Greece’s Debt Sustainability


Greece’s economy as of 2013 was said to be the 51st or 43rd largest globally at $283 billion or $242 billion by purchasing power parity or nominal GDP (Gross Domestic Product), respectively (Serafeim, 2015). In 2017, Greece was ranked as the 17th largest economy within the European Union, which consisted of twenty-eight nations (Eurostat, 2018). Similarly, the 2017 IMF estimates ranked Greece to be the 49th or 39th largest economy globally at $27, 737 and $ 18, 637 for purchasing power parity and nominal GDP, respectively (International Monetary Fund, 2018). According to Serafeim (2015), the economy of Greece in 2014 was mainly constituted of the service sector, which commanded an 80% portion, and the industry sector, which took up 16% of the GDP. Conversely, the agricultural sector only took up 4% of the Gross Domestic Product. The most vital industries in the Greek economy were shipping and tourism. During 2014, Greece received roughly twenty million international tourists, including the nation among the most sought-after tourist destination globally. In 2013, the largest shipping sector around the world was said to be the Greek Merchant Navy, with vessels owned by Greek’s commanding 15 percent of the total deadweight tonnage globally (Serafeim, 2015).

Greece was categorized as an advanced economy, with a high-income rating. Besides it was one of the founders of the OECD (Organization for Economic Co-operation and Development) and the BSEC (Black Sea Economic Cooperation). At the beginning of 1979, Greece signed its accession treaty to the European Communities. Later, in 1981, the nation was formally included in the EU (European Union). Subsequently, in 2001, Greece implemented the use of the euro as its official currency, which replaced the drachma at a 340.75 drachma/euro exchange rate.

In the 1940’s Greece’s economy was devastated by internal conflicts and World War II. Nevertheless, the period between the 1950’s and 1980’s was marked by high economic growth levels, which is mostly referred to as the Greek economic miracle (Bratsis, 2010). Since the year 2000, the country has experienced high growth levels of GDP, which are greater than the Eurozone average, summitting at 5%. Consequentially, the nation attained equivalent levels of Gross Domestic Product per capita to Spain and Italy by 2008. The following Greek government-debt predicament and Great Recession drove Greece’s economy into a steep decline, with the growth rates of real GDP being reported at   -4.4 percent during 2009, -5.4 percent during 2010, -9 percent during 2011, -7 percent during 2012, and –3.2 percent during 2013 (Serafeim, 2015). Greece’s public debt amounted to €356 billion in 2011, this was approximately 172% of its nominal GDP. After successful negotiations of the debt restricting with the private sector, the nation lowered its sovereign debt weight to €280 billion in 2012. Later in 2014, Greece attained 0.7% growth rate of its real GDP. Such growth came after six years of economic deterioration then contracted by 0.3 % and 0.25 in 2015 and 2016 respectively (Mavridis, 2018).

Problem Statement

Greece’s economic crisis that has lasted over seven years is the most appalling crisis to have hit a developed economy in modern history. The gravity of this crisis is from the context of duration, and employment and output loss. According to Nikiforos, Papadimitriou, and Zezza (2016), the real GDP of Greece’s economy as of 2016 was 30% lower than the level recorded in 2008. During the same period over one million individuals lost their jobs. This statistic was a per the 2008 labor force in Greece, which was 4.8 million. Such predicaments can be attributed to the appalling impacts that austerity is capable of exerting on an economy, as well as the tragic outcomes it can impose on the social fabric (Nikiforos, Papadimitriou, & Zezza, 2016).

Public debt has been one of the major issues in the current Greek crisis. At the beginning of the crisis in 2009, Greece’s debt to GDP ratio was approximately 120%. In this light, most policymakers and economists interpreted it to be a public-debt crisis. Consequentially, austerity measures were imposed for over six years to address this issue. Nikiforos, Papadimitriou, and Zezza (2016), note that fiscal consolidation and structural reforms were meant to create large fiscal surpluses, revive investment, and augment the competitiveness of the nation’s economy and hence net exports. Such efforts would then result in a lowered rate of an upsurge in debt as well as an improvement in growth and thus a reduction in the ratio of debt-to-GDP. In other words, structural reforms and austerity are often imposed to a great extent for the purpose of debt sustainability. Nonetheless, Greece’s economic reality has invalidated such projections year after year. In its place, austerity has resulted in the aforesaid massive loss in employment and output. Furthermore, despite the 2012 debt haircut, public debt was estimated to be about 175% of Greece’s GDP. According to Nikiforos, Papadimitriou, and Zezza (2016), such a ratio is quite challenging to lower when the denominator experiences a 30% fall.

The estimation of Greece’s debt at around 175% of the country’s GDP raised a lot of questions over the country’s debt sustainability. Such an estimation meant that Greece’s external debt was too large compared to the country’s GDP. However, such a figure was claimed to be false by Kazarian who argued that Greece did not have a debt problem but instead had management issues. Kazarian insisted that the debt measurement was done at face value instead using accrual accounting. According to this argument, the debt would only have been 68% of the nation’s GDP in the year 2013. Therefore, the argument presented by Kazarian raises questions on whether Greece had too much debt, whether the austerity measures were necessary and whether Greece had too little debt, which would allow it to evade austerity measures, intensify expenditure, and stimulate growth.

In light of the above-outlined concerns related to Greece’s debt sustainability, this text intends to provide a thorough analysis of Greece’s debt situation. This analysis will be particularly inclined towards the issues considered to be a hindrance to the debt sustainability of Greece as addressed by George Serafeim in the article “Greece’s Debt: Sustainable?”. Such issues include the austerity measures imposed on Greece, Greece’s lack of transparency about its financial situation, and Greece’s failure to adopt accrual accounting practices.

Analysis and Findings


Despite there being several measures taken to mitigate Greece’s debt crisis, it’s sustainability is still questionable. Such concern over Greece’s debt sustainability can be accredited to the aforementioned issues related to the imposed austerity measures, transparency, and accrual accounting practices. These issues are interconnected in one way or another. Below are a detailed analysis and discussion of these issues.

  • Austerity Measures

The beginning of Greece’s economic crisis can be dated back to October 4th, 2009, during the parliamentary elections (Nikiforos, Papadimitriou, & Zezza, 2016). The following days after the election of a new government, it was announced that the 2009’s fiscal deficit would surpass 12%. Such a projection was twice the 6%, which was projected by the previous government prior to the elections. In due course, the deficit reached 15.6%. The ratio of debt-to-GDP during that year escalated by about 20% to 127%, which was the combined outcome of the negative growth rate (was -4.3% in 2009) and deficit (Nikiforos, Papadimitriou, and Zezza, 2016). Subsequently, the Greek treasury bonds received a series of rating reductions and a sharp upsurge in their yields by approximately 600 basis points in April 2010. This outcomes effectively excluded Greece from the financial markets access. Due to an impending rollover of a noteworthy chunk of the debt during May of 2010, a 3-year rescue bundle was approved on 2nd May 2010. The agreement was between the “Troika” and Greece’s government. The “troika” is a three-party body of international creditors or lenders, which consists of the IMF (International Monetary Fund), the European Commission, and the ECB (European Central Bank). The financial support was conditional on a stringent fiscal adjustment (Nikiforos, Papadimitriou, & Zezza, 2016). According to a 2010 report by the IMF, the key fiscal balance was anticipated to experience an increase from -8.6 percent (2009) to 3.1% (during 2013) for a fiscal consolidation of about 12% (International Monetary Fund, 2010). Concurrently, the Greek government would have to establish various structural reforms. Consequentially, the Troika anticipated a slight recession followed by a reoccurrence of positive growth rates during 2012, which would be stimulated by net exports and investment. Return to growth and fiscal consolidation would steady and in due course lower the ratio of debt-to-GDP. Such projections were according to the expansionary austerity theory (Alesina, Favero, and Giavazzi, 2012; Ardagna, 2004).

Despite the anticipated outcomes, “troika’s” predictions and those of the expansionary austerity proponents were not attained. The initial phase of the bailout program resulted in substantial reduction in the deficit. Still, the structural reforms and the fiscal consolidation failed to improve net exports or investment and as a result, output collapsed. This output collapse led to more financing needs for the Greek government and the execution of additional austerity measures, which in turn resulted in a profound recession. As illustrated in Figure 1, the outcome was a rapid upsurge in the ratio of debt-to-GDP, which hiked from 127% (2009) to 172% (2011) (Nikiforos, Papadimitriou, & Zezza, 2016). The Greek economy flew down in a contemporary debt depreciation trap, which Nikiforos, Papadimitriou, and Zezza, (2016) refer to as “à la Greca.”

Figure 1:Greece’s Sovereign Debt-GDP ratio 2008-2016

Source: Mavridis, (2018)

This upsurge in the ratio of debt-to-GDP resulted in the discovery that Greece’s debt situation was not sustainable. New negotiations began in 2011, which gave rise to the 2012 debt restructuring efforts, thus the temporary decline illustrated in figure 1. Nevertheless, such efforts were not that of much help as they came late. The careful restructuring process and persistence on the initial austerity procedures resulted in the same outcomes: profound recession, the requirement for additional fiscal austerity, and finally the upsurge in the ratio of debt-to-GDP. As demonstrated in figure 1 the ratio of debt-to-GDP got to 179.4 percent in 2014, this trend was projected to continue upward. Financing such an increasingly substantial debt burden needed two extra memoranda, where one was agreed to in 2012 and the other in 2015 (Nikiforos, Papadimitriou, & Zezza, 2016).

A quick analysis of the Greek crisis illustrates that between the years 2008 and 2016, the country’s economy lost about 30% of its real output and about a million jobs as per the 2008’s labor force, which was 4.8 million. From a political context, there were 4 general elections and 4 government changes over five year period, accompanied by the ascension into power of a neo-Nazi political party that gained a 6.7% electoral influence between the 2007 and 2015.

  • Transparency Issues

Serafeim  (2015), notes that the end of 2009 was marked by the most critical crisis that the Greek economy had faced since 1974 during its democracy restoration. Greece’s government acknowledged the fact that its statistics had undergone some manipulations in the past, hence it was at that time doing an upward revision of its deficit numbers. Besides, Greece, in comparison to other nations, had weak institutions. The government was characterized by poor governance practices, which were replicated in widespread tax evasion, high corruption levels, opacity in government businesses, and ineffective courts. During the beginning of 2010, it was discovered that key investment banks had participated in the development of financial products, which allowed the Greek government, Italian government and other European governments to conceal their borrowing.  In this light, loans issued to such governments were masked as swaps. Therefore, the loans would not get recorded as debt since Eurostat ignored statistics related to financial derivates at that time. However, in 2010 the deficit of the Greek government was revised again and the estimate amounted to 13.6%, which was the second highest globally relative to GDP.

An interesting feature of Greece’s public debt during its economic crisis is the progression of its holders and its form. As per the Bank of Greece financial accounts, prior to the crisis, 80% of the overall financial liabilities were bonds; 73% of the bonds had foreign holders, mainly from financial corporations. In 2015, bonds only accounted for 12% of the entire government financial liabilities, with 50% of them being held overseas. A great volume of the government liabilities is currently held as long-term loans by the official sector outside the country, which claimed 75% of the overall liabilities in the third quarter of 2015. During the second quarter of 2009, they were 9% only and most possibly did not originate from this official sector (Nikiforos, Papadimitriou, & Zezza, 2016).

Besides, it is worth noting that the loans facilitated to Greece during the period of the crisis have just about in their entirely directed back to the country’s foreign creditors. Also, these loans have been used to recapitalize banks. The net amount of loans issued to Greece during the initial adjustment program was € 215.9 Billion. Out of this amount, €183.9 billion was issued by European sources and the other €32 billion was issued by the IMF. According to Rocholl and Stahmer (2016), these loans were directed as follows, about €86.9 billion was directed to debt repayment (40.3%), €52.3 billion was used to pay interests (24.2%), €37.3 billion was directed towards Greek bank recapitalization (17.3%), and lastly €29.7 billion was used as a sweetener of the private-sector involvement (13.8%), this was during the 2012 debt restructuration. From this account, it should be noted that a mere €9.7 billion (4.5% of the total loans) was directed towards handling real primary deficits- apart from the ones associated to the banks’ recapitalization. Such numbers, together with the previous paragraph’s discussion show that Greece’s adjustment programs have particularly acted as a bailout of the local banking sector and the foreign creditors of the nation. Figure 2 below illustrates how the funds were allocated.

Figure 2: Allocation of funds of the initial adjustment programs

Source: Rochol & Stahmer, (2016)

  • Accrual Accounting Practices

Over the past ten years, the accounting field has experienced a revolution in its accounting practices. In this light, the accounting practices dropped the use of historical cost and embraced fair value accounting (Oliver, 2014). This new accounting practice specifically uses present value techniques and market inputs (Serafeim, 2015. b; Oliver, 2014). However, in the instance of Greece, both present value techniques and market inputs are ignored.

The most pressing question as outlined in text’s problem statement is: what is the real amount of Greece’s debt? The press, together with the International Monetary Fund often quote that the ratio of debt-to-GDP is almost 180% (Serafeim, 2015, b). Considering that the debt of the Greek government entails to a substantial amount of concessionary securities and loans, one wonders how come Greece’s debt would be so high. According to Serafeim (2015), the answer to this question is that the amount of debt used is grounded in nominal value. In this case, amount fails to reflect the extensive loan maturities issued to Greece, the low market interest rates that Greece uses to borrow funds, and the reimbursements of profits and interest, which are agreed with the ECB (European Central Bank). Such aspects are very important and should be taken under consideration in the case of Greece since it reflects the amount that the International Monetary Fund applies in the design of measures and policies to guarantee debt sustainability. The greater the amount of debt the more stringent the measures of austerity, and the greater the primary surpluses, which are executed as a condition. Taking the aforementioned aspects into consideration greatly lowers Greece’s debt burden. Particularly, the amount of securities that are held by the European Central Bank, the European National Central Banks, and private sector investors is lowered from a nominal value of €62.8 billion to € 20.3 billion. Besides, based on the estimates made by Japonica, loans issued by the EFSF, the IMF, and the European governments are reduced from €212.4 billion to € 59.5 billion (Serafeim, 2015).

The worst case scenario relates to the decisions, which are arrived at on the foundation of wrong accounts or numbers. For instance, assume the spending of € 11 Billion during the end of the year 2012 for purposes of buying back debt to lower the nominal value by almost €31 billion, or the choice to direct 25%  of the earnings from the just publicized bailout fund to refund the liability. Instead of directing the funds to gravely required investments, the Greek government, pushed by the creditors or lenders, keeps directing funds into reimbursing debt to lower its nominal value.

Besides, Greece’s huge amount of debt can be attributed to the fact that it uses gross debt in place of net debt. According to Kazarian Japonica, Greece’s financial asset’s net debt accounted for 18% of the country’s GDP. The country had financial assets amounting to € 91 billion, which entailed of equity shares worth € 56 billion, currency and deposits worth €21.6 billion, and shares and securities worth € 13 billion (Serafeim, 2015). The net debt value related favorably with approximately 80%, which is the European National average.

Kazarian’s major concern was that the deficiency of consistent accounting numbers and transparency was resulting in financial mismanagement. According to Japonica’s estimation, as from the end of 2013 to March of 2015, the Greek government had lost almost  € 30 billion, which is approximately a third of Greece’s financial assets. About a half of these losses was accredited to the deterioration in the value of HSFSF’s (Hellenic Financial Stability Fund ) investments in the equity shares of Greek banks. According to Serafeim (2015), HFSF was sponsored by the Troika funds during the bailout of Greece. The remaining half was credited to the weakening in the value of the equity investments issued in Greece’s stocks. Similarly, for the period from 30th June 2014 to 3rd August 2016, Japonica projected that value of financial assets lost amounted to € 40 Billion. This recent projection exhibits  an increase in the loses of financial assets value (see Exhibit 1: Greece government asset value lost during 2014 to 2016). Consequentially, Japonica projected that as of December 2015, the net debt of Greece was about 45% of its GDP (Japonica Partners, 2016). A detailed projection of Japonica is attached in the appendix (See exhibit 2: Japonica’s projection of Greece’s Net Debt).

Conclusion and Recommendations

From the above analysis of the issues, which are believed to contribute to Greece’s Debt unsustainability, it can be concluded that the lack of accrual accounting practices in Greece’s financial reports underpins the other two issues. The text assumes that the financial instruments essential for accrual accounting include International Financial Reporting Standards (IFRS), U.S. GAAP, and International Public-Sector Accounting Standards (IPSAS). The basic and common principle of these financial instruments that can be of use in the comprehensive understanding of Greece’s debt situation is fair value, which specifically uses present value techniques and market inputs. Such an accounting practice is different from the one used to value Greece’s liabilities, historical cost. Since the accounting of Greece’s debt was not based on the fair value the amount of public debt was found to be higher than what it was supposed to be. In this light, Japonica stated that if Greece had followed IPSAS, its debt would be only 68% of its GDP as opposed to the face value calculations that resulted to the debt being 175% of its GDP in 2013. Therefore, according to Kazarian, Greece was a victim of  “contrived liquidity squeeze.” Greece is not debt unsustainable since it only has management issues. Such financial management issues were as a result of a lack of dependable accounting numbers and lack of transparency. Besides, as mentioned earlier, the greater the amount of debt the more stringent the measures of austerity. However, since accrual accounting values Greece’s debt to be lower than the initial 175%  the stringent austerity measures imposed on Greece would be unnecessary.  In this light, it can be argued that solving the issue related to accrual accounting practices can result in a solution for the other two issues.

According to Stamatiadis (2009), there has been increasing public demand for fundamental changes aimed at improving the activities of the public sector. Such a public demand is exhibited by the citizens of Greece, who demanded a government that reduced the austerity measures imposed on Greece and assured transparency in governmental activities (Nikiforos, Papadimitriou, & Zezza, 2016; Serafeim, 2015). Stamatiadis (2009) continues to state that such demands have led to a colossal trend towards managerial, accounting, and organizational reform in the public sector around the world. Most of such reforms have various features often outlined under NPM (New Public Management). This term is a management philosophy adopted by governments in an effort to change and revolutionize their public sector to improve the accountability, efficiency, and effectiveness of the delivery of public services through copying management techniques and practices of the private sector to the public sector (Stamatiadis, 2009). The NPM emphases on the decrease of the disparities between the private and public sector by moving private sector practice closer to public sector practice. Such movement shifts the focus from the accountability of process towards more accountability with regards to results and outcomes. Therefore, it would be recommendable for  Greece’s government to adopt New Public Management.

In the perspective of NPM, various nations have been able to adopt reforms in financial accounting at various government levels by transforming or replacing their outdated budgetary systems of cash accounting with accrual supporting systems (Stamatiadis, 2009). Accrual supporting systems provide an accounting basis, which is broadly adopted by organizations to increase their financial transparency and accountability, as well as enhance the measurement of the performance of government sectors (Sariman, Mahadi, Mail, & Noordin, 2017). This revolution of the public accounting systems to become an accrual accounting system is essential since the traditional budgetary system of accounting is considered today to be unsatisfactory. The lack Satisfaction is mainly because of the incapability of traditional budgetary system of accounting to present a correct financial picture as well as providing adequate and useful accounting information to enable the performance and control process (Stamatiadis, 2009). This is evidently the case in Greece’s debt situation. As a result of the traditional budgeting system, the country’s debt-to-GDP ratio is estimated to be higher than what it would actually be when applying accrual accounting practices.

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