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Greek Crisis - Lessons Learned
Posted date 04/03/2016
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Posted date 04/03/2016
11.779 view
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The Greek crisis is perhaps a topical issue and is of great interest not only to those involved - the countries in the Eurozone - but also to those outside.
MSc. Ngo Thuy Ninh
The Greek crisis is perhaps a topical issue and is of great concern not only to insiders - countries in the Eurozone - but also to outsiders. Because, on the surface, it is a debt problem for Greece - a country of 11 million people, with a total GDP in 2014 accounting for less than 2% of the European Union (EU), but hidden inside is a potential risk that weakens the Eurozone and acts as an obstacle to the global economic recovery process that has just begun.
1. Summary of the process leading to the current Greek crisis
2001: Greece joined the Eurozone in mid-2001 and since then has been in a deficit situation with an average of 5% of GDP/year while the average for the entire Eurozone is only 2%/year.
2005: The policy of maintaining a strong Euro and extremely low interest rates allows Greece to borrow huge debts of up to 400 billion USD to cover the budget deficit after wasting the budget to organize the 2004 Olympics.
2009: The Greek crisis officially began in December 2009 when the country discovered a huge budget deficit of 12.7% of GDP, not the 3.7% previously announced by the previous government. This raised concerns among creditors and leaders of Eurozone countries.
2010 : The first bailout package of up to 52 billion euros was given to Greece by the European Union and the International Monetary Fund (IMF) in 2010 under the European Financial Stability Facility (EFSF). In return, Greece had to agree to austerity measures and reduce budget spending. However, this bailout package was not enough to lift the Greek economy, so Greece once again had to ask the European Union for a second bailout package worth 130 billion euros to save the country as well as to minimize the negative impact on the eurozone. In return, Greece committed to cutting its public debt to about 121% of GDP by 2020.
2015 : Up to now, after 2 bailout packages have been introduced, the Greek economic situation is still very gloomy. Recently, the meeting between creditors and Greece did not reach an agreement. The Greek government rejected the 3rd bailout package and will have a referendum on July 5. Currently, Greece's debt has reached 320 billion euros, equivalent to 175% of GDP, the IMF debt of 1.6 billion euros is due on June 30. The government no longer has financial resources to pay the debt. Banks have to close. As of June 27, 500 out of 7,000 ATMs in this country have no money left. People are really upset in this difficult situation because each person can only withdraw 60 euros per day. The Greek tourism industry also faces many problems, such as the consequence that tourists coming to Greece do not have money to spend because they cannot withdraw money from their credit cards because the Greek banking system is closed.
At the moment, whether Greece stays in or leaves the Eurozone is a big question with many consequences. But it is clear that if Greece leaves the Eurozone, the Greek currency will depreciate dramatically and there is no guarantee that the Greek economy will recover. Greece's creditors will also face significant losses.
2. The underlying causes of the Greek economic crisis
Firstly , the underlying cause stems from the EU's awkwardness of having a common currency (Euro), but not a common fiscal policy. The EU established the ECB but did not eliminate the national banks of its member countries, which means the ECB does not have the same role as the US Federal Reserve, and does not have sanctions. Meanwhile, the national central banks of the Eurozone members still have the decisive say in their countries' fiscal and monetary policies.
Second , when the Greek budget deficit continuously touched and exceeded the "limit" of 2% GDP set by the ECB, creditors or investors did not take drastic measures to handle it. Continuing the mistakes, through bailout packages with larger amounts accompanied by "belt-tightening" solutions, privatizing state-owned enterprises, raising the base interest rate and floating the exchange rate while increasing taxes to increase revenue. Meanwhile, the Greek economy depends heavily on imports. The country's top three imports are crude oil, gasoline and pharmaceuticals while its main exports are fish and cotton. It will be very difficult for Greece to increase export output, because the European Union has very strict quotas to prevent overfishing. Meanwhile, demand for cotton is decreasing. Therefore, it will be very difficult for Greece to overcome economic difficulties if it only applies the policies that creditors have proposed for Greece.
Third , it can be said that the Greek crisis is due to a systemic error, but it cannot be blamed entirely on circumstances, because Greece itself does not have a suitable policy mechanism to regulate its own economy and does not effectively use bailout packages. A typical example is that from 2001-2008, Greece always fell into a state of budget deficit but wasted money on organizing the 2004 Olympics, leading to more debt. In addition, this government borrowed heavily from outside, becoming a chronic debtor. Greece's over-reliance on foreign funding has made its economy vulnerable to changes in investor confidence.
3. Lessons learned for Vietnam
3.1. Should not be too dependent on foreign loans
The Greek crisis continues to be a warning bell for the public debt issue, which is a threat to the sustainable development of many countries in the world, including Vietnam . The Economist's global public debt clock shows that as of July 1, 2015, Vietnam's public debt was at 90.4 billion USD, accounting for 46.4% of GDP, up 10% compared to the same period last year. This figure is still within the safe range according to international standards of 65% of GDP. If looking at the statistics, the risk of Vietnam falling into a public debt crisis is not high, but there are still many potential risks regarding budget deficit and debt payment ability in the medium and long term.
3.2. Closely manage loans and have a reasonable spending plan
It is undeniable that in order to have capital to carry out industrialization and modernization, borrowing from abroad is necessary. Many countries with remarkable economic development such as Singapore, South Korea and China have to borrow from abroad. However, Vietnam needs to pay attention to using loans to invest in the most essential infrastructure to serve economic development and poverty reduction. Loans must be strictly managed and used effectively, not using these future debts to pursue mega-projects while the essential technical infrastructure in the country is still inadequate. The opportunity to easily access cheap credit since joining the Eurozone has caused the Greek government to overspend and forget about future debt obligations.
3.3. Reviewing the calculation of public debt
According to the Law on Public Debt Management of Vietnam, public debt includes: government debt, government-guaranteed debt and local government debt. The country's foreign debt is the sum of the government's foreign debt, government-guaranteed debt, debt of enterprises and other organizations borrowed by self-borrowing and self-repaying method according to the provisions of Vietnamese law. However, while the public debt calculation of most developed countries including the US, Canada, Australia, and Japan has calculated debt according to the standards of the United Nations, that is, in public debt there is also a pension part (every time a civil servant receives a salary, they must pay a part into the pension fund, and the other part is paid by the government), but in some developing countries, including Vietnam, the pension part - which is the state's debt to civil servants, has not been counted in public debt.
3.4. Creating confidence for foreign investors
In the context of Vietnam's current integration, facing the great demand for foreign investment capital, as well as the pressure from the balance of payments deficit, transparency is one of the important factors that Vietnam needs to build to strengthen the country's image in the eyes of investors. Currently, public debt in Vietnam is managed by the Ministry of Finance and is responsible for public announcement on the Ministry's information page. However, if you follow the Ministry of Finance's website, so far, this information has only stopped at foreign debt, not all public debt. The statistics given are sometimes confusing between public debt and government debt. Vietnam's current financial statistics still only focus on state debt, so it is difficult to show the whole picture of public finance because the state-owned enterprise sector is very large and the state is still responsible for debt to this sector.
References
1. http://vietnamnet.vn/vn/tuanvietnam/248109/-bong-ma--hy-lap-van-chua-hien-du-hinh-hai.html
2. http://m.gafin.vn/the-gioi/vong-xoay-no-cong-hy-lap-3274746/
3. http://cafef.vn/tai-chinh-quoc-te/hon-loan-khi-hi-lap-mo-lai-cac-ngan-hang-2015070214422868.chn
4. http://cafef.vn/tai-chinh-quoc-te/9-dieu-can-biet-ve-vu-vo-no-cua-hy-lap-20150701174632587.chn
5. http://vietstock.vn/2015/06/kich-ban-vo-no-hy-lap-nhin-tu-tam-guong-argentina-772-426383.htm
6. http://www.bbc.com/vietnamese/world/2015/06/150623_greece_debt_crisis_why_care
1. Summary of the process leading to the current Greek crisis
2001: Greece joined the Eurozone in mid-2001 and since then has been in a deficit situation with an average of 5% of GDP/year while the average for the entire Eurozone is only 2%/year.
2005: The policy of maintaining a strong Euro and extremely low interest rates allows Greece to borrow huge debts of up to 400 billion USD to cover the budget deficit after wasting the budget to organize the 2004 Olympics.
2009: The Greek crisis officially began in December 2009 when the country discovered a huge budget deficit of 12.7% of GDP, not the 3.7% previously announced by the previous government. This raised concerns among creditors and leaders of Eurozone countries.
2010 : The first bailout package of up to 52 billion euros was given to Greece by the European Union and the International Monetary Fund (IMF) in 2010 under the European Financial Stability Facility (EFSF). In return, Greece had to agree to austerity measures and reduce budget spending. However, this bailout package was not enough to lift the Greek economy, so Greece once again had to ask the European Union for a second bailout package worth 130 billion euros to save the country as well as to minimize the negative impact on the eurozone. In return, Greece committed to cutting its public debt to about 121% of GDP by 2020.
2015 : Up to now, after 2 bailout packages have been introduced, the Greek economic situation is still very gloomy. Recently, the meeting between creditors and Greece did not reach an agreement. The Greek government rejected the 3rd bailout package and will have a referendum on July 5. Currently, Greece's debt has reached 320 billion euros, equivalent to 175% of GDP, the IMF debt of 1.6 billion euros is due on June 30. The government no longer has financial resources to pay the debt. Banks have to close. As of June 27, 500 out of 7,000 ATMs in this country have no money left. People are really upset in this difficult situation because each person can only withdraw 60 euros per day. The Greek tourism industry also faces many problems, such as the consequence that tourists coming to Greece do not have money to spend because they cannot withdraw money from their credit cards because the Greek banking system is closed.
At the moment, whether Greece stays in or leaves the Eurozone is a big question with many consequences. But it is clear that if Greece leaves the Eurozone, the Greek currency will depreciate dramatically and there is no guarantee that the Greek economy will recover. Greece's creditors will also face significant losses.
2. The underlying causes of the Greek economic crisis
Firstly , the underlying cause stems from the EU's awkwardness of having a common currency (Euro), but not a common fiscal policy. The EU established the ECB but did not eliminate the national banks of its member countries, which means the ECB does not have the same role as the US Federal Reserve, and does not have sanctions. Meanwhile, the national central banks of the Eurozone members still have the decisive say in their countries' fiscal and monetary policies.
Second , when the Greek budget deficit continuously touched and exceeded the "limit" of 2% GDP set by the ECB, creditors or investors did not take drastic measures to handle it. Continuing the mistakes, through bailout packages with larger amounts accompanied by "belt-tightening" solutions, privatizing state-owned enterprises, raising the base interest rate and floating the exchange rate while increasing taxes to increase revenue. Meanwhile, the Greek economy depends heavily on imports. The country's top three imports are crude oil, gasoline and pharmaceuticals while its main exports are fish and cotton. It will be very difficult for Greece to increase export output, because the European Union has very strict quotas to prevent overfishing. Meanwhile, demand for cotton is decreasing. Therefore, it will be very difficult for Greece to overcome economic difficulties if it only applies the policies that creditors have proposed for Greece.
Third , it can be said that the Greek crisis is due to a systemic error, but it cannot be blamed entirely on circumstances, because Greece itself does not have a suitable policy mechanism to regulate its own economy and does not effectively use bailout packages. A typical example is that from 2001-2008, Greece always fell into a state of budget deficit but wasted money on organizing the 2004 Olympics, leading to more debt. In addition, this government borrowed heavily from outside, becoming a chronic debtor. Greece's over-reliance on foreign funding has made its economy vulnerable to changes in investor confidence.
3. Lessons learned for Vietnam
3.1. Should not be too dependent on foreign loans
The Greek crisis continues to be a warning bell for the public debt issue, which is a threat to the sustainable development of many countries in the world, including Vietnam . The Economist's global public debt clock shows that as of July 1, 2015, Vietnam's public debt was at 90.4 billion USD, accounting for 46.4% of GDP, up 10% compared to the same period last year. This figure is still within the safe range according to international standards of 65% of GDP. If looking at the statistics, the risk of Vietnam falling into a public debt crisis is not high, but there are still many potential risks regarding budget deficit and debt payment ability in the medium and long term.
3.2. Closely manage loans and have a reasonable spending plan
It is undeniable that in order to have capital to carry out industrialization and modernization, borrowing from abroad is necessary. Many countries with remarkable economic development such as Singapore, South Korea and China have to borrow from abroad. However, Vietnam needs to pay attention to using loans to invest in the most essential infrastructure to serve economic development and poverty reduction. Loans must be strictly managed and used effectively, not using these future debts to pursue mega-projects while the essential technical infrastructure in the country is still inadequate. The opportunity to easily access cheap credit since joining the Eurozone has caused the Greek government to overspend and forget about future debt obligations.
3.3. Reviewing the calculation of public debt
According to the Law on Public Debt Management of Vietnam, public debt includes: government debt, government-guaranteed debt and local government debt. The country's foreign debt is the sum of the government's foreign debt, government-guaranteed debt, debt of enterprises and other organizations borrowed by self-borrowing and self-repaying method according to the provisions of Vietnamese law. However, while the public debt calculation of most developed countries including the US, Canada, Australia, and Japan has calculated debt according to the standards of the United Nations, that is, in public debt there is also a pension part (every time a civil servant receives a salary, they must pay a part into the pension fund, and the other part is paid by the government), but in some developing countries, including Vietnam, the pension part - which is the state's debt to civil servants, has not been counted in public debt.
3.4. Creating confidence for foreign investors
In the context of Vietnam's current integration, facing the great demand for foreign investment capital, as well as the pressure from the balance of payments deficit, transparency is one of the important factors that Vietnam needs to build to strengthen the country's image in the eyes of investors. Currently, public debt in Vietnam is managed by the Ministry of Finance and is responsible for public announcement on the Ministry's information page. However, if you follow the Ministry of Finance's website, so far, this information has only stopped at foreign debt, not all public debt. The statistics given are sometimes confusing between public debt and government debt. Vietnam's current financial statistics still only focus on state debt, so it is difficult to show the whole picture of public finance because the state-owned enterprise sector is very large and the state is still responsible for debt to this sector.
References
1. http://vietnamnet.vn/vn/tuanvietnam/248109/-bong-ma--hy-lap-van-chua-hien-du-hinh-hai.html
2. http://m.gafin.vn/the-gioi/vong-xoay-no-cong-hy-lap-3274746/
3. http://cafef.vn/tai-chinh-quoc-te/hon-loan-khi-hi-lap-mo-lai-cac-ngan-hang-2015070214422868.chn
4. http://cafef.vn/tai-chinh-quoc-te/9-dieu-can-biet-ve-vu-vo-no-cua-hy-lap-20150701174632587.chn
5. http://vietstock.vn/2015/06/kich-ban-vo-no-hy-lap-nhin-tu-tam-guong-argentina-772-426383.htm
6. http://www.bbc.com/vietnamese/world/2015/06/150623_greece_debt_crisis_why_care
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