Greece is burning

By Vasant G. Gandhi

(June 11, Washington, Sri Lanka Guardian) Greece is burning and investors around the world see its smoke. Angry youths in capital Athens are lighting stores and vehicles, breaking shop windows, and fighting police. Striking workers have shutdown airports, trains, schools, and garbage pickups. Such scenes, of discontent, of destruction, of disruption, are caused by a severe financial crisis.

Greece is a tiny nation of nearly 11.5 million (1.15 caror in India) and has an estimated GDP to be of 350 billions in US dollar. If one averages, the GDP per head is more than $30,000, a number far better than many other nations’ GDP per capita. So why aren’t the Greeks affluent anymore?

It is because Greece’s debt per Greek is more than its GDP per head, leaving very little for living. Theoretically, income from everything each of its citizen produces should go into paying down the debt owed to foreign banks, foreign governments, foreign institutions, foreign citizens, and domestic lenders. But that is not what Greeks are doing. Instead they have been piling up debts. It is estimated that debt to GDP ratio is going to be 120 and 150 in 2010 and 2011 respectively.

With the debt that is going to be 150 percent of Greece’s GDP next year, it is no wonder why around the globe lenders are not willing to lend to, or investors are not willing to invest in, Greece. The Standard and Poor Company decreased Greece’s debt rating to junk status in April 2010. Imagine a family spending more than it earns, who will lend to such family?

How did Greece get into sovereign-debt crisis? Starting at the turn of the century until 2007, its economy grew briskly. Both the new inflow of investment capital and falling bond yields enticed the government into issuing new bonds. Thus began the heavy borrowing, and the debt grew. But then in 2009 economic downturn came and its two main industries, tourism and shipping, suffered a big blow. The government’s income fell and its expenditure remained high – expenses exceeded the income by about US$45 billions in 2009.

A big part of the problem lies in the fact that one third of Greeks works for the government. They enjoy higher wages, better bonuses, more generous sick and vacation pay, and more munificent health insurance benefits than private sector’s employees. The government retirees get 80 percent of their highest salary. In addition to payroll, it has to pay rising bills to continue to run the public owned facilities. If Greece were a company, it would have filed for a bankruptcy.

Recently, the Euro currency run nations, mainly Germany, are raising fund to bail out the Greece. As a part of the austerity measures, Greece government is asked that its employees take wage cut, forgo bonus, and accept freeze in wage increase. It should also tax pension, curtail public services, raise value added tax, and raise taxes on things like luxury items, tobacco, alcohol, and fuel. Now, for easy-going Greeks, whose median age is rising rapidly due low birth rate, this is a hard pill to swallow.

So, what is going to happen? It is likely that Greece may decide to default on loans, leave the European Union, and start a new currency. And Spain, Portugal, Ireland, and other debt-ridden nations are not too far behind the Greece.