The sovereign debt crisis in Greece has been an issue in world financial markets since the end of 2009. In May 2010 Greece became the first euro-area country requesting a financial rescue from the European Union and International Monetary Fund (EU/IMF) worth 110 billion. Although it has been more than a year since the bailout, the public debt problem remained unresolved as attested by (1) the rise in Greece’s two-year government bond yields of more than 300 basis points; (2) the continuous downgrade of Greek sovereign rating to below investment grade even under the EU/IMF program; and (3) the rise in Greece’s credit default swaps (CDS) to a steep 23.5 percent (as of 14 July 2011), reflecting around 87 percent probability that Greece may default within the next five years. Most important, the Greece crisis has spread to other peripheral countries, namely Ireland and Portugal, which have also requested financial assistance from the EU and IMF in November 2010 and April 2011, respectively. This sovereign debt problem has become a significant risk to the world financial market and economic recovery.
Causes of the Greek debt crisis
Greece’s public debt has been at an elevated level since 1989 and as of the end of 2010 amounted to 329 billion or 148.2 percent of GDP. Such a high public debt to GDP ratio is almost three times larger than the threshold set by the Maastricht Treaty that stipulates member countries, public debt not exceeding 60 percent of output. Greece end of 2010 higher than the euro area average of 6.0 percent and one of the highest in the world.
The sovereign debt crisis in Greece is primarily caused by four factors.
The first is the lack of fiscal discipline due to populist welfare policies, e.g., three-times-a-year bonuses as well as a minimum retirement age of 50, which is below the international average, and the attendant entitlement for pension benefits that is inconsistent with the average lifespan. Such policies led to increases in public spending, particularly on wages, pensions elderly aids, and unemployment benefits, which accounted for more than 75 percent of Greece’s public expenditures.
The second factor is the mismatch between government revenues and expenditures. Greece’s public spending excluding interest payments accounted for 32 percent of GDP, while public revenues excluding social security contributions amounted to only 20 percent. This discrepancy is due partly to inefficient tax collection, as well as tax invasion particularly among high-income bracket individuals, resulting in ongoing fiscal deficits. Greece also needed to make substantial interest payments due to a large amount of borrowings from financial markets during the past ten years. Being a member of the European Union was also a factor that helped Greece to borrow cheaply. Greece’s long-term interest rates and long-term government bond yields significantly declined after it became a member of the European Union.
Third, Greece’s competitiveness is declining relative to its peers in the European Union. A measure of Greece’s competitiveness has decreased by more than 25 percent since becoming an EU member in 2000. The average wage and unit labor cost in Greece were higher than the counterparts in the euro area. These were the main obstacle to economic growth that will also adversely affect tax revenues.
Finally, during the global financial crisis in 2008, the Greek government spent extensively to stimulate the economy, contributing to the large fiscal burden and loss of investor confidence in the government’s debt repayment ability. Since the end of 2009 Greek sovereign bonds, ratings were continuously downgraded to below investment grade, driving up financing costs and reducing the likelihood of paying back their debts.
With regard to Thailand, the impact on the Thai economy is judged to be limited, as financial claims by Thai investors, including financial institutions, on European economies are minimal. However, local authorities foresee further fallout from the crisis in the euro area on Thailand’s financial market and export sector.
The financial market has seen heavy volatility recently. According to Thai Bond Market Association data, global funds bought US$1.9 billion more Thai government debt than they sold this month through June 15. The baht was unchanged at 31.47 per US dollar after reaching 31.33 earlier, the strongest level since May 22.
While Greece’s election result eased some investor concerns, Thailand still needs to stay alert for the indirect impacts. Europe accounts for less than 10 per cent of Thailand’s exports but 18 per cent of exports from China, which is a major market for Thailand. The Thai export sector might suffer and this could lead to financial problems.
As European companies are expected to face tight liquidity amid bank deleveraging, the Export-Import Bank of Thailand anticipates defaults or delayed payments for Thai goods.
So far this month, foreign investors’ net sales have reached 8 billion baht ($254 million). Year to date, they remain net buyers, with a position of 61.1 billion baht ($194 million).
Volatility is likely to remain for the next month or two, depending on the formation of the new government in Greece and its actions to navigate the country out of the debt storm.
Image courtesy of debthelpbureau.com/