Grexit: Time to build a Fiscal Trojan Horse


Grexit – when you separate the constituents of this conjunct word it means Gre+exit = Greece Exit-from where-from the eurozone- what could it mean-it could mean a change in currency and a flight of capital. Unless the eurozone eases its bailout terms, the Greek government has plans to nationalize the country’s banking system and introduce a parallel currency to pay bills. Greece could return to its previous currency, the drachma, and some predict that its value would then tumble.

Grexit- year wise sequence of events- What actually happened

1981- It all started in 1981 when Greece joined the European Communities, and enjoyed an average annual GDP growth rate of 1.7% for the subsequent two decades.

2001- Greece has been in news since 2001 when it joined the Euro.

2004- The government of Prime Minister Kostas Karamanlis revealed that its predecessor had lied economic data, claiming the deficit was less than 1% of GDP, when in fact it was well over the eurozone’s 3% threshold. The 2004 Olympics drove the deficit up to 6.1% of GDP, creating the illusion of prosperity.

2009: From 2004- 2009 there was the structural decay of Greece’s finances. The debt-to-GDP ratio swelled from 97% in 2003 to 130% in 2009.

Spending on pensions edged up from 11.8% of GDP to 13%, and Tax evasion was rampant. Lawmakers took no action to fight it, in part because they were likely among the worst offenders and in part because lax enforcement was seen as a way to earn votes.

In 2009 Greece’s GDP shrank by 4.7% and the deficit ballooned to over 12% of GDP. Same year the socialist Pasok party took control of the government and passed the first of several austerity measures that went on for three years, including further public sector pay cuts, public sector layoffs, minimum wage cuts, tax increases, cuts to pension payouts, cuts to health and defence spending and changes in the labor code to make it easier to lay off workers.

2010- Prime Minister Giorgios Papandreou requested a bailout and the EU and the IMF responded with a three-year,  $147 billion package, the largest sovereign bailout in history, in exchange for another round of painful austerity measures.

2012- A second bailout package was finalized in February 2012, following the passage of a fifth batch of austerity legislation. It brought the total the European Central Bank, EU countries and the IMF – disparagingly called the “troika”– had diverted to Greece with the additional funding worth $172 billion at the time.

The terms required Greece to reduce its debt from 160% of GDP to 120% by 2020. As part of the deal, banks holding Greek bonds would take a 53.5% loss on the face value of their holdings, for an actual loss of perhaps 75%.

Little of this money ever actually went to Greece, but rather passed through it, as it was used to repay debt holders. This has contributed to the perception that foreign governments have not been bailing out Greece, so much as their own banks. Germany, for example, is the largest single contributor to the bailout package, at €56 million euro; its banks are also the largest investors in Greek bonds, at approximately €13.3 billion.

Euro Debt Crisis

2013- Unemployment skyrocketed from just over 10% to nearly 28% in September 2013, when the eurozone’s average stood around 11%. About 50% of Greeks aged 15 to 24 remain jobless, and around 40% of Greek children now live in poverty.

The result was powerful sense among ordinary Greeks that they have been betrayed by their leaders and by leaders in other eurozone countries particularly Germany. This resulted to violent protests and political uncertainty with deaths and suicides. As a result support grew for far-left parties like Syriza and the neo-fascist Golden Dawn; with New Democracy’s Antonis Samaras becoming prime minister as citizens’ anger at austerity and investors’ fears of default deepened.

2014- Greece happened to be in good start, posting a primary (before debt payments) surplus for fiscal 2013, the first in a decade. The country had met one of its creditors’ key conditions ahead of schedule, and its return to the markets in the form of a sovereign bond issue seemed to herald a new beginning for the country.

2015- The anti-troika Syriza party came into power. The new prime minister, Alexis Tsipras, promised to reverse years of austerity policy and to renegotiate Greece’s bailout terms.

The result was considered a snub to Greece’s creditors. Angela Merkel had hinted in the run-up to the election that Germany could accept a Greek exit from the single currency if it elected Syriza. Markets were similarly displeased with the outcome, and the euro fell as close to parity with the dollar as it had been in 11 years.

Negotiations ultimately broke down when Tsipras announced a referendum on the agreement the negotiators were supposed to be finalizing. Tsipras closed banks and imposed capital controls, allowing Greeks to withdraw only €60 ($66) per day. Greece became the first developed country to miss a repayment to the IMF.

what happens when a country defaults

Timeline of upcoming events month of June

  • June 10- Greece due to sell €1.6bn in Treasury bills to refinance maturing debt
  • June 12- IMF loan repayment of €312m due
  • June 16- IMF loan repayment of €573m due
  • June 18- Eurogroup Meeting in Luxembourg
  • June 19- IMF loan repayment of €343m due
  • June 19- Greece owes €85m to the ECB for bonds the central bank bought
  • June 19- European Union finance ministers meet
  • June 25 and 26-European Union leaders Summit in Brussels
  • June 30- Greece due to pay €1.5bn wage and pensions bill by month-end
  • June 30- Greece’s current bail-out deal expires

Greece must also make all its IMF payments by this date or it will be in arrears to the Fund

Grexit- what is happening now

After three emergency bailouts and the biggest debt restructuring in history, talk once again has turned to the country dropping out of the single currency. Businessmen and bankers in private concede that as the economy disintegrates the possibility of a parallel currency is now openly being discussed.

The IMF is under pressure from its own member states, insists that Greece will have to implement additional measures worth €9bn (£6.96bn), or 4.5% of GDP, if it is to meet an agreed budget surplus of 3.5% in the years ahead.

Greeks need to build a ‘Fiscal Trojan Horse’

Greeks need to start afresh economically. They need to form strategy like their Trojan Horse. The Trojan Horse is a tale from the Trojan War about the subterfuge that the Greeks used to enter the city of Troy and win the war. After a fruitless 10-year siege, the Greeks constructed a huge wooden horse, and hid a select force of men inside. The Greeks pretended to sail away, and the Trojans pulled the horse into their city as a victory trophy. That night the Greek force crept out of the horse and opened the gates for the rest of the Greek army, which had sailed back under cover of night. The Greeks entered and destroyed the city of Troy, decisively ending the war.

When looking at the facts of what let Grexit to ever exit in news is all because it was all politics in Greeks to have this mess. The Greeks borrowed money to fund an array of social benefits similar to those found in other European countries like France, Germany, and Sweden.  But unlike those other countries, the Greek government didn’t collect enough in taxes to pay for them.

They charged up benefit upon benefit. Like retirement with a full pension at 57. In fact, for years Greek civil servants could retire after 35 years service at 80 percent of their salary. Greece covered the healthcare for its citizens, including five months of paid maternity leave. Greece’s 17 universities and 30 technical institutes were free for all Greek citizens.

Greek taxes never could pay for these rich benefits of Greek citizenship. The difference between Greece’s ability to pay for these benefits and the cost of the benefits now amounts to $320 billion euro or 180 percent of Greece’s GDP. The country’s tax rate was too low to pay for the benefits. With tax evasion practically “a national sport” in Greece, the country was lucky to collect taxes at all. Upwards of 30 billion euros per year go uncollected, according to some estimates. That in fact amounts to a hefty percentage (roughly 3/8ths) of the bailout that Greece is seeking now from its Eurozone partners.

But now the benefits are washed up. The retirement age is going up to the age of 67, the same age as it is in Germany. Times will be though harder than ever for Greek citizens, but that is to be expected as this is such a huge old debt.

Greece joined the Eurozone with such a debt as it lied. Greece was the last country to join the Eurozone before the currency launched in 1999. In 2004, Eurozone auditors discovered that Greece had fudged its debt figures on entry. Had it been honest, Greece would have had a far more difficult time getting in on the Euro. Greece wanted to be a member of the Euro club without paying its dues.  This is primarily why the later joiners to the Euro, notably Latvia, Lithuania, Slovakia, and Slovenia side with Germany in the bailout politics.  When those countries joined the Euro, they were spun, shaken, and stirred to make sure they could handle the common currency.

The Greece’s political leaders would have set about getting the country’s financial house in order as soon as it became clear, in 2004, the extent of its growing debt problem. But they didn’t. Instead, they began aggressive, expensive preparations for the 2004 Olympic Summer Games in Athens.

Dumping the euro and adopting the Greek drachma, which would of course devalue naturally would have several salutary effects once the initial chaos subside. Greece would no longer be locked into a fixed exchange rate, which would make its exports more affordable and undoubtedly create a boom in tourism, one of Greece’s chief industries.  As no one is going to lend the Greeks money or buy their debt for some time to come at anything like decent rates, so they might be better off just wiping the slate clean with a bankruptcy and starting fresh.

Also like the historical lessons of Troy Greeks are smart, they should have their own form of austerity reforms and learn to grow its economy. A great deal of money could be saved simply be revaluing civil service salaries and pensions in drachmas instead of euros at a government set exchange rate that could be far less than the actual market rate bringing back the stability and well being of Greeks. Like the Trojan Horse story in history books Greek debt crisis will soon be a mere anecdote in European Union and the Eurozone.

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