The European economies were very happy after getting the bailout of around one trillion dollars. It was enough to buy up the debts and save the economy from the verge of death. The world stock markets were happy and were celebrating Christmas due to the revival package poured in to the cup of Greece and other European debt burden economies.
But I am sorry to declare that Greece followed with other debt burden economies of Europe will have to again count for restructuring of its Debts. Currently the debts of Greece alone stands at 115.1% of the country’s gross domestic product The bailout will further spook up the debts to 150% of GDP by 2012. That might frighten up any economy which plans reap the benefits of investing in low growth economic growth of Europe with future gold mine eyesight.
Moreover Greece will need to renegotiate the bond holders who are on the verge of getting materialized. Either Greece will go for lengthen the time frame of restructure will ask them to settle for less amount. So another trance of crash is expected in the bottom-line for correction of bond market once any of the two happens with a severe blow up if the loss acceptance takes place by the bond holders.
If we look historical numbers of bond defaults keeping the recession of 2008 out of books then we get that in late 2001 Argentina defaulted on $82 billion of debt and investors recovered just 30% of their money. In another case Russia’s debt fault in 1998 and later on default recovered about 50%.I don’t need to dig further as its well clear that the chances of recovery remains very fragile and low intended.
Another wheel to add up to the Greece debt restructuring is the flow of funds which will be required to pay for the daily operations of government, like salaries for government workers. Don’t mingle up that the funds of bailout will use to settle the debts and not to pay salaries and Greece domestic benefits. In fact, in 2009, the country was already €20 billion in deficit before it went out for interest payments. The country’s interest payments are growing each day.. In 2012, Greece will be paying out €17.1 billion, up from €11.9 billion last year. In 2014, when Greece’s debt is projected to peak at €353.8 billion, it will pay €20.4 billion to creditors.
The numbers might make you puzzle but one needs to make a cautious outlook on the economic prospects which reflects that Greece and other European nations have less avenues to generate revenue and pay of the debts much faster as it was thought. The IMF projects Greece will need to borrow €70.7 billion and will have €265 billion in debt to the private sector—about where it was in 2009.
Greece is now planning to privatize the state assets so as to reduce the debt mountain. Something likes disinvestment policy of India. The country is also filled up with problems of malpractices and its seems that they are on the top of the cliff. This have now forced the finance ministry to start a broad investigation of tax and customs officials, after receiving a string of complaints over alleged bribery, forgery and smuggling. The ministry said it had even located 234 tax workers who failed to file income tax declarations in 2007 and 2008.
In another case the Italian government approved a €24 billion austerity budget of public sector spending cuts and limited tax hikes intended to reduce Italy’s budget deficit to below 3 per cent of GDP as opposed to 5.3%in 2009.Other proposals taken up by the governments includes
- a freeze in civil service salaries;
- deferment of pensions;
- a rationalization in health care spending;
- cuts for high-paid public service managers, for ministers and for parliamentarians;
- a crackdown on income tax evasion.
Every economy of Europe is now taking active measures to avoid the sleepless nights like Greece.
To cut short Greece have no other way rather than going for restructuring its debts. We will have to wait for the next round of nightmares coming any time soon.
Indranil Sen Gupta
Financial, Economic Writer and Research Analyst.
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