Pepe, Rosamaria (2016) Greece's sovereign debt crisis: origins, effects and policy responses. [Magistrali biennali]
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The following account of Greece’s sovereign debt crisis starts in 2010, when the Greek government formalized the unreliability of its accounting methods and the deal with the Goldman Sachs came to light. This revealed a hole in the budget of more than 15% of GDP and a public debt-to-GDP ratio of 129,7%, a value well above the previously reported 113%. As a result, serious doubts arose on the country's ability to finance its debt, triggering a deep confidence’s crisis, which not only undermined Greece’s financial and economic situation, but also jeopardized the stability and credibility of the projects “European Monetary Union” and “Euro”. Therefore, faced with Greece's inability to finance itself on international financial markets, in May 2010, the IMF in coordination with the European Commission, the European Central Bank, agreed on a twin track course of actions with the Greek government. The former, in order to enable Greece to make interest payments and roll over its debt, would have provided financial assistance to the latter, which, in turn, would have had to adopt a series of austerity measures aimed at achieving substantial fiscal consolidation. However, has this strategy worked out? Clearly, it depends on the targets. Troika's cure was successful in determining a transferring of "Greece-risk" from the European banking system to the Euro zone governments, while it completely failed in achieving the aim of consolidating Greece’s public finances and putting its sovereign debt back on a sustainable path. Greece’s debt-to-GDP ratio passed from 127,9% in 2009 to 148,3% in just one year, and finally it ended up to 177% in 2015, despite a major restructuring in 2012 led to a debt write-off of about €110 billion. This disaster is due to the drastic fall in Greece’s GDP, which shrank by 25% in five years, causing a reduction in the tax base, and to the reluctance of the Greek government to implement the reform program imposed by international creditors. The reduction of the tax base has, in turn, led the country to increasingly rely on debt to finance itself leaving Greece totally vulnerable to shifts in investors’ confidence. It all has had a severe impact on the country’s banking system, which increasingly dependent on the extraordinary liquidity provided by the ECB, has experienced a deep liquidity crisis that was likely to turn into a solvency crisis. However, Cyprus’ experience and the most recent Greece’s experience highlight how the introduction of capital controls can efficiently avoid that risk. Thus, in this framework, three are the alternatives that lie ahead for Greece and its creditors. The first would require Greece to adopt a series of measures aimed at realizing a thorough reorganization of the country, so that a new Greek economy would be able to emerge. The second alternative is that of a debt restructuring. Greece’s sovereign debt should be reduced by at least 60%, down to 120% of GDP, in order to be considered sustainable. A debt restructuring would reduce Greece’s overall debt burden and allow the country to have a greater room to implement reforms to restore competitiveness and growth. Finally, the last alternative would be that of Grexit, or in other words, Greece’s exit from the European Monetary Union.
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