Crisis in Greece

This is the first of a two-part series on the Greek crisis and commonalities with Pakistan; this week's article focuses on the Greek crisis and next week parallels will be drawn with the Greek crisis and lessons that Pakistan can and must learn from the Greek experience.
Greece continues to be much in the news with the third bail out package of 86 billion euros approved to be disbursed over three years with one member of the troika namely International Monetary Fund (IMF) calling for debt relief while the other two members - European Central Bank and European Commission - not yet considering it as an option. The IMF, unable to fund a country with what it believes is an unsustainable debt, withdrew from the negotiations though Germany wants IMF engagement to continue as it values the Fund's capacity to monitor compliance.
The approval for the package came after the Greek parliament approved raising specific taxes and reducing specific expenditure - politically highly unpopular bail-out conditions. The left wing Greek government of Tsipras elected in January this year, initially severely criticised the troika's harsh austerity conditions arguing that deficit reduction would further compromise the growth rate and the quality of life of the average Greek citizen. However Tsipras then proceeded to support the harsh reforms when threatened with exit from the euro (Grexit) though many of his Syriza party members opposed the package during the debate in parliament and have since announced the establishment of a new party. The package was approved in parliament with support from the right wing opposition. Subsequently Tsipras, in true democratic style, resigned and elections to get a fresh mandate have been called.
Germany's parliament, the largest contributor to the package, approved it though the mood of the Bundestag has led many to argue that this is possibly the last package for Greece.
However there is considerable bafflement in Pakistan as to what actually caused the Greek collapse - a developed country by any standards. It all began in 2008 when Wall Street imploded with the collapse of many a financial entity (including Freddie Mae and Freddie Mac). The Obama administration extended hundreds of billions of dollars of bail out packages - the argument being that cash inflows followed by financial sector reforms (especially with respect to not extending credit to those with little capacity to pay back) would restore profitability of the entities. Given the globalization of the financial system the contagion spread to Europe and there too many a country released large bail out packages. However the crisis led to a rise in the cost of borrowing for governments especially those with high debt to Gross Domestic Product (GDP) ratios. Greece had the worst debt to GDP ratio within Eurozone countries which rose to 177 percent in 2012 (about 317 billion euros). Italy's debt to GDP ratio was 127 percent, Ireland's 118 percent, Portugal's 119 percent, and Cyprus registered 90 percent. The cost of borrowing or applicable interest rates rose massively for all these five nations as a result (the interest rate spreads for government bonds became prohibitively expensive as investor concerns about debt sustainability rose) and they were unable to repay or refinance their governments debts or bail out their own banks without external assistance from other Eurozone countries and the IMF.
Greece in particular was plagued by an additional three factors that literally crippled its economy. Paul Krugman, a noted economist, argues that Greece's problem is one of balance of payments as "capital flooded south after the creation of the euro, leading to overvaluation in southern Europe....In truth, this has never been a fiscal crisis at its root; it has always been a balance of payments crisis that manifests itself in part in budget problems, which have then been pushed onto the center of the stage by ideology." Greece suffered a trade deficit averaging around 9.1 percent from 2000-11 and Klugman argues "a trade deficit requires capital inflow (mainly borrowing) to fund; this is referred to as a capital surplus or foreign financial surplus".
Second the Greek economy suffered due to massive tax evasion. In 2010 tax evasion cost the Greek government over 20 billion dollars and by 2012 the government was accepting tax owed to it through a delayed payment scheme. According to Transparency International Greece's Corruption Perception Index was 36/100 in 2012, giving it the most corrupt nation status in EU, and one of the conditions of the bailout was implementation of an anticorruption strategy which led to a ranking of 43/100 in 2014 - at par with Italy, Bulgaria and Romania. The Greek government has estimated that around 80 billion euros are held by Greek nationals in Swiss banks and a tax treaty to address this is being negotiated with the Swiss government. Greece's illegal or black economy was estimated at 24.3 percent of GDP in 2012.
And finally the Greek government acknowledged in 2010 that it had cheated on statistics. Olli Rehn, the European economy commissioner, stated in 2012 that Greece is a unique and a particular case because it had "particularly precarious debt dynamics and Greece is the only member state that cheated with its statistics for years and years." But Greece had some help in fudging its macroeconomic data. Louise Story, Landon Thomas and Nelson Schwartz writing for the New York Times in a report titled "Global Business: Wall St. Helped to Mask Debt Fuelling Europe's Crisis" dated 13 February 2010 maintained that "in dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come". The article further states that in 2001 when Greece was admitted to Europe's monetary union, Goldman Sachs helped the government quietly borrow billions and the deal was hidden from public view because the transaction was treated as a currency trade rather than a loan, and helped Athens to meet Europe's deficit rules while continuing to spend beyond its means. In addition instruments developed by Goldman Sachs, J P Morgan, Chase and a wide range of other banks has enabled politicians to mask additional borrowing in Greece, Italy "and possibly elsewhere". The complicity of these banks was because such deals were "extremely profitable" for them, so stated Christoforos Sardelis, former head of Greece's Public Debt Management Agency. He further maintained that Greece "did not understand what it was buying".
To conclude the Greek problem emanated from an adverse balance of payment position, structural issues including borrowing from external sources to meet Eurozone deficit requirements but hiding it from its macroeconomic data, and massive tax evasion/corruption. I am confident that readers would be able to draw parallels with what is going on in our economy and next week's article would highlight these commonalities.