Greece's Debt Crisis

Since the accession to the European Monetary Union, Greece's macroeconomic outlook has been deteriorated by volatile rates of inflation, high fiscal deficit and one of the highest public debt ratios in Europe.

In 1996, Greece's inflationary outlook was improved since the central bank managed to target the inflation which, for the first time, decreased below two-digit level. Since the accession to the EMU, Greece failed to curb the ailing fiscal deficit and very high public debt. The convergence criteria requires each country of the eurozone not to exceed the fiscal deficit by more than 3 percent of the GDP.

Ever since the beginning of the economic crisis, Greece's economic outlook exacerbated significant worries. In particular, Greece's terrible state of fiscal health was reflected in high levels of current account deficit. According to the IMF, the current account balance is expected to reach -9 percent of the GDP by the end of this year.

The Greek government expects the public debt rising to 110 percent of the GDP. However, the European Commission recently estimated the public debt to rise up to 124.9 percent of the GDP - the highest level of national debt in the European Union. The Commission projected the Greek budget deficit to reach 12.2 percent of the GDP in 2010 and 12.8 percent of the GDP in 2011. 

In addition to one of the world's most terrible pension systems, Greece faces high burden of taxation, high government spending, onerous corruption and highly regulated labor market. The country is likely to face a slow and cumbersome economic recovery that could probably last several years. Loan guarantees from major EU countries and the issuance of bonds to cover fiscal deficit will hamper medium-term growth outlook. 

In 2010, five-year spread on Greek bonds exceeded 400 basis points for the first time while credit default swaps rose to over 350 basis points.  Fitch recently estimated that Greece needs to raise €51 billion to cover the annual budget deficit.

The real cure for Greece's economic crisis includes prudent macroeconomic policy, cuts in government spending and the reduction of country's vast and inefficient public sector. Without the restoration of credible and healthy fiscal management, Greece could become the next country facing a prolonged debt crisis and a recovery that could last for decade.