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How Greece Failed


“You shouldn’t commit suicide because you’re afraid of dying.” This is what Jean-Claude Juncker, the president of the European Commission, said aimed at convincing Greeks that the austerity measures and budget cuts rejected by their Government are actually for good.

Since its failure to repay the €1.56Bn to the IMF by June 30, 2015 Greece has really made itself vulnerable to European aggression and pity. The country has failed miserably at managing its finances. Last Sunday’s referendum was the final nail in the coffin to end diplomacies in the not so united “European Union”.

A lot has been said and written about the whole phenomenon. A whole lot of dirty tricks came up after the 2008 financial crisis. The Greece downfall kick started in October 2009 after admission by then Greek PM, Mr. Andreas Papandreou, that Greece had understated its deficits and budget flexibility when it sought entry to the Euro.

The country lost trust with the global investors and went into a spiral. Carrying high deficits and hollow taxation structure, Greek was dealt a fatal blow to its armour.

Break down of Greece Debt

Thereafter two bailouts amounting to €240Bn were offered by the troika– the International Monetary Fund, the European Central Bank and the European Commission in 2010. This money failed to lift up the Greece situation. The conditions (attached with the bailout) requiring financial discipline were not met. And just like a spoilt brat, Greece continued to live lavishly off others.

In this piece we look at the major financial indicators signalling Greece’s fragile economic state. We compare it with its counterparts. And understand in simple terms how they impact the citizens of this “great” land.

The parameters include Debt to GDP Ratio, Movement in GDP, Rate of Unemployment and Bond Yield of 10Yr G-Sec. The first two compare production and external debt, third measures the level of unemployment and the fourth indicates the level of confidence in Greek economy over the last two decades.

1) Debt to GDP Ratio at near 175% –

Justifying a debt amounting to double the size of the economy is hard. In simpler terms, it means full two years of production might still not be enough to repay the borrowings. With average of European Union’s debt at 100% of the GDP, the Debt-GDP of Greece is clearly an outlier. Low fiscal prudence and lack of overhaul in policy measures ensured Greece continued on the path of self-infliction.

Gross government debt as a percentage of gross domestic

product plotted through the fourth quarter of 2014

2) Fall in GDP by 25% –

Carefully look at the chart below. You will see that among the major European nations, Greece is the only one to suffer a significant decline in output, a staggering 25% since its level in 2008. While UK and Germany have grown by 21% and 16% respectively, Greece hasn’t been able to sustain it production levels.

Fall in GDP of Greece by 27% since Q1’08

3) Unemployment at 25% –

What do you do to save a country where every fourth individual is jobless? Let aside economics for a moment, it becomes difficult to maintain law and order. Frustrations and social unrest are bound to arise. From the lows of 8% even deep into the sub-prime crisis, unemployment in Greece has gone up to 25%. History is testament that employment is pre-requisite to a civil society.

Greece needs to bend its ways, and plan to instil a culture of savings and investment and not just to consume.

Unemployment in Greece has touched an all time high of 26.5%

4) Astronomical Yield –

Yield is basically the return expected by the holders of Government gilds of a nation.

It represents the payoff expected by its holder for lending the principal amount.

Thus riskier the asset, higher is the yield and vice-versa. See below and compare the yields of Greece with other European nations.

Yes, that is the level of confidence the world has in Greece. Though in 2008 (before the Greece crisis unfolded), Greece was at par with the rest of Europe, it now stands at an astonishing 15%. This is when Germany can raise funds at less than 1%.

10 Year G-Sec Yields since 1993

Conclusion –

Greece has brought this upon itself. It shall serve as an example of what insurmountable debt accompanied with high fiscal and current deficit and leakages in the taxation structure can do. A lot is brewing in Europe. Since the referendum supporting a clear “NO” to the proposed austerity measures last Sunday, the Greek PM has now been offered even harsher conditions for a further bailout by the EU. The capital controls remain intact. A Grexit is still in sight. And the world refuses to relent.

It seems it shall now be the final part of the Act. But again, who knows ?



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