spending, in turn, will be reduced
leading to a slowdown of the economy.
Perhaps one of the most painful measures Greece is taking is the cuts on the public sector.
Public-sector deficit has been increasing from 3.1% of GDP in 1999 to 15.5% of GDP in 2009. As
indicated by the “Greece—Memorandum of Economic and Financial Policies” dated February 9,
2012, Greece has agreed to severe cuts on public sector. Overall wage reductions have been as much
as 3% which include: judges, politicians, doctors, professors, police, military etc. Along with wage
reduction, Greece has committed to reducing personnel, reduction of pensions, and restructuring of
government operations. This austere measure, especially when imposed on Greece, has sparked
multiple political uprisings throughout Greece, resulting in severe injuries and deaths. It has also
hindered the Greek economy and increased unemployment rate, at least for the short term.
Greece has agreed to privatize some state industries. This means that Greece has to sell some of its
state-owned enterprises to reach its objectives. State owned enterprises typically don’t have much
profit motive, and they are inefficient in producing goods or services at low cost to the consumer.
Privatization typically boosts efficiency of the corporation, but at a cost to its members. With
privatization of state owned enterprises, the primary motive becomes making profit which drives
leaner operations, reduction of workforce, reduction of benefits, and greater output from employees.
In the long run it will make Greece more competitive in certain areas and reach its debt reduction
objectives.
There are primarily three objectives IMF and EU conditions imposed on Greece. One being to
cut budget deficit by 11% of GDP by 2013, through spending cuts valued at 7% GDP and revenue
increases valued at 4% GDP. Another is to reduce budget deficit below 3% GDP by 2014 and
thirdly to reduce debt-to-GDP ratio from 2013, gaining budget surpluses of at least 5% GDP up to
2020. These measures imposed, not just by the IMF but the Troika as a whole, have led to multiple
riots and uprisings in Greece. And general public is not happy with all of the cuts, economy has been
starved. It is all temporary until debt issue has been resolved. If or when the objectives are met,
Greece can develop to be truly a contributing member of the EU instead of a “consumer” status it
currently has.

7. Crisis Resolution
Greece crisis sparked the alarm of a contagion spreading to Spain, Portugal, Italy and Ireland.
They share economic similitude with Greece and have made painful adjustment in labor costs.
Compared to the East Asia crisis, the resolution has been different. Asia abandoned the dollar peg so
their exports became competitive again and recovery happened faster, pushed by an international
global growth. In the old continent, peripheral Europe cannot abandon the euro, the international
growth slows down and the only way to be competitive is transforming the labor market.
The measures taken to resolve the Greek crisis by the EU and the IMF have been consistent
mainly by imposing austerity measures and reforms. Some nations of the EU have resolved their own
financial crisis through reforms and are expecting Greece, as a member of the EU, to follow the same
or similar rules and conditions. The EU and the IMF, by the end of 2012, have provided close to
€240 Billion in emergency funding to implement change. Greece has been applying the measures,
and as a result exports have been rising, but the Greek financial economy as a whole has been
declining. Tax revenues were reduced and have made it difficult to repay the debt. The current Prime
Minister of Greece, Antonis Samaras, is adamant about resolving the Greece debt issue and has
appointed a cabinet of business leaders. He has plans to privatize Greece’s marine enterprises, resorts
and airports previously state owned. This, in turn, will boost tourism and the Greek economy as a
whole. In retrospect, Greece has come a long way since 2009. They have implemented a torturous
plan and currently have, what appears to be a real government seeking to reduce corruption and tax
evasion. Improvement has been slow and minimal but it is noticeable and is mainly due to the
austerity measures implemented.

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