Quote:
Originally Posted by archimedes11
So Greece has borrowed like $240b or whatever so far, but it doesn't have the capacity to pay back that public debt because it's economy just isn't strong enough to generate the requisite tax revenue. But where exactly has the $$$ that Greece owes gone to? Someone's got it (in the private sector/households), right? We all know the story about the Greek welfare state being too big and unsustainable, but wouldn't that mean that the economy would be fine cause the money would be what's making up Greeks' pensions? And yet their economy isn't healthy, and I don't really understand why.
I get that in 2008 much value simply evaporated from the world economy and in the US in particular because it was held in the form of credit, backed against non-liquid, overvalued assets like houses that became worth far less than their mortgages when the housing bubble burst. But I don't think that's happened in Greece.
Greek problem actually have little to do with the crunch of 08. Maybe that has fast-tracked their default by a couple of years but that's about it. Greek banks were also involved very little in US subprime loans and things like that.
The problem was (and is) that Greek government spending was not sustainable in the first place. Prior to joining the Euro Greece had to pay about 8 to 9pc of their GDP on interest payments alone. After they got into the Euro that no. suddenly dropped to about 4 to 5pc GDP and the Greek governments were using that to massively increase government spending financed by new
net debt. In 2007 about half of government spending was financed by new
net debt (!). About 1/3 of the European money was used to pay off foreign creditors after the government had taken over the banks, the other 2/3 was simply used to uphold government programmes. The cliffs here are:
Even without the 08 crisis Greece would have defaulted, maybe 2 to 5 yrs later
Greek GDP was hugely artificially blown up by unsustainable debt (pre-crisis), without the European money and the capability to get new credit it wouldve shrunk maybe by 50 to 70pc instead of the 30pc it did.
Therefore as another poster pointed out it's quite LOL to even call what is happening austerity in the first place, it's more like reducing the Greek spending to levels that have any chance of being sustainable.
As a reminder, due to the low interest repayment terms of the European credit Greece is now paying less than 5 pc GDP annually for interest so it is on the same page as many other European countries and about half of what it was paying before the Euro. Even if there was a new haircut as long as Greece does not work both on the spending and the income side to levels it can sustain it will simply default again a couple of years later.
It's a long debunked myth that you can simply put new money into an economic system such as a state and it will pay for itself via economic growth. It has been shown that on average only around 1/3 of that money comes back via additionally generated taxes over the following years and that is assuming an efficient tax collection system, in Greece its prolly a lot worse.