“In Greece the banks didn’t sink the country. The country sank the banks”. Discuss this view.
Which are the main differences between the Greek crisis and the crisis in Ireland and Portugal? The Greek crisis is basically a result of the inability of the government to balance the tax income with the public spending, to control effectively its expenditure and to enforce its tax collecting policies. The country has shown significant fiscal imbalances and at the same time, high levels of corruption in the political and economic sectors.Moreover, with the aim to be in line with the requirements of the European Union, Greece has been constantly misleading the public and the Eurostat through the false disclosure of statistical data concerning its true financial position. When the actual situation was revealed, rating agencies proceeded to several downgrades to reflect the higher risk of default, a fact that turned Greek government bonds into “junk” and thus no longer eligible to be owned by many of the investors who already owned them. The resulting dumping of Greek bonds into the market removed Greece from the free financial markets.As it was expected, Greek banks were also downgraded, and consequently the public felt insecure about the safety of their money. This resulted in an increase in deposit outflows and non-performing loans along with the credit contraction.
However it is worth noting that, virtually alone in the European region, Greek bankers acted more like old, slow moving commercial bankers and they did not invest in U. S. subprime-backed bonds or leverage themselves to extreme levels, or even pay themselves huge sums of money as bonuses.The biggest problem that the Greek banks faced was that they had bought roughly 30 billion Euros of Greek government bonds which were then degraded gradually to junk. As a result the Greek sovereign crisis has resulted in the Greek banking crisis and not the other way around. Comparing Greece with other countries such as Portugal and Ireland, the similarity between them is the state of their government finances: they all have government debts and budget deficits in excess of that permitted by the Eurozone requirements.The difference between Ireland on the one hand and Portugal and Greece on the other is the cause of their high budget deficits. Ireland experienced an overheated property market in which both property prices and building activity reached unsustainable levels.
The growth of the property market initially pushed up economic growth as well as tax revenues. From 2002 to 2007, the country boasted a budgetary equilibrium or surplus. Its government debt was as a result very low in 2007 (25% of GDP). But the sharp correction of the untenable situation in the property market caused a substantial fall in tax revenues.Also loan volumes increased by more than 26% on average every year between 2002 and 2007 due to the booming construction industry, a percentage much more than the Eurozone area as a whole (where the average growth was 8. 2%).
Finally nominal corporate debt tripled in less than five years, definitely an indicator of unsustainable, excessive credit growth and a sign of a lending bubble. Eventually, when the property bubble exploded, the government had to come to the aid of banks facing major losses on loans. Another difference is that the Greek deficit is structural, whereas the Irish deficit is mostly a result of the bank bailouts.This means that the Irish deficit, as history has shown in similar cases, will drop dramatically in the coming years once the recapitalization of the troubled banks is finished, while in the case of Greece more long term measures are needed. Portugal and Greece have been struggling with large deficits in their government budgets for years. In contrast to Ireland, the present budget deficits of these countries did not come on the heels of earlier surpluses. In addition, the economic downturn in Greece and Portugal in 2008-2009 was much less steep than in Ireland, partly because it was not preceded by an overheating of the property market.
Both countries therefore have only a limited economic excuse for their large budget deficits and for years they have been spending more than they could afford. Greece differs from Portugal in that its budget deficits have been excessive for many years and, worse still, their true extent was masked by gravely deficient reporting. The sudden doubling of the budget deficit that was disclosed in the autumn of 2009 is seen as the start of the unrest in the market for European government bonds.Portuguese debt numbers on the other hand are a concern but nowhere near that of Greece: a 76,1% debt-to-GDP ratio (as of 2009) is not good, but it is significantly lower than Greece’s 115%.
Another difference between Greece and Portugal is that the vast majority of population in Portugal at least seems to accept any austerity measures, as the fiscal cutbacks from 2004 to 2007 showed. In Greece however we have seen various protests, indicating that it would be harder for the Greek government to introduce austerity measures and deal with its financial problems.