The sorry state of Greece - T he sorry state of Greeces...

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The sorry state of Greece’s public finances is a test not only for the country’s policymakers but also for Europe’s SOME would say that tragedy was inevitable from the moment, nine years ago last month, when Greece was admitted to the euro zone. Others would claim that woe was sure to befall such a disparate currency union sooner or later: if not Greece, then some other weak member of the club would have been the cause. Avoidable or not, trouble has arrived. At best, Greece has to undergo a dramatic budgetary tightening. Its fellow Europeans, or the IMF, may yet have to organise a humiliating bail-out. Some even talk—probably mistakenly—of the beginning of the end of the euro area. Last year Greece’s budget deficit reached 12.7% of GDP. Worries over whether the Greeks would act to cut it have caused paroxysms in the bond markets: late last month the yield on ten-year Greek government bonds vaulted to 7.1%, the highest since the country joined the euro area and about four percentage points more than that on German bunds, the euro zone’s safest investment. The panic abated on February 3rd, when the European Commission endorsed the Greek government’s plan to cut the deficit to 3% of GDP by 2012. The day before, Greece’s prime minister, George Papandreou, had used a television address to announce higher taxes on fuel and an extension of a public-sector wage freeze to include low-paid civil servants. However, Greece and Europe are not out of trouble yet. The commission says it will watch Greece closely to ensure that it keeps its promises: it expects a report in mid-March on Greece’s chances of hitting this year’s deficit target of 8.7% of GDP. Joaquín Almunia, the outgoing economics commissioner, said he hoped a positive assessment by the commission in
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mid-May would help restore confidence in Greece, which has one of the world’s largest debt burdens relative to its GDP (see chart 1). If the Greeks do not regain the markets’ confidence, they may fail to refinance the €20 billion ($28 billion) or so of debt that falls due in April and May. At that point the government would default or would have to be bailed out. And Greece is not the only country about which the bond markets are worried. On the same day as the commission approved the Greek plans, investors were selling Portuguese bonds. The spread of ten-year bonds against bunds widened by 0.16 percentage points, to 1.43 points. A marathon, not a sprint Greece has a long history of fiscal trouble. It has spent half of the past two centuries in default, note Carmen Reinhart and Kenneth Rogoff in “This Time Is Different”, a history of financial crises. When it became the 12th country to join the euro in 2001, its public debt was more than 100% of GDP. Many thought its chronic budgetary mismanagement might harm the currency. For Greece, membership was a boon. Bond markets no longer had to worry about high
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This note was uploaded on 05/07/2011 for the course ECONOMY 101 taught by Professor Nam during the Spring '11 term at Hanoi University of Technology.

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The sorry state of Greece - T he sorry state of Greeces...

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