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Monday, September 3, 2012

Is Greece on the Verge of Bankruptcy?

Greece may not be able to keep an almost sure bankruptcy at bay for too long. The signs are clear. It has defaulted on its bailout package terms, again and again, and now, it is planning to ask for another extension up to 2016 – a request most likely to go unheard.

A lot of genuine tax payer money, precisely EUR 240 billion has already gone towards preventing bankruptcy in Greece. However, the richer players in the Euro zone, like France and Germany, are not inclined for any more support. Upon, any talks on the third bailout scheme, the leaders are expected to face stiff opposition in their home countries. For Greece, the conditions have deteriorated since the final announcement of second bailout package of EUR 130 billion in February this year. Against the previously estimated economic contraction of 4.5% for 2012, the rates were -6.5% in Quarter 1 and -6.2% in Quarter 2. The economy continues to slip and is expected to shrink even further in 2013.

Country’s policy makers and the Troika (tripartite committee formed by EU, ECB, and IMF) have largely ignored socio-economic impact of the current situation and counter measures on the common people. Common public is feeling victimized and alienated. Corruption and tax evasion has increased over the pre-recession level. As a result, the tax receipts have fallen and the austerity measure have fallen flat. During the first six months of 2012, corporate tax receipts fell by ~24% y-o-y, while individual tax collections improved only marginally. Overall Government fell by 5%. Another significant contributory factor is people’s inability to pay taxes amidst an unemployment rate of 23%.

In one way, the impending bankruptcy in Greece is inevitable. The lending nations might prefer to postpone it as they have a lot to lose. However if the bankruptcy is pushed further, it may cause a massive meltdown across the Euro zone and can seriously undermine the future efforts of Greece to rebuild itself. Currently, the Government is issuing the sticky sovereign bonds to its banks, which, in turn, are using them as collateral for borrowing from the country’s Central Bank! The longer this policy continues, the greater the Greek financial faces the risks of a domino effect and complete collapse. On the other hand, the ECB has already swapped its EUR 50 billion holding of Greek bonds for identical bonds that will be immune to bankruptcy and default, effectively subordinating the stakes of all other holders.

It remains to be seen how long Greece desperately tries to play out before accepting the obvious and allow its economy to start a new chapter.

Additional Reads:


The wider impact of Grexit
Will Euro survive the European crisis

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