The financial crisis in Greece and its impact on the euro area Abstract Due to the 10 factors which postponed the financial crisis in Euro Zone and Greece, The financial crisis has had a pervasive impact on the real economy of the EU, and this in turn led to adverse feedback effects on loan books, asset valuations and credit supply and like many countries Greece, the Greek government relies on borrowed money to balance its books making the recession harder to achieve, because tax revenues are falling just as welfare payments start to rise. And even with the IMF assistance, will be enough to save Greece for the current situation? But the current state of Greece is related to the state of affairs in Greece is hot, no doubt about that. This is not new, nor is it directly correlated to the current financial crisis; rather, we have a scaling of the tension that is definitely related to the fact that the Greek oriented capital manages to achieve very high rates of profitability, while there is a very strong political movement. Even though all the negative reports a forecast has been made and a return to sustained positive growth
is projected for 2012 as external demand strengthens, competitiveness improves and the far-
reaching structural reforms implemented in response to the fiscal crisis start to take hold.
Financial crisis outburst
The crisis was the product of 10 factors. Only when taken together can they offer a sufficient
explanation of what happened:
Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained
housing bubble in the UK (factors 1 and 2). Excess liquidity, combined with rising house prices
and an ineffectively regulated primary mortgage market, led to an increase in nontraditional
mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often
beyond borrowers' ability to pay.
However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage
products are not by themselves responsible for the crisis. In the UK losses from the housing
downturn were concentrated in highly leveraged financial institutions. Which raises the essentialquestion:
³Why were these firms so exposed?´
Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets
(factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating
agencies erroneously rated these securities as safe investments, and buyers failed to look behind
the ratings and do their own due diligence. Managers of many large and midsize financial
institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and
they amplified this risk by holding too little capital relative to the risks and funded these
exposures with short-term debt (factor 6). They assumed such funds would always be available.
Both turned out to be bad bets.
These risks within highly leveraged, short-funded financial firms with concentrated exposure to a
collapsing asset class led to a cascade of firm failures. We call this the risk of contagion (factor
7). In other cases, the problem was a common shock (factor 8). A number of firms had made
similar bad bets on housing.
A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a
financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as
the health of almost every large and midsize financial institution in Europe was questioned. The
financial shock and panic caused a severe contraction in the real economy (factor 10). ...
It is dangerous to conclude that the crisis would have been avoided if only we had regulated
everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simplenarratives like these ignore the global nature of this crisis, and promote a simplistic explanation
of a complex problem. Though tempting politically, they will ultimately lead to mistaken
policies.
I don't think the conclusion that better regulation would not have stopped the crisis follows from
By their own admission, the reason that factors 1 and 2 led to factor 3 was "an ineffectively
regulated primary mortgage market." So right away better regulation could have stopped the
chain of events the led to the crisis.
Factor 3 was "nontraditional mortgages that were in some cases deceptive, in many cases
confusing, and often beyond borrowers' ability to pay." Sure seems like regulation might help to prevent deception and confusion (through, among other things, a financial protection agency).
One thing is clear in any case. The market didn't prevent these things on its own.
Factor 4: Securitizers lowering credit standards, a failure of credit agencies, and buyers failing to
do their own due diligence. Once again, regulation can help where the private market failed. The
ratings agencies exist because they help to solve an asymmetric information problem. The typical
purchaser of financial assets does not have the resources needed to assess the risk of complex
financial assets. Instead, they rely upon ratings agencies to do the assessment for them.
Unfortunately, the ratings agencies didn't do their jobs and this is where regulation has a role to
play.
Factor 5: the accumulation of correlated risk.When regulators see this type of risk building up,
they should do something about it. The question, however, is how to give regulators better tools
for assessing these risks. Backing off on regulation, as implied above, won't help with this.
Factor 6: holding too little capital relative to the risks and funded these exposures with short-
term debt. Mandating higher capital requirements is the solution to this problem.
Factors 7 and 8: risk contagion and widespread exposure to a common shock. The private sector
didn't prevent these risks from getting too high so, again, why wouldn't we want a regulator to do
something about excessive risks of this type? False positives is one worry but that is a matter of
how high to set the threshold for action, not an argument against regulation itself. If anything, the
threshold for action was too low prior to the crisis.
Factor 9: A rapid succession of 10 firm failures, mergers and restructurings in September 2008
that endangered the financial system.
Factor 10: Effects on the real economy. I'll concede that regulation could not have helped much
here. Once the financial system crashed in the way that it did, the real economy was sure to
follow. These factors are, for the most part, a chain of events. If the chain had been broken by
more effective regulation anywhere along the way, the chain of events is interrupted and factor
10 does not come into play.
Strategies proposed by the European Union for recovery from the Financial Crisis:
The strategies developed by EU to the financial and economic crises can be categorized
y The first group of strategies devoted to the restore of confidence in markets withstimulus plans.
y The second group of strategies developed for the proper supervision andgovernance of the financial system
y The third group comprises the strategies to enhance economy policy coordination
among Member States through economic governance mechanisms.Right after the crisis enters the most critical stage in September 2008; European
Economic Recovery Plan was the first stimulus package introduced by the EU. The strategic
objectives of the plan were to recover the economy by considering the long-term objectives such
as enhancing competitiveness and creating green economy and to mitigate the social costs of the
crisis. In order to attain these objectives, the plan proposed a number of strategic actions in
accordance with Lisbon Strategy and was supported by a budget of 200 billion Euros.
As the crisis spread the eurozone µperiphery¶ countries, namely Greece, Ireland and
Portugal, European Financial Stabilisation Mechanism (EFSM) and a European Financial
Stability Facility (EFSF) were introduced as new mechanisms to avoid financial distress in euroarea. Within the framework of EFSM the Commission can contract borrowings from financial
markets on behalf of the EU, and then lend it up to ¼60 billion to the Member State in financial
difficulties. Additionally, EFSF was as a special purpose vehicle, which can issue bonds up to
¼440 billion for lending to Eurozone Member States in difficulties. Both EFSM and EFSF were
adopted following the Ecofin Council in 9 May 2010, became fully operational since August
2010 and will remain in force until June 2013. After June 2011, European Stability Mechanism
(ESM) will replace ESFM and EFSF as a permanent instrument to safeguard the stability of euro
area.
The second group of strategies has started when European Union gave a mandate to ahigh level group chaired by Mr. Larosiere, in order to identify what has to be done to undertake
more deep-rooted reforms. Based on this Larosiere¶s group report, European Commission
launched a set of strategies intended to constitute a more transparent European financial system.
In March 2009 a communication was adopted for the formation of European Financial
Supervision System.
With the establishment of the new system, three existing Committees (Committee of
European Banking Supervisors, Committee of European Insurance and Occupational Pensions
Committee, Committee of European Securities Regulators) will be replaced by more
strengthened Authorities, which will operate at European level and in coordination with nationalsupervisors. In accordance with the Communication of March 2009, European Commission
published a second communication two months later which details the European Financial
Supervisory Framework. The Commission proposes a system based on two dimensions:
y The first dimension establishes European Systemic Risk Board (ESRB), whichwill be responsible for monitoring the macro risks in the financial
system. The decisions of ESRB will not be binding on Member States, but an action or
explanation might be demanded in case they didn¶t act on ESRB¶s recommendations. The
organizational structure of ESRB will be composed of members and observers. President and
Vice-President of European Central Bank, governors of national central banks, chairpersons of
three European Supervisory Authorities and one person from the European Commission would
have a right to vote as members in the ESRB. The representatives of national supervisory
authorities and chairperson of European and Financial Committee would join the organization as
observers.
y The second dimension of financial supervision is the European System of Financial Supervisors (ESFS). The main objective of ESFS is to identify micro risks stem from
financial institutions, other sectors¶ players or consumers. It transforms three existing
Committees of financial regulation into the Authorities (European Banking Authority, European
Insurance and Pensions Authority and European Securities and Markets Authority) with more
power and responsibilities. The Authorities can take binding decisions when a disagreement
occurs between national authorities or actors. The organization of ESFS consists of a steering
committee, board of supervisors and management board. One representative from each authority
would work in Steering Committee to determine the cross-sectoral risks. The Board of
Supervisors in each Authority will be composed of the chairperson of that Authority and
representatives from relevant authorities in Member States, moreover, a representative of
European Commission, of ESRC and of EFTA-EEA country would be involved in as observers.
A management board will be responsible for operational tasks, which comprise national
representatives and the Commission.
European Commission presented legislative proposals for the European Financial Supervisory
Framework in September 2009 and one year after European Council and European Parliament
approved the new financial supervision structure was created. Both ESRB and three Authorities
started to work officially in January 2011.As mentioned above, while dealing with the global
financial crisis, Europe has to cope with sovereign debt problems of some Member States since
November 2009. European Monetary Union has been widely criticised because it is based on a
single central bank without a common fiscal policy among Member States. The lack of
supranational fiscal coordination has become more apparent in the absence of immediate and
mutual response to the Greek crisis. Hence, EU initiates a new strategy to ³reinforce economic
policy coordination´ by the invitation of EC Commissioner Olli Rehn in April 2010. European
Union¶s new economic governance strategy is based on three pillars; strengthening of Stabilityand Growth Pact, enhancing macroeconomic coordination within EU and harmonisation of
national budget frameworks of Member States.
As a fiscal surveillance mechanism of Euro area member states, Stability and Growth
Pact plays a key role in European economy policy coordination, however, recent debt crisis has
shown that Member States could not perform in compliance with rules and principles set by the
Pact. To enhance its implementation and to avoid the breaches of the rules, Commission set out a
strategy that will reinforce so-called the ³preventive´ and ³corrective´ parts of the SGP.
The existing preventive arm of SGP operates through stability and convergence programmes in
which Member States outline medium-term objectives (MTO) of their budgetary positions in
accordance with the rules of SGP. However, as the current crisis proved, Member States areinsufficient to achieve their MTO¶s and a new tool is added to the existing mechanisms, namely
³prudent fiscal policy-making´, which ensures that ³annual expenditure should not exceed a
prudent medium-term rate of growth´. With the help of prudent fiscal policy-making it is aimed
to use unexpected extra revenues for debt reduction instead of spending it. On the other hand, the
existing corrective arm of SGP is implemented through excessive deficit procedure (EDP) - EDP
is an instrument to prevent excessive deficits and debts of Member States. While current EDP
mainly focuses on deficit criterion (3% of GDP), the new strategy puts more emphasis on debt
threshold (60% of GDP); in addition to this, the evolution of debt levels would be monitored
more tightly. If a Member State¶s debt level exceeds 60% criterion, that Member State should
take appropriate actions in order to decrease the difference between its debt level and the
reference debt values at a rate 5% per annum over the last three years.
Both for the breach of preventive and corrective practices, the Commission developed
new sanctioning mechanisms for the Member States in the euro area. If a Member State fails to
adopt preventive actions, 0.2% of its GDP would be held as an ³interest-bearing deposit´. In the
case of corrective action, the amount deposited would be the same; however, Member States in
would not bear any interest as such, these sanctions, Commission developed a ³reverse voting
mechanism´ in order to strengthen their implementations. Through this mechanism, the
Commission¶s recommendation would be adopted, unless Council disapproves of it by the
qualified majority. The rationale of second pillar¶s formation of economic governance is to
prevent and correct macroeconomic imbalances. The reactions of Member states to the financial
turbulences could be wide ranging as a result to manage the process more efficiently, first
mechanism introduced is an alert system based on Member States¶ scoreboards in which a series
of macroeconomic indicators represented and analyzed. An alert threshold would be specified for
each indicator that will give a signal to experts for the in-depth evaluation of the problematic
situation. The evaluation process of the scoreboards would be conducted on a regular basis. In-
depth reviews can lead to two different outcomes for Member States. The first option is to take
no action when macroeconomic indicators are stable. The second option is to recommend
preventive actions if there is a risk of macroeconomic imbalance.
If the macroeconomic imbalances of a Member State produce severe negative consequences for
other Member States, the mechanism of ³excessive imbalance procedure (EIP)´ would be put
into effect. In such cases, Member States are obliged to take a corrective action within a specific
time period. Similar to implementation of the first mechanism, if the macroeconomic imbalance
corrected, EIP will be closed. If the Member State took corrective actions, but its effects didn¶t
occur simultaneously, the procedure will be closed but monitoring would be continued. If a
failure in implementing corrective action or noncompliance with the recommendations continued
repeatedly, a set of sanctions would be imposed for the Member States of euro. A Member State
in euro area has to pay 0.1% of its GDP as a yearly fine if it fails repeatedly to correct
macroeconomic balances under EIP. The decision of enforcement will be taken by the reverse
voting mechanism.
Third pillar of economic governance aims to harmonize budgetary frameworks of the
Member States. This encapsulates the convergence of public accounting systems, forecasting
methods, numerical fiscal rules and transparency.
All three pillars have been presented in six legislative proposals to the Council of the
European Union in September 2010, and they were planned to be operational in June 2011 with
the consent of European Parliament. On the other hand, European Commission has already
started the new framework of budget surveillance, so-called ³European Semester´. Within the
scope of the European Semester, a schedule of activities is organized in order to coordinate and
evaluate the preliminary draft budgets of Member States which will start each year in Januarywith the adoption of the Annual Growth Survey, and after a series of reviews and debates on
national budgets of Member States it lasts in June.
Greece
Greece has a capitalist economy with the public sector accounting for about 40% of GDP.
Tourism provides 15% of GDP. Immigrants make up nearly one-fifth of the work force, mainly
in agricultural and unskilled jobs. Greece is a major beneficiary of EU aid, equal to about 3.3%
of annual GDP. The Greek economy grew by nearly 4.0% per year between 2003 and 2007, due
partly to infrastructural spending related to the 2004 Athens Olympic Games, and in part to anincreased availability of credit, which has sustained record levels of consumer spending. But
growth dropped to 2% in 2008. The economy went into recession in 2009 and contracted by 2%,
as a result of the world financial crisis, tightening credit conditions, and Athens' failure to
address a growing budget deficit, which was triggered by falling state revenues, and increased
government expenditures. Greece violated the EU's Growth and Stability Pact budget deficit
criterion of no more than 3% of GDP from 2001 to 2006, but finally met that criterion in2007-
08, before exceeding it again in 2009, with the deficit reaching 13.7% of GDP. Public debt,
inflation, and unemployment are above the euro-zone average while per capita income is below;
debt and unemployment rose in 2009, while inflation subsided. Eroding public finances, a
credibility gap stemming from inaccurate and misreported statistics, and consistentunderperformance on following through with reforms prompted major credit rating agencies in
late 2009 to downgrade Greece's international debt rating, and has led the country into a financial
crisis. Under intense pressure by the EU and international market participants, the government
has adopted a medium-term austerity program that includes cutting government spending,
reducing the size of the public sector, decreasing tax evasion, reforming the health care and
pension systems, and improving competitiveness through structural reforms to the labor and
product markets. Athens, however, faces long-term challenges to push through unpopular
reforms in the face of often vocal opposition from the country's powerful labor unions and the
general public. Greek labor unions are striking over new austerity measures, but the strikes so far
have had a limited impact on the government's will to adopt reforms. An uptic in widespread
unrest, however, could challenge the government's ability to implement reforms and meet budget
targets, and could also lead to rioting or violence.
The impact of the financial crisis in Europe
The financial crisis has had a pervasive impact on the real economy of the EU, and this in turn
led to adverse feedback effects on loan books, asset valuations and credit supply. But some EU
countries have been more vulnerable than others, reflecting inter alia differences in current
account positions, exposure to real estate bubbles or thepresence of a large financial centre. Not
only actual economic activity has been affected by the crisis, also potential output (the level of
output consistent with full utilization of the available production factors labour, capital and
technology)is likely to have been affected, and this has major implications for the longer-termgrowth outlook and the fiscal situation. Against this backdrop this chapter takes stock of the
transmission channels of the financial crisis onto actual economic activity (and back) and
subsequently examines the impact on potential output.
The impact on economic activity
The financial crisis strongly affected the EU economy from the autumn of 2008 onward. There
are essential three transmission channels:
via the connections within the financial system itself . Although initially the losses mostly
originated in the United States, the write-downs of banks are estimated to be considerately larger
in Europe, notably in the UK and the euro area, than in the United States. According to model
simulations these losses may be expected to produce a large contraction in economic activity.
Moreover, in the process of deleveraging, banks drastically reduced their exposure to emerging
markets, closing credit lines and repatriating capital. Hence the crisis snowballed further by
restraining funding in countries (especially the emerging European economies) whose financial
systems had been little affected initially.
via wealth and confidence effects on demand . As lending standards stiffened, and households
suffered declines in their wealth, in the wake of drops in asset prices, (stocks and housing in
particular), saving increased and demand for consumer durables (notably cars) and residential
investment plummeted. This was amplified by the inventory cycle, with involuntary stock
building prompting further production cuts inmanufacturing. All this had an adverse feedback
effect onto financial markets.
via global trade. World trade collapsed in the final quarter of 2008 as business investment and
demand for consumer durables -both strongly credit dependent and trade intensive ± had
plummeted .The trade squeeze was deeper than might be expected on the basis of historical
relationships, possible due to the composition of the demand shock (mostly affecting trade
intensive capital goods and consumer durables), the unavailability of trade finance and a faster
impact of activity on trade as a result of globalization and the prevalence of global supply
chains.
The impact on labour market and employment
Labour markets in the EU started to weaken considerably in the second half of 2008,
deteriorating further in the course of 2009. Increased internal flexibility (flexible working time
arrangements, temporary closures etc.), coupled with nominal wage concessions in return for
employment stability in some firms and industries appears to have prevented, though perhaps
only delayed, more significant labour shedding so far.
Even so, the EU unemployment rate has soared bymore than 2 percentage points, and a further
sharp increase is likely in the quarters ahead. The employment adjustment to the decline ineconomic activity is as yet far from complete, and more pronounced labour-shedding will occur
as labour hoarding gradually unwinds. Accordingly, the Commission's latest spring forecast
(European Commission 2009a) indicates that, on current policies, employment would contract by
2½ % this year and a further 1½ % in 2010. The unemployment rate is forecast to increase to
close to 11% in the EU by 2010 (and 11½ % in the euro area).
Recent developments
Until the financial crisis broke in the summer of 2007 the EU labour markets had performed
relatively well. The employment rate, at about 68% of the workforce, was approaching the
Lisbon target of 70%, owing largely to significant increases in the employment rates of women
and older workers. Unemployment had declined to a rate of about 7%, despite a very substantial
increase in the labour force, especially of non-EU nationals and women. Importantly, the decline
in the unemployment rate had not led to a notable acceleration in inflation, implying that the
level of unemployment at which labour shortages start to produce wage pressures (i.e. structural
unemployment) had declined.
These improvements had been spurred by reformsto enhance the flexibility of the labour market
and raise the potential labour supply. The reforms usually included a combination of cuts in
incometaxes targeted at low-incomes and a redirection ofactive labour market policies towards
more effective job search and early activation. Measures to stimulate the supply side of the
labour market and improve the matching of job seekers with vacancies were at the centre of
policies in a majority of countries. Importantly, however, in many countries the increase in
flexibility of the labour market was achieved by easing the access to non-standard forms of work.
Like many countries, the Greek government relies on borrowed money to balance its books. Therecession has made this harder to achieve, because tax revenues are falling just as welfare payments start to rise. It doesn't help that, in Greece, tax evasion is commonplace and pensionrights are unusually generous ± but, to be fair, using public spending to even out the bumps of the global downturn is what most large developed economies are trying to do right now.Unfortunately, investors have lost confidence in the Greek government's ability to walk thistightrope ± so they have been demanding ever higher rates of interest to compensate for the risk that they might not get their money back. The higher its borrowing costs, the harder it is for theGreek economy to grow itself out of trouble.
Events began to spiral out of control when credit rating agencies downgraded Greek governmentdebt to "junk" status, pushing the cost of borrowing so high that the country effectively had itsinternational overdraft facility cancelled overnight. Fearing bankruptcy, Greece had to turninstead to the European Union and the International Monetary Fund (IMF) ± the world's lender of last resort ± for up to 120bn euros of replacement lending.But political opposition in Germany and IMF orthodoxy in Washington demands that the rescue package comes with strings attached: a tough series of public sector cuts designed to reassureinternational investors that the government can become creditworthy again.The snag is, this traditional market response is complicated by Greece's membership of thesingle-currency euro club. This means it cannot stimulate growth by devaluing its currency, andnor can it cut interest rates any further, which would help, because these are decided by the
European Central Bank in Frankfurt. Instead, the public sector cuts are almost certain to deepenthe Greek recession, reducing tax revenues and making it even harder to service the debts infuture.What many investors fear is that the only way out of this vicious circle is for Greece to walk away from its existing debts and try to go it alone ± potentially triggering a wave of similar defaults in other indebted European countries, and jeopardizing the euro itself. In the meantime,what many Greeks fear is that the IMF option is just going to prolong the agony ± and drive thecountry to the brink of political as well as economic collapse.
On May 2, 2010, Eurozone finance ministers and the IMF agreed on a three-year program of loans to Greece totaling ¼110 billion (about $145 billion): ¼80 billion (about $105 billion) fromEurozone member states and ¼30 billion (about $40 billion) from the IMF. The package could
reportedly provide ¼30 billion (about $40 billion) from the Eurozone and ¼10 billion (about $13 billion) from the IMF in 2010 to help ensure that Greece meets its immediate paymentobligations. The breakdown of the financial assistance package for Greece is shown in Figure 1.
Figure 1. Eurozone/IMF Financial Assistance Package for Greece
Eurozone Member States
Details on Eurozone Member State Assistance to Greece
Over the course of March and April 2010, Eurozone leaders incrementally formulated amechanism for providing financial assistance to Greece. After considerable negotiation, leadersagreed that the Eurozone countries would provide bilateral loans, at a market-based interest rate(approximately 5%, which is lower than what Greece had paid in recent bond sales), if supplemented by additional loans from the IMF and if the Greek government implementedsubstantial austerity measures over the next three years. On April 23, 2010, the Greek governmentformally requested the activation of this mechanism and the final package was announced thefollowing week.Of the Eurozone member states, Germany is reportedly providing the largest loan, expected to be
¼22.4 billion (about $29 billion) over the three-year period, followed by France, which isexpected to loan Greece ¼16.8 billion (about $22 billion). With payment deadlines on Greek bonds looming, European leaders are aiming to execute the loan arrangements quickly. Due todifferent legal requirements among Eurozone countries²final approval requires a parliamentaryvote in some countries²the loans will likely not all be available at the same time. Advocates of quick implementation overcame a major hurdle, however, when the German parliamentapprovedGerman participation in the plan on May 7, 2010.
Approximately one-third of the Eurozone and IMF financial package for Greece is from IMFresources. The IMF assistance to Greece is a three-year, $40 billion loan made at market-basedinterest rates. Specifically, it is a three-year Stand-By Arrangement (SBA), which is the IMF¶s
standard loan vehicle for addressing balance-of-payments difficulties. The IMF does not disbursethe full amount of its loans to governments at once. Instead, the IMF will divide the loan intotranches (French for ³slice´) and will only disburse the next tranche after verifying that thespecified economic policy reforms have been met. Urging policy reforms in this way ensures thatthe loans will be repaid to the IMF, and that the required economic reforms are implemented.Greece¶s loan from the Fund is unusual for two reasons. First, the IMF does not generally lend todeveloped countries and has never lent to a Eurozone member state since the euro wasintroducedin 1999 as an accounting currency and 2002 as physical currency in circulation. Second, it isunusual for its relative magnitude. The IMF has general limits on the amount it will lend to acountry either through a SBA or Extended Fund Facility, which is similar to a SBA but for
countries facing longer-term balance-of-payments problems. The IMF¶s guidelines for limits onthe size of loans for SBAs and EFFs are 200% of a member¶s quota annually and 600% of amember¶s quota cumulatively. IMF quotas are the financial commitment that IMF membersmake upon joining the Fund and are broadly based on the IMF member¶s relative size in theworld economy. In ³exceptional´ situations, the IMF reserves the right to lend in excess of theselimits, and has done so in the past. The IMF¶s loan to Greece is indeed exceptional access at3,200% of Greece¶s IMF quota and is the largest access of IMF quota resources granted to anIMF member country.The IMF is expected to finance half of Greece¶s loan ($20 billion) using IMF quota resources.Although the United States has contributed 17% of IMF quota resources, it is unclear what portion of the IMF loan for Greece that is financed by quota resources will be funded by the U.S.
quotas. The IMF does not disclose country contributions to individual transactions with theFund.In deciding which quota resources to use, the IMF aims to provide a balanced position for allmembers.The other half ($20 billion) of the IMF loan is expected to be financed by bilateral loans thathave been committed to the IMF as part of an overall effort to increase IMF resources. None of this portion is coming from the United States. In 2009, the United States did agree to extend a line of credit worth $100 billion as part of expanding the IMF's New Arrangements to Borrow (NAB).However, the expanded NAB is not yet operational, so this $100 billion line of credit from theUnited States cannot be tapped for Greece's package.
Debates over IMF Involvement
At the onset of the Greek crisis, many EU officials were insistent that the Eurozone takeownership of the issue. Analysts asserted that it was important for the Eurozone to demonstrateitsstrength and credibility by taking care of its own problems. The prospect of ³outside´intervention from the IMF was viewed by many as a potential ³humiliation´ for the Eurozone,
with officials at the ECB, among others, strongly opposed.46 In late March, however, the debatein Europe appeared to shift, with the door slowly opening for possible IMF involvement as anumber of member states came to favor a twin-track approach combining Eurozone and IMFfinancial assistance.
In the end, IMF involvement was reportedly a key condition of German Chancellor Merkel¶swillingness to provide financial assistance to Greece. Some argue that the policy reforms(conditionality) attached to an IMF loan would lend additional impetus to reform and provide both the Greek government and the EU with an outside scapegoat for pushing through politicallyunpopular reforms. The EU would also make policy reforms a condition of loans, but the IMF isseen as more independent than the EU and has more experience in resolving debt crises than theEU.
EU Member States
Despite the enactment of the Eurozone-IMF assistance package for Greece, investor concernsabout the sustainability of Eurozone debt deepened during the first week of May 2010. Drivendown by such fears, global stock markets plunged sharply on May 6, 2010, and the euro fell to a15-month low against the dollar. Seeking to head off the possibility of contagion to countriessuchas Portugal and Spain, EU finance ministers agreed to a broader ¼500 billion (about $686 billion)³European Financial Stabilization Mechanism´ on May 9, 2010. Some analysts assert that such a bold, large-scale move had become an urgent imperative for the EU in order to break themomentum of a gathering European financial crisis. Investors reacted positively to theannouncement of the new agreement, with global stock markets rebounding on May 10, 2010, tore-gain the sharp losses of the week before.The bulk of the European Financial Stabilization Mechanism package consists of a ³SpecialPurpose Vehicle´ under which Eurozone countries could make available bilateral loans andgovernment-backed loan guarantees totaling up to ¼440 billion (about $560 billion) to stabilizethe euro area. The agreement, which expires after three years, requires parliamentary ratificationin some Eurozone countries. The mechanism additionally allows the European Commission toraise money on capital markets and loan up to ¼60 billion (about $76 billion) to Eurozone states.Previously, such a procedure could only be applied to non-Eurozone members of the EU, andwasused after the global financial crisis to improve the balance-of-payments situations of Latvia,Hungary, and Romania. Lastly, the ECB may take on a more significant new role: if necessary toincrease market confidence, the ECB can now buy member state bonds, an activity in which ithasnot previously engaged.
IMF
The European Financial Stabilization Mechanism was announced with the IMF contributing uptoan additional ¼220 billion to ¼250 billion (about $280 billion to $318 billion). This is in line withthe Greece package, where the Eurozone states contributed roughly 2/3 and the IMF 1/3. IMFManaging Director John Lipsky reportedly later clarified the news reports about the IMF
contribution to the European Financial Stabilization Mechanism, saying that these pledges were³illustrative´ of the support that the IMF could provide.54 Reportedly, Lipsky reiterated that theIMF only provides loans to countries that have requested IMF assistance and that Greece is theonly Eurozone country to date that has requested IMF assistance.
Present situation in Greece
The state of affairs in Greece is hot, no doubt about that. This is not new, nor is it directlycorrelated to the current financial crisis; rather, we have a scaling of the tension that is definitelyrelated to the fact that the Greek oriented capital manages to achieve very high rates of profitability, while there is a very strong political movement. The key factors in thiscontradiction are the low level of organization of the workers and the historical roots of theCommunist Party in society. This post is the first of a series that will highlight some key featuresof the current situation in Greece, starting with the presentation of the main frontiers.
At the time of writing the farmers were in the 9th day of their blockage of the highways, bordersand other major roads with their tractors, practically paralyzing the road network. Some of their claims are against the Common Agricultural Policy and the policies that shrink the income of smaller producers to the benefit of big companies. This has been an open frontier for years, andhas its own issues.
In the cities, now, there are two frontiers. The first one concerns education. The students are preparing their next move, after the demonstrations of December and those supporting thePalestinians. The main issues concern the founding of private universities (until nowconstitutionally forbidden), the abolishment of asylum (so police can enter the universities), theequalization of diplomas from universities with those from private colleges, the breakdown of the undergraduate into two cycles (until now 4 years minimum), the imposition of fees, thesalaries and the working conditions of the professors, the facilities; practically everything.
The events of December following the execution of a 15-year old by a policeman also deservesome comment. First, they occurred against a background of already heightened tension due tovery low wages and incomes, strict fiscal policy, inflation, persistent unemployment at theofficial rate of 9% (the real figure is at least 14%), state terrorism and government corruptionand, most importantly, no perspective for improvement; on the contrary, the country was on the brink of crisis. So the murder of the child was the last straw.
Second, several other factors were less reported. Another pupil was shot on the 10th, outside hisschool, while discussing with other pupils their participation in next day¶s demo. The bullet stuck in his arm and that prevented him from dying. On the 22nd, the secretary of the union of thecleaners, a 44-year old woman from Bulgaria was murderously attacked with acid in response toher fighting stance the previous period. The murderers even forced her to drink the acid! Duringthe time that the cities were on fire, the police forces were beating and arresting 10- to 15-year old pupils in the morning, while successfully playing an old game with rioters at night.
Finally, big strikes were held, workers demonstrated in the streets with their children andteachers with their pupils, but the media of the bourgeoisie ignored them, presenting only
repeated scenes of destruction, appalling people and discouraging them from participating in thedemonstrations.
Which brings us to the third frontier: that of the workers. Despite the fact that the workers arestruggling, there are serious limits to their fight. In the next post we will discuss the working
movement and the political situation.
Greece economic forecast
The economy is suffering a serious recession in the context of the sizeable, but vital, fiscalretrenchment. A return to sustained positive growth is projected for 2012 as external demandstrengthens, competitiveness improves and the far-reaching structural reforms implemented inresponse to the fiscal crisis start to take hold. Substantial economic slack and risingunemployment will keep inflation pressures subdued. The outlook is subject to important, mostly
Adherence to the fiscal and structural adjustment program, agreed in May 2010 with theEuropean Union (EU) and the International Monetary Fund (IMF), is indispensible for restoringcredibility and market confidence, long-term public debt sustainability and competitiveness.Success depends crucially on rigorous expenditure control and further progress in fighting taxevasion, combined with comprehensive reforms to address chronic rigidities in fiscalmanagement, and in labour and product markets.
Are the Domestic Reforms and Eurozone/IMF Package for Greece Enough?
Some economists fear that Greece¶s fiscal austerity plan, which entails cutting budget deficits by
9% of GDP in four years, is too ambitious and will be politically difficult to implement. As aresult, some economists suggest that the Greek government could still default on or, consideredmore plausible, restructure its debt. In fact, some observers regret that debt restructuring was notincluded in the IMF package in order to provide a more orderly debt workout. Restructuringwould also push some of costs of the crisis onto private banks that, it is argued, engaged in³reckless lending´ to Greece. However, a default or debt restructuring could accelerate thecontagion of the crisis to other Eurozone countries, as well as hinder Greece¶s ability to regainaccess to capital markets. In addition, even if Greece¶s government stopped servicing its debt, it
would still need substantial fiscal austerity measures to address the government deficit unrelatedto debt payments.This has led some economists to argue that Greek fiscal austerity should be offset by moreaccommodating monetary policy by the ECB. This seems unlikely in light of recent reportedcomments by the President of the ECB, Jean-Claude Trichet, on the ECB¶s commitment to price
stability.As a result, some economists have suggested that Greece should or may leave the Eurozone.This would likely require abandoning the euro, issuing a national currency, and allowing thatcurrency to depreciate against the euro. The Greek government would also probably have to putrestrictions on bank withdrawals to prevent a run on the banks during the transition from the euroto a national currency. It is thought that a new national currency depreciated against the eurowould spur export-led growth in Greece and offset the contractionary effects of austerity. SinceGreece¶s debt is denominated in euros, however, leaving the Eurozone in favor of a depreciatednational currency would raise the value of Greece¶s debt in terms of national currency and put pressure on other vulnerable European countries. Additionally, some argue that a Greek departure
from the Eurozone would be economically catastrophic, creating the ³mother of all financialcrises,´ and have serious ramifications for political relations among the European states andfuture European integration.
