The Greek story

In Iceland and Ireland, two prosperous economies with stable government finances were ruined by an excessive and opportunistic banking sector. Greece constitutes the exact opposite: mostly healthy banks were brought to ruin by a spendthrift state. The Greek story has been told elsewhere and does not need to be repeated; here we are only concerned with the effects of the sovereign debt crisis on its banks and the resolution of its banking system.

Greece entered the euro area in 2001 by means of what have been shown to be falsified statistics. Rather than fulfilling the Maastricht criteria, Greece had a budget deficit in 2001 of 4.5 percent of GDP (above the limit of 3 percent) and a government debt-to-GDP ratio of 103 percent, way above the 60 percent limit. It was also the only country in the euro area to break the required inflation threshold (a maximum of 1.5 percentage points above the average of the three countries with the lowest inflation rate) every single year in the new century.

Despite a healthy GDP growth rate of some 4 percent on average during the years preceding the financial crisis, excessive government spending, inefficiency in tax collection and lack of competitiveness led to a budget deficit of 9.8 percent of GDP in 2008, rising to 15.7 percent in 2009. Simultaneously, the government debt-to-GDP ratio exploded to reach 130 percent of GDP in 2009 and 174 percent of GDP in 2014. From the euro start year 1999 until 2009, unit labor costs in Greece rose by 50 percent more than Germany's (and also 20 percent more than Spain's and 30 percent more than Italy's, according to OECD data). In parallel, overconsumption and cheap borrowing led to a current-account deficit of 15 percent in 2007, second only to Iceland's.

During the adjustment phase, caused mainly by the cuts in public expenditures ordained by the “troika” (EU Commission, ECB, IMF), GDP fell a cumulative 20 percent until 2012 and a projected further fall of an additional 5 percent in 2013–14, returning to growth only in 2015. Unemployment rose to 28 percent with youth unemployment above 60 percent. As a result, on 27 April 2010, Standard & Poor's lowered the rating of Greece from BBB− to BB+, i.e. “junk,” the first time this had happened to a eurozone country; Ireland and Portugal would follow.