The Greek Debt Crisis: Prospects and Opportunities
Prepared remarks delivered at the Peterson Institute event The Greek Debt Crisis: Prospects and Opportunities
Ladies and gentlemen,
Greece is at the center of international attention in the last two years. This is due to its poor financial situation, coupled with the fact that the Greek crisis develops within the Eurozone; within a monetary zone with a strong currency and a very satisfactory macroeconomic and fiscal performance overall. However, while Eurozone’s average performance as far as the public debt, the budget deficit, the trade balance, the growth rates, inflation and unemployment, does not justify such a strong and lasting challenge, the controversy exists. In particular, The Eurozone has a lower fiscal deficit and a lower public debt compared to the US.
Greece’s Position within the Eurozone
Greece represents just 3 percent of Eurozone’s public debt and only 2.5 percent of Eurozone’s GDP. Greece, Ireland and Portugal combined represent only 6 percent of Eurozone’s public debt. However, the inclusion of these countries to support programs introduced by the Eurozone, the European Union and the International Monetary Fund has not prevented the pressure on countries such as Spain, with 8 percent of Eurozone’s public debt and particularly Italy, with 25 percent.
I remind you that Italy belongs to the G-8 and has a relatively low fiscal deficit and high competitiveness indicators. On the other hand, Greece ranks in the 27th position internationally in terms of the volume of its economy, with a GDP which is significantly greater than that of Ireland, and even Portugal.
Given Greece’s small size compared to the Eurozone, a decisive and effective program of protection and reconstruction was definitely easy to engineer. In the beginning, a temporary mechanism for Greece was set up, with bilateral loans of Eurozone member states and IMF’s involvement. This program amounted to € 110 billion (US $ 158 billion) for the period until 2013.
The programs for Portugal and Ireland that followed are mainly based on mechanisms that were established immediately after the original Greek program was developed. These mechanisms are EFSF (European Financial Stability Facility) which corresponds to the Eurozone and EFSM (European Financial Stabilization Mechanism) which corresponds to EU-27, and was created for the former Eastern European Countries.
Meanwhile, the Eurozone and the EU formed a permanent mechanism to support member states that could be found in a state of fiscal crisis, i.e. with a debt crisis and incapacity to borrow. This new mechanism, the ESM (European Stability Mechanism), will enter into force in July 2013 and will incorporate the participation of the private sector with provision of CACs (Collective Action Clauses). Now, Eurozone member states are in the process to ratifying this mechanism by their Parliaments.
Greek crisis of debt, deficit and competitiveness – Interventions at three levels
The international picture is simple: for almost four years, the crisis of the financial system was followed by massive state interventions. This led to the exposure and the aggravation of the fiscal problems in many countries. The financial crisis became fiscal crisis. The fiscal crisis in turn causes back problems in the banking system which owns state bonds, etc.
In Greece’s case the crisis is more complex. It’s not just the excessive debt, but also the excessive budget deficit and the current account deficit that reflects a competitiveness deficit of the Greek economy and the excessive size of consumption in relation to production.
Therefore, we had to organize an intervention at all levels:
- At the fiscal level, by reducing the deficit, securing the viability of the Greek public debt and by organizing a modern tax system and an efficient tax administration.
- At the level of the real economy, by drastically reducing the grey economy and stopping tax evasion.
- At the level of the model for development, by introducing structural changes that make Greek economy competitive. This requires the removal of restrictions from business and trade, reducing administrative costs and structural overspending, combating bureaucracy, providing for faster administration of justice, securing stability of legislation and transforming Greece into the investor-friendly country.
This project is very ambitious, since the drastic reduction of the fiscal deficit must be achieved in just three years. This is a transition from a fiscal deficit of 15.5 percent in 2009, to primary surplus in 2012. The need for a dramatic drop of public spending and dramatic increase of state revenues is of course is intensifying recession, which marked a -3.9 percent in 2011, according to estimates in the Bank of Greece’s last report. It is obvious, thus, that the whole adjustment program of the Greek economy must move along two axes: one fiscal and one for growth.
The Greek contradictions and how to overcome them
Because of the crisis, many contradictions have become apparent and should be addressed. Historically, these contradictions exist since the period of the foundation of the modern Greek state back in 1827. Greece’s typical features of the economy, society and politics collide with atypical features in all three levels. History tells us that in Greece the establishment of civil society and economic structures took place after the creation of the state which was inspired by the existing Western models of the early 19th century. Problematic public administration, favoritism, corporate interests, tax evasion as an act of resistance against state power, grey economy as a form of “flexibility” (in brackets) are not exclusively Greek features. In Greece’s case, however, these features work combined, thus creating a conflicting picture for the whole nation.
In Greece there is wealth, there’s property and incomes, there are national resources for growth, there’s a big public real estate and an even bigger real estate belonging to households and private enterprises; there are also high and middle incomes that are not taxed and there are little incomes that are also not taxed because they fall within the tax-free limit; and of course there are some middle-income wage earners and pensioners –with annual income between 12 and 50 thousand euro- who are overtaxed.
Just picture this: From € 100 billion of income officially declared annually by taxpayers, only € 30 billion is taxed by an average rate of 30 percent, which generates around € 9 billion. Thus, the average taxation for all the declared taxpayers’ income (€ 100 billion) is only 9 percent! If the officially declared annual income is increased by 30 percent -totaling € 130 billion- and if all of it is taxed at a 15 percent average, this would generate € 19.5 billion. This would consequently relief Greece’s fiscal problems at a great extend!
The Greek public debt sustainability issue - A political problem
Over the past 20 months, we have been implementing an ambitious program for the adaptation of the Greek economy in all sectors. There were indeed delays and problems on our own responsibility. We had to face, however, the insisting challenging of the markets about whether the Greek public debt was indeed viable, or whether the efforts of the Greek government, the citizens and the businesses could produce fruit without a radical intervention to sustain that debt.
The Greek fiscal/debt problem, as well as the Eurozone’s fiscal/debt problem in general, is a political problem. The same applies to the United States. Eurozone, however, is not a federal union as is the U.S.. There is a common currency which plays an important international role, but institutions of political integration similar to those in the U.S. do not exist in the EU and the Eurozone.
The European Central Bank cannot act like the Fed in the U.S. because the lack of a strong federal government requires the ECB to serve as the main unifying factor in the Eurozone. This is achieved through a hard euro policy, stable prices and controlled monetary circulation. In fact, through the Stability Pact, the Eurozone is governed by strict fiscal rules, as to the tolerable levels of deficit (3 percent og GDP) and the tolerable levels of debt (60 percent of GDP). This is not the case in the U.S. Constitution.
The political decision-making entity in the Eurozone is not an institution like the U.S. President and his administration or the U.S. Congress. It is 17 different governments that operate within 17 parliamentary systems, are dependent from 17 different national parliaments and operate within 17 different political and electoral cycles.
The Eurozone has strong governments that enjoy a fresh mandate, coalition governments, minority governments, caretaker governments, governments that prepare for elections in a few weeks. It is always difficult for the governments to ask for approval by their national parliaments in order to provide assistance to other countries, like Greece, Portugal or Ireland. Taxpayers always have the same sensibilities. European solidarity is visible through the single market and common currency, but it is difficult to take the form of financial assistance when it comes to real money.
The IMF role
The Eurozone is open to the participation and assistance of the IMF which has a vast experience and know-how.
This way or the other, the situation has asymmetrical features, as in the field of international defense and security. States and international organizations like EU, ECB and IMF are not alone. There are rating agencies, funds, international audit firms, the international banking system. The decisions taken by the G-20 in 2008 in London for global economic governance were never fully implemented.
Recovering Greece’s reliability
Within this international and European context, after spending several months of uncertainty, Greece has regained now its credibility through some major policy initiatives it took. I cite the Greek Parliament’s voting of two focal laws, the Medium-Term Fiscal Strategy Program and the Implementation Law, which were crucial to our partners -the European Commission, ECB and IMF. An ambitious privatization program was also implemented. That program aims at € 50 billion (US $ 72 billion) of revenues by 2015 through a competent body that has already been established in a climate of political consensus.
The recovery Greece’s reliability in combination with attacks by the markets against Italy and Spain led to more mature attitudes regarding the need to undertake major initiatives for the sustainability of the Greek public debt. The stabilization of the Greek financial situation is vital for Greece, as it is vital for Eurozone’s own self-protection.
The decisions of the July 21 Eurozone Summit
- The Eurozone had to send –and it did- a strong message of support for itself and its currency. The Eurozone Summit of July 21 took impressive decisions in collaboration with the private sector. Thus, public and private sector together guarantee entirely and finally the viability of the Greek public debt through interventions of large-scale:
- Greece’s borrowing needs are covered until 2020
- The servicing cost of the Greek public debt is significantly reduced. To average servicing cost of Greece’s public debt for the next 30 years is stabilized at levels below 5 percent
- For the first five years, until 2016, there is provision for an even lower rate that facilitates the annual budgets
- The new official aid given with EFSF rates of 3.5 percent and a ten-year grace period
- A debt retirement mechanism in the secondary market becomes operable with an initial yield of € 26 billion (US $ 31 billion) which equal to 12 percent of Greece’s GDP.
- The private sector participates by rolling over (in majority for 30 years) or exchanging Greek government bonds of a face value of € 135 billion (US $ 194 billion) that expire in 2020, with an anticipated participation of 90 percent. This is guaranteed by the public sector provided through EFSF.
Greece is committed to implementing the program
After this major intervention that ensures the sustainability of the Greek public debt we can breath easier, be more determined and turn our attention to:
- executing the budget,
- implementing the reconstruction program,
- proceeding with the structural changes,
- speeding up the privatizations.
Our goal is to return to positive growth and create primary surpluses by 2012.
Everyone has also realized that apart from intervening at a fiscal level, a powerful push for development at the level of the real economy is absolutely necessary.
A new Marshall Plan for Greece
After World War II, President Truman announced a reconstruction program for Greece, which had suffered huge losses and was still bleeding in a civil war. That program was known as the Marshall Plan. Now we have a new European "Marshall Plan" for Greece, with main contributions from the European Commission, the EU Structural Funds, the European Investment Bank, as well as its member states. An initial amount of € 20 billion is already available in the EU funds.
This is the plan we discussed with the U.S. government, Secretary of State Hillary Clinton and Secretary of the Treasury Timothy Geithner. There are many interesting areas such as energy, tourism and real estate in this plan. The U.S. support is strong and I'm sure it can take a very concrete and practical form. Overall, the support provided by the U.S. is particularly important for Greece, for the Eurozone, the international economy and the global economic governance. U.S. support especially through the IMF is vital for us but also for the international monetary stability. If I may say, this support is in the interests of the United States as leading power of the global economy.
We are partners and allies. In the previous two years as Minister for Defense I had the opportunity to work with the U.S. administration in NATO, in very sensitive and crucial issues, such as Afghanistan, Libya, the fight against piracy, or the fight against international terrorism. In the recent weeks, as Minister for Finance, I find myself in the battlefield of debt, deficit and economic growth. In these last weeks, I had the opportunity to really see the positive U.S. attitude. And I’m telling you we do count on it.
The decisions taken at the Eurozone Summit of July 21 and the active participation of the private sector in addressing the problem of the Greek public debt are giving a new momentum for Greece. We are determined to fully exploit this opportunity. In a climate of political consensus and social cohesion we see activated all the forces of the Greek nation inside and outside Greece. I am referring to Greeks of the Diaspora, the Greeks of America, and the Greek commercial shipping which is the largest in the world.
Together we will succeed in rebuilding our country, restoring its fiscal independence and achieving the competitive position Greece deserves in the international market. We can do this and we will do this. This is a historic challenge for the Prime Minister, the Government and for me personally as Minister for Finance. But by and large, this is a challenge for the Greek people, a proud people with many qualities and skills, who yearns to honor the nation’s long history.