Greek Debt Crisis 101 with Tony Alexander


#1

In a special Q+A, BNZ Chief Economist Tony Alexander explains how Greece got itself into so much debt, how the issue is likely to be resolved, and whether there will be a flow-on effect to the New Zealand economy. Next week, China.

How did Greece get itself into this situation?
Greece borrowed too much money during the 2000s and ahead of the global financial crisis, and they didn’t invest it wisely. They grew the public service too much, introduced generous social welfare payments – especially for pensioners, and they regulated their economy to the point where it’s no longer competitive against other economies. Now, Greece has an economy that is unable to support its level of debt.

How much money does Greece owe, and to whom?
Greece owes more than €300 billion all up, mostly to European tax payers through organisations such as the European Central Bank, the International Monetary Fund, individual European Governments, private bond holders and private banks. They owe what is equal to 180 percent of their GDP.

What effect does Greece’s debt have on other countries in the European Union?
If Greece doesn’t pay back their debt, then investors will suffer a loss over €300 billion. So inevitably, down the track, some write-offs will be made. That is upsetting to the other members of the Eurozone - who have advanced a lot of money to Greece since 2010 - but in turn have not seen the econmic reforms they have asked for in Greece. For example, their pension system, in comparison to the rest of the world’s standards, is considered to be gold plated.

Monday’s referendum showed Greece wants to stay in the Eurozone, they want to continue being lent money, but they’re not interested in changing their social policies. The most probable outcome is that they are effectively booted out of the Eurozone, and possibly leave the European Union by refusing to take the steps they’re being asked to to become a modern, competitive nation.

What effect will the Greece debt crisis have on the rest of the world?
The actual economic impact of this will be very minimal outside the Eurozone. This isn’t so much of an economic shock - it’s a political shock and social shock for Europe. It’s going to lead to a lack of confidence in the wider European area for an extended period of time, and global investment flows will tend to divert to other parts of the world – such as the Americas and Asia. One of the other uncertainties around the world is that no one really knows which hedge funds may be sitting on large losses either.

In particular, will there be a flow-on effect to the New Zealand economy?
In some regards, New Zealand can expect to receive a positive boost to its economy over the longer term, from extra investment capital making its way down here. The Reserve Bank is likely to look at whether people are being a bit cautious with their money, so interest rates could be cut further. This is the sort of thing that can actually stimulate the New Zealand housing market, because you get lower interest rates than would otherwise be the case. I expect there’ll be minimal effects on the New Zealand economy from trade flows, and there are likely to be extra migrants coming down to New Zealand from other places.


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#2

Hi Tony, I have a question:

What effect would expulsion from the Eurozone have on the Greek economy long term? Will returning to the drachma be beneficial or detrimental?

Many Thanks

E


#3

The key issue for Greece is not the currency it uses but whether or not it chooses to modernise its economy by implementing tax reform and penalising non-compliers, removing a gold-plated pension scheme costing 16% of GDP versus our 4.5% and the OECD average 8%, cutting back public servant numbers and salaries which ballooned during the 2000s, selling state assets, and opening the economy’s sectors up to proper competition.

Unwillingness to make sufficient moves toward these goals lies behind unwillingness of EU partners to forgive debt and extend new financing arrangements. Only when the economy and the attitudes of politicians, public servants and citizens are modernised will Greece show any sustained improvement, and those changes can be made independent of whether Euros or Drachmas are the currency of exchange within the country. Grexit in the short-term will make the economic situation in Greece much, much worse. Long-term is up to them. 


#4

This article claifies the Greek situation well - highly informative.


#5

Very helpful article. Thanks.