Tides of 1.07.2015

What went wrong in Greece: the story in five charts---livemint

A quick look at how Greece has got to the brink of a default that threatens to send shock waves through the global economy

People stand in line to withdraw cash at an ATM in Athens on Sunday. Photo: AFP

The Greek tragedy has unfolded over several years. Here is a quick look at how the country has got to the brink of a default that threatens to send shock waves through the global economy.

It all began when the Greek economy imploded after the global financial crisis. The economy shrank for six years in a row.

Greece has lost an entire decade, thanks to its deep economic crisis.

The roots of the problem can be traced to the years before 2008. Greece had already allowed massive economic imbalances to build up. Take a look at the chart showing its current account deficit.

And the fiscal numbers were made to look better, thanks to creative accounting.

Any country with such large economic imbalances tries to adjust through an exchange rate depreciation that makes exports more competitive. Greece does not have this option because it uses the euro (though using the euro also gave the country some advantages when it came to borrowing).

So the brunt of the adjustment had to be met through the labour market, or a combination of job losses and falling wages. Unemployment soared till more than one in four Greek workers are now jobless.

The growth collapse destroyed a tax system that was already weak because of evasion. The Greek government was forced to borrow to keep going, which it was already adept at since being in the euro initially allowed it to borrow at the same rate as Germany.

Gross debt rose sharply even as the economy was shrinking: a rising numerator and a falling denominator can never be good news in such circumstances. The interest rates that lenders were asking to lend to Greece finally went up as the financial markets belatedly accepted that the risk profile of Greece was not the same as Germany’s. These rising interest rates sent Greece into a debt crisis.

The troika of the International Monetary Fund, European Central Bank and the European Commission stepped in with a bailout once the private credit markets went on strike. They asked Greece to accept austerity measures if it wanted financial help. The austerity can be seen in the sharp drop in the fiscal deficit as well as the current account deficit. Spending cuts dominated austerity policies since tax growth in a shrinking economy was not a viable option.

Greek citizens had to bear the resultant pain. Expectedly, that led to a political backlash. The left-wing Syriza government won the January 2015 elections after a vibrant campaign against austerity. It is this government that is now involved in a confrontation with the troika of lenders.

The end game is now on the horizon.