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Jun 8, 2009 | 23:02 GMT

6 mins read

Greece: Dire Economic Concerns

Greece's economic troubles have spilled over into the political arena — in the form of protests and heavy losses suffered by the current center-right government. Greece had one of Europe's most troubled economies even before the current global recession began. Now, the government is trying to find ways to make it through the economic downturn, even though government spending cuts are extremely unpopular, and borrowing from anyone other than the International Monetary Fund might not be an option.
Greek Prime Minister Costas Karamanlis' center-right government suffered heavy losses in the European Parliament elections as the votes were tallied June 7. This comes on the heels of Greek Finance Minister Yannis Papathanassiou's announcement that he will travel to Brussels this week to speak to the European Commission about his country's plans to address the ongoing economic recession. One of the most significant items to be discussed is the fact that Greece will need to borrow more than 54 billion euro ($75 billion) this year in order to cover public sector expenses and loan repayments coming due in 2009. The commission has made public its fears that Athens is in a precarious financial position and could be on the verge of bankruptcy. Much like the rest of Europe, Greece entered 2009 in recession; the first quarter brought a 1.2 percent drop in gross domestic product (GDP) year-on-year, and forecasts call for a 5.1 percent contraction for the year overall. The country's shipping industry, which controls 20 percent of the world's merchant fleet, was hit hard by the economic climate's harsh turn. More than a quarter of Greece's shipping vessels have remained anchored as declining global trade has outpaced drops in production. The value of the cargos these ships carry also has dropped significantly since late 2008, with prices declining by more than 70 percent according to some estimates. At the very onset of the global economic crisis, STRATFOR pointed out that Greece has one of Europe's most troubled economies. This is because Athens has poor economic fundamentals across the board, recording a budget deficit of 5 percent of GDP and a public debt of 97.6 percent of GDP in 2008. These figures were not just a result of the financial crisis; they were already high (relative to other EU and eurozone economies) in years prior due to internal political bickering that led to government overspending. Karamanlis had hoped to strengthen his mandate in order to tackle the debt and deficit, but instead he has faced hurdle after hurdle. This means that Greece might not have enough cash to cover the current crisis, and thus would be forced to turn to greater borrowing or governmental cost-cutting. But it is not clear that Greece will be able to borrow, as it has to compete for loans on the international bond market with other European countries — as well as the United States — that investors looking for safety view as much more attractive options. In fact, international investors have continued ranking Greek bonds as the least favorable in Europe, with the spread between the yield on Greek sovereign bonds and the German Bund (a hallmark of stability in terms of European sovereign debt) consistently one of the highest in Europe. Exacerbating the tenuous macroeconomic situation is Greek banks' heavy involvement in lending to the Balkan region in the years leading up to the financial crisis, with the banks' overall exposure to the region at more than 20 percent of GDP. Athens took advantage of the low interest rates associated with the euro to extend credit in the emerging economies of Southeastern Europe, whose interest rates were much higher. While the global economy was booming and construction was on the upswing, this process proved quite successful for Greece's biggest banks, including National Bank and Alpha Bank. But when growth plummeted, these banks faced heavy losses. That is because while the Greek banks made loans in euros, the borrowers' salaries and incomes were in dinars, forints, lei and other currencies. Once the mass exodus of foreign capital from emerging-market economies began leading these currencies to crash, the loans that consumers in the Balkan countries took out with Greek banks to service their mortgage or car payments started to balloon in real terms as a result of the foreign exchange discrepancies. As the Greek banks had heavily expanded their assets in the Balkans, their nonperforming loan portfolios in these countries expanded as well. In response to these growing problems, Athens announced an injection of 28 billion euro — more than 10 percent of Greece's GDP — late last year to boost liquidity in the Greek economy, with 5 billion euro directed into these banks. But this plan has yet to be fully utilized, and the Greek government has recently extended the plan by another six months in order to shore up the banks' balance sheets, shedding light on the severity of the situation. The economic and financial problems Greece has experienced have already spilled over politically, primarily in the form of social unrest. Protests erupted in December 2008 in large part because of underlying discontent with Karamanlis' attempts to cut social spending — the primary reason for the Greek state's heavy indebtedness. Considering the level of social angst toward any cuts in social spending, Athens is unlikely to use tax increases and government budgetary cuts to resolve the current crisis — at least under the current political arrangement. Karamanlis' center-right government is hanging by a thread; the June 7 European Parliament elections dealt a huge blow to his party and elevated the left-wing opposition. The left-right split is the most significant in Greece's political dichotomy and is becoming ever more crucial as tensions continue to flare. Coupled with the deteriorating economic situation in the country, these developments could spell real trouble for Greece in the months ahead. As a result, Greece could very well become the first euro country to face significant economic problems that are beyond its control (with Ireland most likely following close behind). This would put pressure on the European Union, and particularly on the heavyweight economy of Germany, to bail out a fellow EU (and eurozone) member state. This would be problematic, however, considering that German federal elections are only months away, and any move to spend money on bailing out a foreign government could be the kiss of death for the incumbent coalition parties. Greece may therefore become the first eurozone country to reach out to the International Monetary Fund for help — a move that could sap investor confidence in the eurozone as a whole.

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