Ten Years After The Financial Crisis, The Problem For Greece Is The Same But Bigger

Greek Debt is Only Getting Less Sustainable.

In the decade before the financial crisis, Greece had seen a stable government debt at just over 100% of GDP. In 2006 and 2007, real GDP growth was 5.5% and 3.5%. These are good figures. But when the crisis struck in 2008, money fled from Greece with great velocity. Investment in Greek business froze and the government could not sell debt at a sustainable interest rate. This happened while the economy shrunk as a result of the global financial crisis. In 2007, debt-to-GDP was at an acceptable 103% – lower than that of the U.S. or Belgium today. It is true that interest payments on debt were higher in 2007, but there was also higher economic growth to offset the higher interest rates. By 2011, the Greek debt had risen to a completely unsustainable 172% of GDP and the economy had shrunk by 20%. Educated youth have fled the country for better opportunities in the North. The Greek economy has contracted more than the U.S. economy during the great depression of the 1930s there.

Greece GDP and Greece Debt-To-GDP
Greece GDP and Debt-To-GDP – Source: FRED

We can discuss how and why this debt explosion suddenly appeared. Although that would be an interesting topic by itself, in this article I want to focus on how this crisis was dealt with, and why the Greek debt crisis is still getting worse 10 years later.

A Logical Conclusion To The Greek Debt Crisis

There were two decent solutions that would have ended this crisis within a year or two. One would have been that Greece default on its debts, paying back for example 30% of outstanding loans. Another would have been for Greece to leave the Euro Zone and go back to using the drachma (their currency before the Euro), and pay its creditors in the new currency. This new drachma would quickly fall in value as the Greek central bank would print more drachmas, making it easier to repay the devalued drachma loans.

Both of these solutions – defaulting on the debt or leaving the Euro zone – would have financially harmed Greece’s lenders. This is the risk that lenders face when they lend money, and for which they are compensated through interest. However, the Greek government debt was held by banks in Europe, in Germany and France in particular. These banks would be insolvent if parts of their debt-reserves would suddenly loose 70% of their value, and the German and French governments would probably have had to nationalize (bail out) their banks. So the German, French, and other European governments put immense pressure on Greece to not come to the logical conclusion of their debt crisis. The European Central Bank (ECB) threatened to cut off the Greek banks, the Greek people were stigmatized as lazy, and certainly many more nasty things happened to pressure Greece.

The Troika Solution

Instead of allowing Greece to default, the Troika (European Commission, European Central Bank, and the International Monetary Fund (IMF)) together bailed out Greece by providing low interest loans, essentially at gunpoint. It was an offer that Greece couldn’t refuse, or so it was intended. So Greece took the Troika loans, and that is when Greece’s problems really began.

Greece General and Youth Unemployment
Greece General and Youth Unemployment – Source: FRED

Once Greece was taking bailout loans, the Troika dictated Greek reform measures. These reform measures consisted of privatizations, sale of state assets, and deep spending cuts, gutting the Greek welfare state.

Political Instability

The Troika-imposed Greek government spending cuts had a severe effect on unemployment and certainly contributed to the implosion of the economy. These spending cuts were correctly identified by the Greek people as imposed on them by political forces from outside of their country. The Troika measures were and still are an attack on Greek sovereignty.

The Troika also imposed some micromanagement measures, such as a ‘liberalization’ of what the size of a loaf of bread could be. These cuts and micromanagement measures undermined the credibility and legitimacy of the post-crisis Greek governments, which fell in quick succession and gave rise to extremist parties, including fascists and Nazis.


The privatizations and sale of state assets amounted to a plundering of the country. The sale of state assets included:

  • electricity, water, and sewage utilities
  • energy extraction companies
  • 14 airports
  • 2 sea ports

Even though the government debt was not backed by these assets, they were sold in order to pay the creditors. And they were sold in a fire sale during a crisis, for less than they would otherwise have been worth.

The last time we saw such plundering of a European country was post-WWI, when Germany had to pay for the damage of WWI. At the time, it set the stage for Hitler’s rise. Again, we can discuss who’s fault it is that Greece ended up in such a deep crisis. But even if we find the Greek government and people at fault for all their problems, we should not resort to cruel and unusual punishment as a response. That response was a mistake in the case of Germany after WWI, and it is a mistake to do so with Greece today, both for moral an pragmatic reasons.

The Way Forward For Greece And The EU

What would be best for Europe and for Greece would be an overdue, proper default on its debt, allowing recovery to begin. This is complicated because the ECB has bought Greek debt and there are also other non-private sector lenders to Greece. What is more likely to happen, unfortunately, is that the crisis is drawn out further. Greece will have its loans extended without interest payment, and 35 years later the real value of the debt will be 50% lower. This is a default in disguise, but politically easier to achieve.

Because Greece was not allowed to default on its debt, and because the Troika demanded such harsh austerity measures, the Greek debt as a percentage of GDP is not shrinking, the economy is still contracting, and the country has been stripped of many of its assets. The sad truth is that Greece is simply not recovering.

One Reply to “Ten Years After The Financial Crisis, The Problem For Greece Is The Same But Bigger”

  1. Hey Macro Affairs – this is a really good & intriguing post. However, one of my issues with it is the first graph. You’re using a dual axis graph which is largely accepted as an awful means for visualisations of 2 line graphs. I’d recommend something more along the lines of an indexed chart to better the visualisation.

    Source for indexed graphs: https://blog.datawrapper.de/dualaxis/


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