Greece – an economic disaster – lessons for Ireland.

In Greece – Public debt is 113% of GDP and is €298 billion. It is likely to reach 138% by 2012 (Standard and Poor). Brussels lists Greek public debt as 99% of GDP in 2008 rising to 135% of GDP by 2011 unless there are drastic cuts.

The budget deficit is >12%. This was claimed to be 3+ % in March and would be 4% GDP in 2010 by last government. In October, the election of PASOK and George Papandreou lead to the revelation that the deficit will be 12.7% in 2009 and 12.2% in 2010.

The current account deficit was 14.5% of GDP in 2008. Greece ran budget deficits of 4.6% at the top of the boom.

Greece spends 5% of GDP on the military – in September, Athens has defaulted on a four submarine deal with ThyssenKrupp for €520 millions and cancelled a tender for aircraft worth €250 million.

The government has tried to introduce a pay freeze in the public sector for those on more than €2,000 per month. They also announced that a crackdown on tax avoidance would stabilise the budget deficit at 9.1% next year. – Disbelief is the international reaction. Teachers have taken strike action in protest. Tourism in 2009 is down 20% by revenue. Greek labour costs have risen 40% since 2001 compared to German rates remaining almost constant.

Public sector employment increased by 50,000 mainly low skilled employees between the years 2004 and 2009. Public sector wages are scheduled to rise 5-7% in 2010. The government wants to reduce the number of state pension funds from 13 to three and increase the pension age for women to 65 as for men. A pay freeze or cut will be necessary but the government has not faced up to this yet. The new Greek government has promised to cut the deficit by 4% in 2010 and to cut to 3% of GDP by 2013. Spending will be cut by hiring only one replacement civil servant for every five who retire; a third of short term contracts in public sector abolished; tourism offices abroad cut; military expenditure cut; and supplies to state hospitals and state services monitored for value for money.

Greece’s credit rating by Fitch rating agency was downgraded in December to BBB+ with negative outlook and their bond (IOUs) interest rate jumped to 5.75% which contrasts with the German rate of 3.21%. That is a huge extra interest debt burden.

Recently the ECB has lent Greek banks €40 billion at 1% by purchasing state bonds. But the ECB is tightening up on this now. Greece only accounts for 3% of eurozone GDP. If the Greek government cannot control their deficit, it is obvious that the International Monetary Fund (or its agent the ECB) will and that may be the best mechanism into the future because PASOK were elected on opposite policies only in October 09.

Leaving the Eurozone for Athens would cause the cost of foreign debt servicing to escalate into bankruptcy and the IMF would feature anyway with huge cuts in public expenditure and massive social turmoil. In the end there may have to be a strings attached handout from Brussels via the ECB to save their democracy. Remember the Colonels in the Military Dictatorship!

Check Financial Times for more details.