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Can Greece ever pay off its debts?

Reuters

How did Greece end up owing so much money? And can it ever pay off its debts? A look at the state of the Greek economy and some previous examples of countries who have got themselves out of the red?

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What's the size of the Greek economy? 

Greece’s GDP at 275bn euros makes it the 33rd richest country in the world, going by a list compiled by the International Monetary Fund.

Greek economy weakest in western Europe
Reuters

Of the 300bn euros the Greek government owes creditors, about 200bn are owed mainly to insurance companies and mutual funds, as well as to banks inside the 16-country eurozone.

Actually, the country’s GDP figure is an underestimate. Like most places in the world - perhaps even more than most – Greece has a sizeable underground economy. Adding this undeclared wealth creation to its official GDP makes the country’s real ratio of debt-to-national income smaller than is officially computed.

 
How did the Greece end up with massive debts?

Greece is a major beneficiary of European Union aid - cheap loans and assorted subsidies - equal to about 3.3 per cent of annual GDP. Its economy grew by nearly four per cent per year between 2003 and 2007.

That came partly from building or repairing stadiums, buildings and roads for the  2004 Athens Olympic Games.

In part though, Greeks lived it up on borrowed money, too easily made available by the banks.

Growth dropped to 2.9 per cent in 2008. The year after, as a result of the international financial crisis, the Greek economy went into recession and shrunk by 2.5 per cent. State revenues fell, while government spending increased, propelling a growing budget deficit. 

The eurozone’s Growth and Stability Pact requires governement budgets in ieach of its 16 countries to be no higher than three per cent of GDP.

Greece violated those budget rules from 2001 to 2006, met that criteria in 2007-08, then exceeded it again in 2009. Economic growth slumped, aggravating the country’s problems and bloated the debt owed by the Greek state and parapublic agencies to 115 per cent of GDP.


What will the European Union and the IMF-imposed belt-tightening mean?

China to the rescue?
Reuters

European Union officials say that without drastic government spending cuts Greece's public debt will rise to 135 per cent by 2011. Pessimists say, it might reach that level even with austerity.
That may appear a Herculean task but the country might just pull it off, according to an analysis in the Greek newspaper Ekathimerini, even with high levels of government debt.

"Belgium’s public debt peaked at 141 per cent of GDP in 1993 and that is not that far away from where Greece’s is going to peak in 2013, that is, at around 149 percent of GDP,” Dimitris Kontogiannis argues.

Belgium did indeed manage to cut its debt-to-GDP ratio by more than 50 per centage points between 1993 and 2007. Italy’s public-debt-to-GDP ratio too hit a high at 132 per cent in 1998 but followed a downward path, at least until recently.

But those efforts were helped by the European economy growing at reasonably healthy rates for the better part of the 1990s.

The climate today looks far more unkind, with all the eurozone states, even powerful Germany, opting for austerity. Belt-tightening in the name of savvy economic management soothes international financial interests but pushes a country deeper into recession.

Financial rating agencies that set the tone for lending to a country have decided that Greek debt is “junk”, meaning basically that the country does not have the means to repay on time.

Like Portugal but unlike Ireland and Spain, Greece consumes the major part of the wealth it produces each year. It’s national savings rate is lower than 10 percent of GDP by some estimates.

Greece thus relies on large inflows of foreign capital to finance investment and consumption. The big worry is that Greece’s private sector will be forced to reduce investment spending if it cannot borrow abroad. Lower investment mean less economic output and fewer jobs.

But there is a relative unknown: the size of Greece’s underground economy which could still provide a cushion to the economy’s downside even if the overground economy shrinks.

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