The Greek Tragedy: Is there a Deus ex Machina?

Dr Ioannis Kokkoris, Reader, University of Reading, Reading, UK, Dr Rodrigo Olivares-Caminal, Sovereign Debt Expert, UNCTAD, Geneva, Switzerland, and Kiriakos Papadakis, Financial Economist, Canea and Associates SA, Greece

1. Introduction
The purpose of this article is mainly twofold: first, to discuss the difficulties that being a member of the European Monetary Union ('EMU') entail, with particular focus on Greece and on the implications of an internal devaluation. Secondly, how debt re-profiling can help to support the mechanisms of fiscal rehabilitation and external financing at the sovereign and corporate level. Among other issues, this article will attempt to clarify the situation that Greece is currently confronted with and provide a description of the different mechanisms to restructure/re-profile sovereign debt.

2. The global financial crisis and its impact on sovereign debt
The global financial crisis of 2007 has resulted in an overall increase of sovereign debt levels. Fiscal balances (as a ratio of GDP) have deteriorated. This deterioration is mainly because of falling revenues resulting from decreased real and financial activity. According to IMF’s data, in 2010, advanced countries will average a budget deficit of –8.3% while emerging economies one of –3.3%. In advanced economies, public debt to GDP ratio will in 2010 reach the level of 97% (rising from below 75% in 2006) while in emerging economies will be 37% (almost equal to 2006 level). This is the result of a shift in risk allocation in advanced economies. In other words, the turmoil of the markets has been calmed by pouring in government financial aid which in turn resulted in a considerable increase in the amount of sovereign debt. Although financial markets seem to have eased, sovereign debt markets are fragile at the moment.

Research by Reinhart and Rogoff shows that a debt to GDP ratio beyond the 60% to 90% level for developed countries may become counterproductive for the economy (i.e. further government spending may not lead to growth) and a debt spiral may be created in cases where GDP growth falls below the weighted average interest paid on the bonds.

On 16 February 2010, the Ecofin Council approved the Hellenic Stability and Growth Programme (SGP). The aim of the SGP is to bring the fiscal deficit of Greece to less than a 3% by 2012 and reduce the government consolidated debt as a percentage of GDP from 2012 onwards. In order to safeguard this deficit-reduction target, the government recently adopted additional measures aiming at reducing costs and enhancing revenues. The Greek government’s short and medium term fiscal and reform strategy measures include budget, tax, social security and public administration reform, as well as institutional changes to enhance the credibility and sustainability of policies. These measures will be supported with a EUR 110 billion package provided by EU Member States (EUR 80 billion) and the IMF (EUR 30 billion). The programme will be monitored through twelve quarterly reviews.