Greece

Greece achieved independence from the Ottoman Empire in 1829. During the second half of the 19th century and the first half of the 20th century, it gradually added neighboring islands and territories, most with Greek-speaking populations. In World War II, Greece was first invaded by Italy (1940) and subsequently occupied by Germany (1941-44); fighting endured in a protracted civil war between supporters of the king and Communist rebels. Following the latter's defeat in 1949, Greece joined NATO in 1952. In 1967, a group of military officers seized power, establishing a military dictatorship that suspended many political liberties and forced the king to flee the country. In 1974, democratic elections and a referendum created a parliamentary republic and abolished the monarchy. In 1981, Greece joined the EC (now the EU); it became the 12th member of the European Economic and Monetary Union in 2001. In 2010, the prospect of a Greek default on its euro-denominated debt created severe strains within the EMU and raised the question of whether a member country might voluntarily leave the common currency or be removed.

Ancient Greece
In Athens, the constant shortages of grain and a need to import it from overseas caused its price to rise and fall according to supply. An army of grain inspectors, called Sitophylakes, was appointed to set the price of grain. "...to see to it first that the grain was sold in the market at a just price, that the millers sold meal in proportion to the price of barley, that the bakers sold bread in proportion to the price of wheat, that the bread had the weight they had fixed." When this and other legislative measures failed, the state appointed officials called sitonai, corn-buyers, who sought supplies wherever they could find them, raised public subscriptions for the necessary funds, introduced price reductions arid rationing. Despite the often used penalty of death for merchants and bureaucrats alike, the price of grain continued to rise when supplies were short and continued to fall when supply was plentiful.

Solon, on taking office in Athens in 594 BC, instituted a partial debasement of the currency (there is some disagreement on this matter). For the next four centuries the drachma had an almost constant silver content (67 grains of fine silver until Alexander, 65 grains after) and became the standard coin of trade in Greece and in much of Asia and Europe. Even after the Roman conquest of Greece in roughly the 2nd century BC, the drachma continued to be minted and widely used.

The Greek city-states were largely independent, though there was an awareness of Hellenic identity. Each city-state had its own coinage. There was an active trade in these currencies, and probably few laws limiting citizens of a given city-state to the use of their own money. Debasement of the currency either for state profit or for the accommodation of changes in the ratio was rare in Greek history (with the notable exception of Dionysius of Syracuse ). On the contrary, there are cases of actually raising the standard of the coinage for the greater prestige which a coinage of high intrinsic value seemed to offer. In the sixth century B.C., the Euboean unit was increased in a number of cities by about five grains, in emulation of an increase introduced by Pisistratus in Athens.

Banking, bank fraud and even banking crises were very well known. After the revolt against Mithridates, a serious banking crisis in Ephesus followed. The banking industry received here its first express, historically-documented privilege, which established a ten-year deferment on the return of deposits.

Corruption
Greece is notorious for its high corruption. It is one of the most problematic OECD countries.

According to Transparency International, in 2008, more than 13% of Greeks resorted to giving "fakelakia" (or little envelopes), paying an estimated €750 million in bribes to public and private officials, €110 million more than the previous year. The amount equated to an average of 1,450 euros [US $1,850] in bribes per family. The majority of bribes, 60 percent of the total, are "related to doctor's fees, tax evasion and building permits."

The debt crisis has brought up an explosion of what a local English-language newspaper calls "rubber checks". In the first seven months of 2011, there was a 43 per cent increase in the value of bounced cheques to €1.38 billion. A survey of Greek small businesses shows that nearly half the companies that accept cheques are in possession of duds.

Financial crisis
For years, the Greek government has demonstrated rather thriftless spending behavior. This was exacerbated when Greece started to pay lower interest rates on government bonds by virtue of having entered the European Economic and Monetary Union.

Greece's interest rates were subsidized due to an implicit guarantee from the strong members of the eurozone, who were expected to support weaker members in times of trouble. During the first years of the euro, interest rates on Greek bonds were thus reduced; they approached German bond yields. Greece spent wildly but paid interest rates like a much more conservative country. Meanwhile, the Greek economy and voting public adapted to government spending subsidized by low interest rates.

When the global financial crisis broke out, deficits of both strong and weak eurozone countries widened. Stronger countries had their own problems and people started to doubt that they would support the weaker countries in an emergency. Furthermore, the difference between the interest rate that Greece had to pay on its bonds and the rate Germany had to pay increased.

In October 2009, the Greek government deficit for 2008 was revised from 5.0% of GDP (the ratio reported by Greece, and published and validated by Eurostat in April 2009) to 7.7% of GDP. At the same time, the Greek authorities also revised the planned deficit ratio for 2009 from 3.7% of GDP (the figure reported in spring) to 12.5% of GDP, reflecting a number of factors (the impact of the economic crisis, budgetary slippages in an electoral year and accounting decisions). The deficit was later revised to 13.6%, with a possible revision of up to 14%.

By the beginning of 2010, a discussion about the bailout of Greece has begun. However, Greece was already being bailed out by the rest of the union. The European Central Bank (ECB) accepted Greek government bonds as collateral for their lending operations. European banks could buy Greek government bonds (paying a premium in comparison to German bonds of more than 3%) and use these bonds to get a loan from the ECB at 1% interest — a highly profitable deal.

The banks would buy the Greek bonds because they knew that the ECB would accept these bonds as collateral for new loans (which depended on their assessment by rating agencies). As the interest rate paid to the ECB was lower than the interest received from Greece, there was a demand for these Greek bonds. Without the acceptance of Greek bonds by the ECB as collateral for its loans, Greece would have to pay much higher interest rates. Greece was, therefore, already being bailed out. The other countries of the eurozone would pay the bill. New euros were, effectively, created by the ECB accepting Greek government bonds as collateral. Greek debts were monetized, and the Greek government would spend the money it received from the bonds to secure support among its population.

Prices started to rise in Greece, and the money would flow to other countries, bidding up prices throughout the eurozone. Abroad, people would see their buying costs rising faster than their incomes - a redistribution in favor of Greece. The Greek government was being bailed out by a constant transfer of purchasing power from the rest of Europe.

In the Eurosystem, each government has an incentive to accumulate higher deficits than the rest of the eurozone, because its costs can be externalized. Consequently, there is an inbuilt tendency toward continual losses in purchasing power. This overexploitation may finally result in the collapse of the euro.

To avoid this, the European Monetary Union is regulated with the Stability and Growth Pact, and it requires that each country's annual budget deficit is below 3% and its gross public debt not higher than 60% of its GDP. Sanctions were defined to enforce these rules.

Yet the sanctions have never been enacted and the pact is generally ignored. For 2010, all but one member state is expected to have a budget deficit higher than 3%; the general European debt ratio is 88%. Germany, the main country that urged these requirements, was among the first to refuse to fulfill them.

European Central Bank President Jean-Claude Trichet pledged in January, 2010, that it would not loosen lending requirements "for the sake of any particular country." However, credit-rating downgrades threatened to render Greek government bonds ineligible as collateral and exacerbate the crisis.

Already in March 2010, ECB lowered its threshold for accepting debt as collateral. At the end of April, 2010, Standard & Poor’s cut Greece’s sovereign rating to junk status, below the minimum BBB- required by the ECB from at least one major rating company.

On May 3rd 2010, the European Central Bank has suspended the minimum credit rating threshold in the requirements for the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Greek government. That was a day after euro-zone countries and the International Monetary Fund agreed to extend an unprecedented €110 billion ($147 billion) rescue package to the debt-laden country.

As of March, 2011, a debt default by Greece was considered a possibility according to Standard & Poor’s. This would have negative effect on banks across Europe and European Central Bank. The Frankfurt-based institution would be forced to write down a significant portion of its claims as irrecoverable. In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, the total estimated to be worth at least €40 billion ($58 billion) as of May 2011.

Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out. Should the country become insolvent, euro-zone countries would have to renounce a portion of their claims.

By January, 2012, Greece's government warned that the debt-crippled country will have to ditch the euro if it fails to finalize the details of its second, €130 billion ($169 billion) international bailout and that more austerity measures may need to be implemented. After the government failed in elections in May, 2012, Greece's exit from eurozone was considered even by EU officials.

Economical characteristics

 * Currency: Euro (ISO code: EUR)
 * Central bank discount rate: 3% (31 December 2008)
 * Commercial banks lending rate: 8.65% (31 December 2008)
 * is part of the Eurozone

Notable events:

 * Banking crisis: 1931, 1991-1995
 * Hyperinflation: 1941-1944
 * Years in inflation: 12.7 % (share of years 1829-2009 with annual inflation above 20 per cent per annum)
 * Public default: 1826-1842, 1843-1859, 1860-1878, 1894-1897, 1932-1964 (external), 1932-1951 (domestic)

Links

 * Greece on Wikipedia
 * Central bank of Greece
 * BBC country profile
 * Europe's Web of Debt by Bill Marsh, May 2010
 * Economic Thought in Ancient Greece by Jesus Huerta de Soto, September 2010
 * Greece defies Europe as EMU crisis turns deadly serious by Ambrose Evans-Pritchard, December 2009
 * STEYN: Our own Greek tragedy by Mark Steyn, February 2010, comparing the economic situation in the US and Greece
 * In Greece’s Crisis, Fed Studies Wall St.’s Activities by Nelson D. Schwartz and Sewell Chan, February 2010
 * Can Corruption Adversely Affect Public Finances in Industrialized Countries? by Daniel Kaufmann, April 2010
 * Panicky Greeks Paying Over $1,700 Per Ounce For Physical Gold by Patrick A. Heller, May 2010
 * I predict a riot by Anita Acavalos, May 2010
 * Greece starts putting island land up for sale to save economy by Elena Moya, June 2010
 * Beware of Greeks Bearing Bonds by Michael Lewis, October 2010
 * Greece denies seeking repayment extension by Nicholas Paphitis, January 2011
 * "I Won't Pay" movement grips debt-ridden Greece by Elena Becatoros, February 2011
 * Greek CDS Deals Come Under Scrutiny by Mark Brown, May 2011
 * Struggling to Stoke Economic Growth in Greece by Liz Alderman, June 2011
 * Privatizing Greece, Slowly but Not Surely by Liz Alderman, November 2012
 * Greece not doing enough against rich tax dodgers, say EU/IMF, The Star Online, December 2012
 * Greeks fight back against corruption by Andrew Bomford, January 2013
 * Greece’s Aggressive Pursuit of Tax Evaders Appears to Collect More Anger Than Money by Suzanne Daley, October 2013