Quick Economics on Greek’s debt crisis

Quick Economics on Greek’s debt crisis

Up till now, it seems like there is no clear fix for the Greek’s debt crisis.  Too much of borrowing and spending for years is coming to call home in the next few months. A lot of debt is coming due in 2010, around euro 54 billion- and if Greece can’t pay off these debts on time, the country will be in default.

The European Union hasn’t really say that they are going to guaranteed to help Greece with its debt, so far it has only been mostly vague promises.  Most European governments are also reluctant to get involved to bail out Greece.

Greece faces a terrible burdensome pension system, taxation, high government spending, widespread corruption and highly regulated labor market. The country is likely to face a slow and cumbersome economic recovery that could probably last several years. Loan guarantees from major EU countries and the issuance of bonds to cover fiscal deficit will hamper medium-term growth outlook. 

The Greek government announced that its deficit for 2009 was equal to 11.4 percent of GDP, nearly four times the EU limit. It announced that it will try to bring the deficit back down to 3 percent of GDP in 2013.  This is not really possible, as a lot of the money to be cut down to bring down deficit to 3% has to come from the public sector or the government. The public sector forms a major part of the Greek economy. About 40% of the Greek jobs are in government.

Although the Socialist Prime Minister George Papandreou did not specifically say what are the measures to be announced, he indicated that it would include pay cuts for civil servants – notably in their so called “14th salary”, part of annual bonus held back as holiday bonus. Now just imagine, if  you are a civil servant, now you have lesser cash or money to spend, won’t you also be forced to cut back on your spending? This means buy less IT gadgets, new furnishings for the house, less dining in restaurants etc.

Hence if you want to cut down on the public sector, you are actually slowing down growth. When the government is cutting down the budget deficit, growth slows down, economy slows down, there is also lesser tax or revenue to collect for the budget.  It is like a vicious cycle – the more they cut, the worse it is going to get.

Adding to these woes, the general public is not taking well with the Socialist government’s reforms – pensions froze, cutting civil servants’ pay and new taxes on misc items in the country. Thousands of Greek workers protest and go on strikes over the socialist’s government plan to solve the country’s debt crisis. Government offices, public hospitals and schools were to close as more than a million people were called out on strike and urged to join street protests. Now this will probably scare away all the potential tourists who has money to come and spend in the country.

Looks like there is going to be more problems up in Europe. Time to take flight from Europe stocks and park your money in safer markets in Asia.


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