Public Debt Management in Greece and Spain
Definition of terms Austerity measures In economics, austerity describes policies used by governments to reduce budget deficits during adverse economic conditions. These policies can include spending cuts, tax increases, or a mixture of the two. Austerity policies demonstrate governments’ liquidity to their creditors and credit rating agencies by bringing fiscal income closer to expenditure. European Central Bank (ECB) One of the seven institutions of the European Union (EU) listed in the Treaty on European Union (TEU).
It is the central bank for the euro and administers the monetary policy of the 17 EU member states which constitute the Eurozone, one of the largest currency areas in the world. Financial contagion It refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission of a medical disease.
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Financial contagion happens at both the international level and the domestic level Eurozone An economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender Greek Public Debt Crisis 1. 0 Introduction Since late 2009 Greece has earned itself a place among the countries dubbed ‘the sick men of Europe’ in terms of public Debt Management.
Although the Public Debt problems heightened between late 2009 and 2010,Greece’s debt percentage had always been higher than the average debt percentage of the Eurozone (an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender) for more than a decade prior to the crisis that forced the state to as for assistance from other countries and International financialorganizations.
Figure 1: Comparison of Greece’s against the Eurozone’s average percentage public debt The Greek government-debt crisis is one of a number of current European sovereign-debt crises and is believed to have been caused by a combination of structural weaknesses of the Greek economy coupled with the incomplete economic, tax and banking unification of the European Monetary Union. In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece’s ability to meet its debt obligations due to strong increase in government debt levels.
This led to a crisis of confidence, indicated by a widening of bond yield spreads(difference between the quoted rates of return on two different investments, usually of different credit quality) and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany. The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets practically were no longer available for Greece as a funding source.
On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece, conditional on compliance with the following three key points: 1. Implementation of austerity measures, to restore the fiscal balance. 2. Privatization of government assets worth €50bn by the end of 2015, to keep the debt pile sustainable. 3. Implementation of outlined structural reforms, to improve competitiveness and growth prospects. The payment of the bailout was scheduled to happen in several disbursements from May 2010 until June 2013.
Due to a worsened recession and the fact that Greece had worked slower than expected to comply with point 2 and 3 above, there was a need one year later to offer Greece both more time and money in the attempt to restore the economy. In October 2011, Eurozone leaders consequently agreed to offer a second €130 billion bailout loan for Greece, conditional not only the implementation of another austerity package (combined with the continued demands for privatisation and structural reforms outlined in the first programme), but also that all private creditors holding Greek government bonds should sign a deal accepting lower interest rates and a 53. % face value loss. 2. 0 Causes of the debt crisis and counter measures 2. 1 Causes In January 2010 the Greek Ministry of Finance highlighted in their Stability and Growth Program 2010 these five main causes for the significantly deteriorated economic results recorded in 2009 (compared to the published budget figures ahead of the year): 1. GDP growth rates: After 2008, GDP growth rates were lower than the Greek national statistical agency had anticipated.
In the official report, the Greek ministry of finance reports the need for implementing economic reforms to improve competitiveness, among others by reducing salaries and bureaucracy, and the need to redirect much of its current governmental spending from non-growth sectors (e. g. military) into growth stimulating sectors. 2. Government deficit: Huge fiscal imbalances developed during the past six years from 2004 to 2009, where “the output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues. In the report the Greek Ministry of Finance states the aim to restore the fiscal balance of the public budget, by implementing permanent real expenditure cuts (meaning expenditures are only allowed to grow 3. 8% from 2009 to 2013, which is below the expected inflation at 6. 9%), and with overall revenues planned to grow 31. 5% from 2009 to 2013, secured not only by new/higher taxes but also by a major reform of the ineffective Tax Collection System. . Government debt-level: Since it had not been reduced during the good years with strong economic growth, there was no room for the government to continue running large deficits in 2010, neither for the years ahead. Therefore, it was not enough for the government just to implement the needed long term economic reforms, as the debt then rapidly would develop into an unsustainable size, before the results of such reforms were achieved.
The report highlights the urgency to implement both permanent and temporary austerity measures that – in combination with an expected return of positive GDP growth rates in 2011 – would result in the baseline deficit decreasing from €30. 6 billion in 2009 to only €5. 7 billion in 2013, finally making it possible to stabilize the debt-level relative to GDP at 120% in 2010 and 2011, followed by a downward trend in 2012 and 2013. 4. Budget compliance: Budget compliance was acknowledged to be in strong need f future improvement, and for 2009 it was even found to be “A lot worse than normal, due to economic control being more lax in a year with political elections”. In order to improve the level of budget compliance for upcoming years, the Greek government wanted to implement a new reform to strengthen the monitoring system in 2010, making it possible to keep better track on the future developments of revenues and expenses, both at the governmental and local level. 5.
Statistical credibility: Problems with unreliable data had existed ever since Greece applied for membership of the Euro in 1999. In the five years from 2005–2009, Eurostat each year noted a reservation about the fiscal statistical numbers for Greece, and too often previously reported figures got revised to a somewhat worse figure, after a couple of years. In regards of 2009 the flawed statistics made it impossible to predict accurate numbers for GDP growth, budget deficit and the public debt; which by the end of the year all turned out to be far worse than originally anticipated.
In 2010, the Greek ministry of finance reported the need to restore the trust among financial investors, and to correct previous statistical methodological issues, “by making the National Statistics Service an independent legal entity and phasing in, during the first quarter of 2010, all the necessary checks and balances that will improve the accuracy and reporting of fiscal statistics”. According to an editorial published by the Greek conservative newspaper Kathimerini,other causes included; 6. Government spending
The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007; during this period it grew at an annual rate of 4. 2%, as foreign capital flooded the country.  Despite that, the country continued to record high budget deficits each year. Financial statistics reveal solid budget surpluses existed in 1960-73 for the Greek general government, but since then only budget deficits were recorded. In 1974-80 the general government had an era with moderate and acceptable budget deficits (below 3% of GDP).
Unfortunately this was followed by a long period with very high and unsustainable budget deficits in 1981-2014 (above 3% of GDP). 7. Tax evasion and corruption Another consistent problem Greece has suffered from in recent decades is the government’s tax income. Each year it is several times below the expected level. In 2010, the estimated tax evasion costs for the Greek government amounted to well over $20 billion per year. To keep within the monetary union guidelines, the government of Greece had also for many years misreported the country’s official economic statistics.
At the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001, for arranging transactions that hid the actual level of borrowing. Most notable is a cross currency swap, where billions worth of Greek debts and loans were converted into Yen and Dollars at a fictitious exchange rate by Goldman Sachs, thus hiding the true extent of Greek loans. The purpose of these deals made by several successive Greek governments, was to enable them to continue spending, while hiding the actual deficit from the EU.
The revised statistics revealed that Greece at all years from 2000-2010 had exceeded the Eurozone stability criteria, with the yearly deficits exceeding the recommended maximum limit at 3. 0% of GDP, and with the debt level significantly above the recommended limit of 60% of GDP. 8. Unsustainable and accelerating debt-to-GDP ratios The first period with accelerating debt-to-GDP ratios was in until 1996, where it increased from 22% to 100% due to some years characterized by: low GDP growth, high structural deficits, high inflation, high interest rates and multiple currency devaluations.
In 1996-1999, the solution that brought the Greek economy back on a sustainable track was the combination of enforcing a “hard drachma policy”, and some consistent yearly reductions of the structural deficits through implementing austerity measures. This in turn caused inflation and interest rates to decline, which created the foundation for significant GDP growth and at the same time, put a halt to the accelerating trend for the debt-to-GDP ratio. The second period with accelerating debt-to-GDP ratios was in 2008-13, which was preceded by four years in which the debt-to-GDP ratio had been marginally increased from 98% to 107%.
The accelerating trend in the ratio was this time triggered by the onset of the global recession (GDP decline) in October 2008, also known as the Global Financial Crisis, which caused some related high budget deficits in 2008-13. The root cause behind the problem with accelerating debt-to-GDP ratios, was however that Greece had failed to reduce the debt-to-GDP ratio during the good years with strong economic growth in 2000-07, and instead had opted to continue on a path of running high structural deficits.
The first problem for Greece was a too high and increasing debt level, creating the so-called negative spiral of “interest rate death”, which occurs if a country suffers from a constantly increasing debt that exceeds the sustainable level, which will mean the financial markets will start to ask higher and higher interest rates to cover the increasing risk for default. Figure 2: Interest rate of Greek 2 year government bond showing perceived risk by investors 2. 2 Counter measures 2. 2. 1 First bailout plan by the European Central Bank (ECB)
On 1 May 2010, the Greek government announced a series of austerity measures to persuade Germany, the last remaining holdout, to sign on to a larger EU/IMF loan package. The next day the Eurozone countries and the International Monetary Fund agreed to a three-year €110 billion loan (see below) retaining relatively high interest rates of 5. 5%, conditional on the implementation of austerity measures. Credit rating agencies immediately downgraded Greek governmental bonds to an even lower junk status.
This was followed by an announcement of the ECB on 3 May that it will still accept as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation’s credit rating, in order to maintain banks’ liquidity. The new austerity package was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece. On 5 May 2010, a national strike was held in opposition to the planned spending cuts and tax increases.
In Athens some protests turned violent, killing three people. 100,000 people protested against the austerity measures in front of parliament building in Athens (29 May 2011). Former Prime Minister George Papandreou and European Commission President Jose Manuel Barroso after their meeting in Brussels on 20 June 2011. Interim prime minister Lucas Papademos defends the austerity measures in parliament (November 2011). Still the situation did not improve. It was riginally hoped that Greece’s first adjustment plan together with the €110 billion support package would reestablish Greek access to private capital markets by the end of 2012. However it was soon found that this process would take much longer. The November 2010 revisions of 2009 deficit and debt levels made the 2010 targets even harder to reach, and indications signaled a recession harsher than forecast. In May 2011 it became evident that due to the severe economic crisis tax revenues were lower than expected, making it even harder for Greece to meet its fiscal goals. . 2. 2 Second bailout loan and austerity measures (July 2011 to date) EU emergency measures continued at an extraordinary summit on 21 July 2011 in Brussels, where euro area leaders agreed to extend Greek (as well as Irish and Portuguese) loan repayment periods from 7 years to a minimum of 15 years and to cut interest rates to 3. 5%. They also approved the construction of a new €109 billion support package, of which the exact content was to be debated and agreed on at a later summit, although it was already certain to include a demand for large privatization efforts.
In the early hours of 27 October 2011, Eurozone leaders and the IMF also came to an agreement with banks to accept a 50% write-off of (some part of) Greek debt, the equivalent of €100 billion, to reduce the country’s debt level from €340bn to €240bn or 120% of GDP by 2020. On 7 December 2011, the new interim national union government led by Lucas Papademos submitted its plans for the 2012 budget, promising to cut its deficit from 9% of GDP 2011 to 5. 4% in 2012, mostly due to the write-off of debt held by banks. Excluding interest payments, Greece even expects a primary surplus in 2012 of 1. %. The austerity measures have helped Greece bring down its primary deficit before interest payments, from €25bn (11% of GDP) in 2009 to €5bn (2. 4% of GDP) in 2011, but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011. Overall the Greek GDP had its worst decline in 2011 with -6. 9%, a year where the seasonal adjusted industrial output ended 28. 4% lower than in 2005, and with 111,000 Greek companies going bankrupt (27% higher than in 2010).
As a result, the seasonally adjusted unemployment rate also grew from 7. 5% in September 2008 to a, at the time, record high of 19. 9% in November 2011, while the youth unemployment rate during the same time rose from 22. 0% to as high as 48. 1%. ;since then both rates have kept rising with seasonally adjusted unemployment rate and youth unemployment rate reaching respectively 25. 1% in July 2012 and 55% in June 2012 setting new record high values. Overall the share of the population living at “risk of poverty or social exclusion” did not increase significantly during the first 2 year of the crisis.
The figure was measured to 27. 6% in 2009 and 27. 7% in 2010, which was also just slightly worse than the EU27-average at 23. 4%, but for 2011 the figure was now estimated to have risen sharply above 33%. 2. 3. Rescue packages provided by the EU and IMF 2. 3. 1 First rescue package (May 2010) Having had the credit rating agencies further downgraded Greece’s ability to achieve and the risk premiums on long-term Greek government bonds first record levels, the Greek government requested on 23 April 2010 official financial assistance.
The European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) agreed on 1–2 May 2010 with the Greek government to a three-year financial aid programme (loan commitments) totaling €110 billion. The Greek debt in exchange for household should be consolidated within three years, so that the budget deficit should be reduced by 2014 to below 3 percent. Of the €110 billion promised by the IMF took €30bn, the Eurozone €80bn (as bilateral loan commitments).
Instrumental in determining the rates of the individual euro area countries in the €80bn of the Eurozone was the respective equity interest in the capital of the ECB, which in turn is determined every five years after the prorated share of a country in the total population and economic output in the EU. The German share of the €80bn was 28% or about €22. 4bn in three years while France paid €16. 8bn. In May 2010 Greece received the first tranche of the bailout money totaling €20bn. Of this total, 5. 5 billion came from the IMF and 14. 5 billion of Euro states.
On 13 September the second tranche of €6. 5bn was disbursed. The 3rd tranche of the same amount was paid on 19 January 2011. On 16 March, 4th tranche in the amount of €10. 9 billion was paid out, followed by the 5th installment on 2 July. The 6th tranche of €8bn was paid out after months of delay in early December. Of this amount, the IMF took over €2. 2bn. 2. 3. 2 Second rescue package (July 2011 – February 2012) Since the first rescue package proved insufficient, the 17 leaders of Euro countries approved a (preliminary) second rescue package at an EU summit on 21 July 2011.
It was agreed that the aid package has a volume of €100 billion, provided by the newly created European Financial Stability Facility. The repayment period was extended from seven to 15 years and the interest rate was lowered to 3. 5%. For the first time, this also included a private sector involvement, meaning that the private financial sector accepted a voluntary cut. It was agreed that the net contribution of banks and insurance companies to support Greece would include an additional €37 billion in 2014.
The planned purchase of Greek bonds from private creditors by the euro rescue fund at their face value will burden the private sector with at least another €12. 6 billion. It was also announced at the EU summit, a reconstruction plan for Greece in order to promote economic growth. The European Commission established a “Task Force for Greece”. 2. 3. 3 Preventing a debt crisis contagion The contagion risk for other Eurozone countries in the event of an uncontrolled Greek default has greatly diminished in the last couple of years.
This is mainly due to a successful fiscal consolidation and implementation of structural reforms in the countries being most at risk, which significantly improved their financial stability. Establishment of an appropriate and permanent financial stability support mechanism for the Eurozone (ESM) along with guarantees by ECB to offer additional financial support in the form of some yield-lowering bond purchases (OMT) for all Eurozone countries involved in a sovereign state bailout program from EFSF/ESM (at the point of time where the country regain/possess a complete market access),also greatly helped to diminish the contagion risk.
On the night of 26 to 27 October at the EU summit, the politicians made two important decisions to reduce the risk of a possible contagion to other countries, in the case of a Greek default. The first decision was to require all European banks to achieve 9% capitalization, to make them strong enough to withstand those financial losses that potentially could erupt from a Greek default. The second decision was to leverage the EFSF from €500bn to €1 trillion, as a firewall to protect financial stability in other Eurozone countries with a looming debt crisis.
The leverage had previously been criticized from many sides, because it is something taxpayers ultimately risk to pay for, due to the significantly increased risks assumed by the EFSF. Furthermore, the Euro countries agreed on a plan to cut the debt of Greece from today’s 160% to 120% of GDP by 2020. As part of that plan, it was proposed that all owners of Greek governmental bonds should “voluntarily” accept a 50% haircut of their bonds (resulting in a debt reduction worth €100bn), and moreover accept interest rates being reduced to only 3. %. At the time of the summit, this was at first formally accepted by the government banks in Europe. The task to negotiate a final deal, also including the private creditors, was handed over to the Greek politicians. 3. 0 The Spanish Financial crisis 3. 1 Introduction The 2008–2013 Spanish financial crisis began as part of the world Late-2000s financial crisis and continued as part of the European sovereign debt crisis, which has affected primarily the southern European states and Ireland.
In Spain, the crisis was generated by long-term loans (commonly issued for 40 years), the building market crash, which included the bankruptcy of major companies, and a particularly severe increase in unemployment, which rose to 24. 4% by March 2012. Spain continued the path of economic growth when the ruling party changed in 2004, keeping robust GDP growth during the first term of Prime Minister Jose Luis Rodriguez Zapatero, even though some fundamental problems in the Spanish economy were already evident.
Among these, according to the Financial Times, there was Spain’s huge trade deficit (which reached a staggering 10% of the country’s GDP by the summer of 2008), the “loss of competitiveness against its main trading partners” and, also, as a part of the latter, an inflation rate which had been traditionally higher than those of its European partners, back then especially affected by house price increases of 150% from 1998 and a growing family indebtedness (115%) chiefly related to the Spanish Real Estate boom and rocketing oil prices.
During the third quarter of 2008 the national GDP contracted for the first time in 15 years and, in February 2009, it was confirmed that Spain, along with other European economies, had officially entered recession. The economy contracted 3. 7% in 2009 and again in 2010 by 0. 1%. It grew by 0. 7% in 2011. By the 1st quarter of 2012, Spain was officially in recession once again. The Spanish government forecasts a 1. 7% drop for 2012.
The provision of up to €100bn of rescue loans from Eurozone funds was agreed by Eurozone finance ministers on 9 June 2012. As of October 2012, the so-called Troika (European Commission, ECB and IMF) is in negotiations with Spain to establish an economic recovery program required for providing additional financial loans from ESM. Reportedly Spain, in addition to applying for a €100bn “bank recapitalization” package in June 2012, now negotiates financial support from a “Precautionary Conditioned Credit Line” (PPCL) package.
If Spain applies and receives a PCCL package, irrespectively to what extent it subsequently decides to draw on this established credit line, this would at the same time immediately qualify the country to receive “free” additional financial support from ECB, in the form of some unlimited yield-lowering bond purchases (OMT). 3. 2 Causes of the Spanish Debt crisis 1. Property bubble The residential real estate bubble in Spain saw real estate prices rise 200% from 1996 to 2007. 651,168,000,000 is the current mortgage debt (second quarter 2005) of Spanish families (this debt continues to grow at 25% per year – 2001 through 2005, with 97% of mortgages at variable rate interest). In 2004 509,293 new properties were built in Spain and in 2005 the number of new properties built was 528,754. 2004 estimations of demand: 300,000 for Spanish people, 100,000 for foreign investors, 100,000 for foreign people living in Spain and 300,000 for stock; in a country with 16. 5 million families, 22–24 million houses and 3–4 million empty houses.
From all the houses built over the 2001–2007 period, “no less than 28%” are vacant as of late 2008 House ownership in Spain is above 80%. The desire to own one’s own home was encouraged by governments in the 60s and 70s, and has thus become part of the Spanish psyche. In addition, tax regulation encourages ownership: 15% of mortgage payments are deductible from personal income taxes. Even more, the oldest apartments are controlled by non-inflation-adjusted rent-controls and eviction is slow, therefore discouraging renting. As feared, when the speculative bubble popped Spain became one of the worst affected countries.
According to Eurostat, over the June 2007 – June 2008 period, Spain has been the European country with the sharpest plunge in construction rates. Actual sales over the July 2007 – June 2008 period were down an average 25. 3% (with the lion’s share of the loss arguably happening in the 2008 tract of this period). So far, some regions have been more affected than others (Catalonia was ahead in this regard with a 42. 2% sales plunge while sparsely populated regions like Extremadura were down a mere 1. 7% over the same period). Figure 3: The subprime mortgage crisis process 2. Prices and inflationary tendencies
Due to the lack of its own resources, Spain has to import all of its fossil fuels, which in a scenario of record prices added much pressure to the inflation rate. Thus, in June 2008 the inflation rate reached a 13-year high of 5. 00%. Then, with the dramatic decrease of oil prices that happened in the second half of 2008 plus the confirmed burst of the property bubble, concerns quickly shifted to the risk of deflation instead, as Spain registered in January 2009 its lowest inflation rate in 40 years which was then followed in March 2009 by a negative inflation rate for the first time ever since this statistic was recorded.
As of October 2010, the Spanish economy has continued to contract, resulting in decreasing GDP and increasing inflation. From 2011 to 2012 alone, prices rose 3. 5% as compared to 2% in the United States. The rise in prices, combined with the recently implemented austerity measures and extremely high unemployment, are heavily impacting the livelihood of Spanish citizens. As the average wage decreases, the buying power of the money decreases as well.
The frustration of these decreases in buying power has manifested in several, very large, worker demonstrations. 3. Spanish banking system The Spanish banking system had been credited as one of the most solid and best equipped among all Western economies to cope with the worldwide liquidity crisis, thanks to the country’s conservative banking rules and practices. Banks are required to have high capital provisions and demand various proofs and securities from intending borrowers.
Nevertheless this practice was strongly relaxed during the housing bubble, a trend to which the regulator (Banco de Espana) turned a blind eye. Spain’s unusual accounting standards, intended to smooth earnings over the business cycle, has misled regulators and analysts by hiding losses and earnings volatility. The accounting technique of “dynamic provisioning”, which violated the standards set by the International Accounting Standards Board, obscured capital cushions until they were depleted, allowing the appearance of health as the problems mounted.
It was later revealed that nearly all the Spanish representatives in Congress had strong investments in the housing sector, some having up to twenty houses. Over the time, more and more news have emerged about the informal alliance between Spanish central and regional governments, the banking sector (bear in mind for example the recent government pardon of the second at command at the Santander Bank, while all the major parties are strongly indebted with banks, and such debts are extended from time to time) which increased the bubble size over the years.
Most regional semipublic savings banks (cajas )lended heavily to real estate companies which at the end of the bubble went bankrupt, then, the cajas found themselves left with the collateral and properties of those companies, namely overpriced real state and residential-zoned land, now worthless, rendering the cajas in essence bankrupted. 3. 3 Manifestations of the public debt crisis 1. Employment crisis
After having completed substantial improvements over the second half of the 1990s and during the 2000s which put a few regions on the brink of full employment, Spain suffered a severe setback in October 2008 when it saw its unemployment rate surging to 1996 levels. During the period October 2007 – October 2008 Spain had its unemployment rate climbing 37%, exceeding by far the unemployment surge of past economic crises like 1993. In particular, during this particular month of October 2008, Spain suffered its worst unemployment rise ever recorded and, the country has suffered Europe’s biggest unemployment crisis during the 2008 crisis.
Spain’s unemployment rate hit 17. 4% at the end of March 2009, with the jobless total now having doubled over the past 12 months, when two million people lost their jobs. In this same month, Spain for the first time in her history had over 4,000,000 people unemployed, an especially shocking figure even for a country which had become used to grim unemployment data. By July 2009, it had shed 1. 2 million jobs in one year and was to have the same number of jobless as France and Italy combined. By March 2012, Spain’s unemployment rate reached 24. 4%, twice the euro-zone average. 2. Emigration
Large scale immigration continued throughout 2008 despite the severe unemployment crisis, but by 2011 the OECD confirmed that the total number of people leaving the country (Spaniards and non-Spaniards) had over taken the number of arrivals. Spain is now a net emigrant country. There are now indications that established immigrants have begun to leave, although many that have are still retaining a household in Spain due to the poor conditions that exist in their country of origin. 3. Decline in Tourism As the financial crisis was getting started in Spain, it was already underway in the U. S. and other western countries.
The decrease in disposable income of consumers led to a sharp decrease in Spain’s tourist industry, a rare thing for a country with so many coastal towns. Indeed, the EU as a group saw a decline in tourists coming to their countries in 2008 and 2009, with -13% tourism growth in coastal Spain. Despite its traditional popularity with Korean and Japanese tourists, the relatively expensive cost of vacationing in Spain led many to pursue “sun and beach” Mediterranean getaways in Turkey, Spain’s tourism rival. However, Spain has also seen the largest growth again in that industry since 2011 and 2012.
Spain’s geographical advantages, general atmosphere, the Arab Spring, and other non-economic factors are contributing to its resurgence as a key tourism destination. 3. 4 Counter measures by the Spanish Government Spain entered the crisis period with a relatively modest public debt of 36. 2% of GDP. This was largely due to ballooning tax revenue from the housing bubble, which helped accommodate a decade of increased government spending without debt accumulation. In response to the crisis, Spain initiated an austerity program consisting primarily of tax increases.
PM Rajoy announced (11 July 2012) €65 billion of austerity including cuts in wages and benefits and a VAT increase from 18% to 21%. The government eventually succeeded to reduce its budget deficit from 11. 2% of GDP in 2009 to 8. 5% in 2011 and it is expected to fall further to 5. 4% in 2012. As of 15 June 2012, Spain’s public debt stood at 72. 1% of GDP, still less that the Euro-zone average of 88%. If Spain uses the €100 billion credit line to bailout its banks, its debt will approach 90% of GDP. To avoid this, the EU has pledged to lend to banks directly although it now appears that the Spanish government may have to guarantee the loans.
In June 2012, the Spanish 10-year government bond reached 7%, 5. 44% over the German 10-Year bond. As Spanish CDS hits a record high of 633 basis points and the 10yr bond yield at 7. 5% (23 July 2012) Spain’s economic minister travels to Germany to request that the ECB facilitate government bond purchases to “avoid an imminent financial collapse”. Promised borrowing by the ECB has enabled Spain’s 10-year yield to stay below or close to the 6% level. 3. 5 The financial bailout of Spain On 9 June 2012 the Eurogroup held an emergency meeting to discuss how to inject capital into Spanish Banks.
The IMF also announced this day that the capital needs of the Spanish banks wasestimated to be about 40,000 million euros. The Eurogroup announced intentions to provide up to 100,000 million euro to the Fund for Orderly Bank Restructuring to the Spanish government. The Spanish government is then expected to give the appropriate amount of money to the respective banks. On 21 June 2012 it was decided that 62,000 million euro would be shared among the Spanish banks in need. The European Union warned that rescued banks are subject to control and Union experts would meet stringent requirements.
Since then, the country’s borrowing costs have reached levels deemed unsustainable in the long run, raising the prospect of a second aid program for Madrid following the 100 billion euro lifeline it obtained for its banks in June. Spain expects the European Commission, to approve the restructuring plans of the banks needing aid on 15 November 2012 and then to authorize the disbursal of the first credit line of up to 100 billion euros within three weeks after that. A larger economy than other countries which have received bailout packages, Spain had considerable bargaining power regarding the terms of a bailout.
Due to reforms already instituted by Spain’s conservative government less stringent austerity requirements are included then was the case with earlier bailout packages for Ireland, Portugal, and Greece. 4. 0 Conclusion In the early mid-2000s, Greece’s economy was one of the fastest growing in the Eurozone and was associated with a large structural deficit. As the world economy was hit by the global financial crisis in the late 2000s, Greece was hit especially hard because its main industries — shipping and tourism — were especially sensitive to changes in the business cycle.
The government spent heavily to keep the economy functioning and the country’s debt increased accordingly. The economy of Greece is the 34th or 42nd largest in the world at or $304 billion by nominal gross domestic product or purchasing power parity respectively, according to World Bank statistics for the year 2011. Additionally, Greece is the 15th largest economy in the 27-member European Union. In terms of per capita income, Greece is ranked 29th or 33rd in the world at $27,875 and $27,624 for nominal GDP and purchasing power parity respectively.
However, after 14 consecutive years of economic growth, Greece went into recession in 2008. An indication of the trend of over-lending in recent years is the fact that the ratio of loans to savings exceeded 100% during the first half of the year. By the end of 2009, the Greek economy (based on data revised on 15 November 2010 in part due to reclassification of expenses) faced the highest budget deficit and government debt to GDP ratios in the EU. The 2009 budget deficit stood at 15. 4% of GDP. This and rising debt levels (127% of GDP in 2009) led to rising borrowing costs, resulting in a severe economic crisis.
In essence, its debt problems were driven by high public wage and pension commitments. Spain, on the other hand, had a comparatively low debt level among advanced economies prior to the crisis. Its public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece. Debt was largely avoided by the ballooning tax revenue from the housing bubble, which helped accommodate a decade of increased government spending without debt accumulation.
When the bubble burst, Spain spent large amounts of money on bank bailouts. A fundamental cause for its rising government debt levels is the subprime mortgage crises coupled with questionable accounting methods that disguised massive bank losses therefore crippling liquidity. A notable drastic measure introduced by Spain is that of the amendment of the constitution to restrict Public debt spending to less than 60% of the Gross Domestic product except in cases of natural catastrophies and economic ecession and the introduction of an Economic recovery programme in October 2012. It can be observed that both countries’ problems were accelerated by the global economic downturn. In addition the European Union countries faced the problem of having a single currency without fiscal union such as Taxation and public pension rules. The countries are not of the woods yet with Greece expecting to recover by 2017 and Spain between 2022 and 2027.