The Greek economy, one of the fastest growing in the Eurozone during 2000 to 2007, grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large deficits. According to an editorial published by the Greek newspaper Kathimerini, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974.
After the removal of the right leaning military junta, the government wanted to bring back left leaning portions of the population into the economic mainstream. In order to do so, successive Greek governments have, among other things, run large deficits to finance public sector jobs, pensions, and other social benefits. Since 1993 debt to GDP has remained above 100%.
To begin with lower currency value through devaluation helped finance the borrowing. After the introduction of the euro Greece was able to borrow due to the lower interest rates government bonds could command. The 2008 global financial crisis had a particularly huge impact on Greece. Two of the country’s largest industries tourism and shipping were badly affected by the downturn with revenues falling 15% in 2009.
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To show that the country was following the monetary union guidelines, the government of Greece has been found to have consistently and knowingly misreported the country’s official economic statistics. In the beginning of 2010, it was found that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing.
The purpose of these deals made by several subsequent Greek governments was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers. The emphasis on the Greek case has tended to overshadow similar irregularities, and manipulating statistics (to cope with monetary union guidelines) that have also been observed in cases of other EU countries, especially Ital. However, Greece was seen as the worst case.
In 2009, the Papandreou government revised its deficit from an estimated 6% to 12.7%. In May 2010, the Greek government deficit was estimated to be 13.6%, which was one of the highest in the world relative to GDP. Greek government debt was estimated at €216 billion in January 2010.
Accumulated government debt is forecast, according to some estimates, to hit 120% of GDP in 2010. The Greek government bond market is reliant on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally.
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Greece faced another problem of tax evasion which costed the Greek government over $20 billion per year. Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January).
According to the Financial Times on 25 January 2010, “Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on.” In March, again according to the Financial Times, “Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount.”
On 27 April 2010, the Greek debt was rated as junk by Standard & Poor’s amidst fears of default by the Greek government. Yields on Greek government two-year bonds rose to 15.3% following the downgrading. Some analysts question Greece’s ability to refinance its debt.
Standard & Poor’s estimates that in the event of default investors would lose 30-50% of their money. The stock exchanges worldwide declined in response to this downgrading. Later on Fitch, Moody’s and S&P also downgraded Greek bond yields. Yet on 3 May 2010, the European Central Bank suspended its minimum threshold for Greek debt “until further notice”, meaning the bonds will remain eligible as collateral even with junk status.
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On 2 May 2010, a loan agreement was reached between Greece, the other Eurozone countries, and the International Monetary Fund. The deal consisted of an immediate €45 billion in loans to be provided in 2010, with more funds available later.
A total of € 110 billion has been agreed. The interest for the Eurozone loans is 5%, considered to be a rather high level for any bailout loan. The government of Greece agreed to impose a fourth and final round of austerity measures.