Greek Crisis Is Opportunity

¶ … Investors

Corporate Office

Greek Crisis- Opportunity

Board of Directors

The Greek financial crisis is rooted in two decades of profligate spending which has ballooned the country's debt to GDP ratio to 124.9% of GDP in 2010 (The Wall Street Journal.com. May 7, 2010). Coupled with a stagnant economy, the risk of a Greek sovereign default is roiling markets and could cause a contagion across the Eurozone and ultimately the global financial system. Yet, Greece has a unique opportunity to emerge from this crisis stronger and able to compete competitively around the globe as a viable and prospering member of the Euro block. To do so they must embrace a mix of austerity and free market reforms to ensure liquidity and avoid default.

Background

Greece had always been a weaker member of the Eurozone as compared with Germany, France, and Italy accounting for only 2.6% of the GDP of the Euro area (Roscini, D. Schlefer, J. & Dimitriou, K. April 19, 2011. P. 1). Since the EU currency was established in the late 90's and early 00's, Greece had taken advantage of low EU borrowing rates to finance their version of the welfare state. The borrowing occurred against a backdrop of an anemic economy and a lack of consistent government revenues. The picture was clear; Greece's financial trajectory was unsustainable.

Austerity

The "Great Recession" of 2007-2009 pushed Greece over the edge as the economy went into decline, concomitant with government revenue declines and a surge of the deficit to GDP ratio to 15.4% (Roscini, D. Schlefer, J. & Dimitriou, K. April 19, 2011. P. 1). "As the deficit numbers worsened, nervous financial markets kept demanding higher interest rates on government debt" (Roscini, D. Schlefer, J. & Dimitriou, K. April 19, 2011. P. 1). As such Greece was in consideration of default if they did not receive help from the Troika: European Central Bank, EU, and IMF. Funding though would come at a price, harsh austerity to cut spending and deficits.

The EU commandment to receive EU / International monetary Fund (IMF) funding requires Greece to reduce deficit spending to below three percent of GDP by 2015 (The Wall Street Journal.com. November 26, 2011), from the current 13% of GDP (The Wall Street Journal.com. May 7, 2010). Additionally, Greece must slash debt as a percent of GDP to near 60% in the next two decades (Organization of Economic Cooperation and Development.com. 2011). Given the entrenched interests of the Greek populace and government, these reforms are likely far more difficult to achieve than articulated on paper. In fact "Greece's government acknowledged in early October that it will miss the budget targets it has promised its fellow euro-zone members and the International Monetary Fund for 2011" (The Wall Street Journal.com. November 26, 2011).

Free Market Reforms

Austerity presupposes that sacrosanct programs such as golden parachute pensions, early retirement, and high outlier wages could be reined in under reform. What is absolutely necessary is a Greek revival and acceptance of free market reforms to change their course. As an example, The World Bank publishes an annual report identifying a country's ease of doing business. The 2010 survey indicates "Greece comes in 109 out of 183 countries around the world. It is dead last among the 27 members of the European Union as well as the advanced economies in the OECD" (The Wall Street Journal.com. May 7, 2010). Specifically, "the Doing Business survey reveals an economy that's hostile to free enterprise and private property, primed for corruption, lacking in labor and capital mobility, stifled by powerful trade unions and unlikely to grow without deep-rooted changes" (The Wall Street Journal.com. May 7, 2010).

Greek reforms must put in place substantive changes which encourage entrepreneurial activity, reduce regulation, flatten the tax code, and encourage saving and investment. Without strong economic growth Austerity will drown the country not save it.

Liquidity and Default