Greece: Fiscal Policy and Public Finances

Background:

Greece has historically struggled to comply with the Maastricht Treaty’s criteria for EU membership, which demands that public debt be less than 3% of GDP and with a public debt-to-GDP ratio of less than 60%. During the late 1990s Greek debt exceeded the Maastricht guidelines, but, in order to join the single currency, the then-government claimed that it had reduced public debt to the required level. In January 2010, however, the European Commission published a report slamming the integrity of the Greek government’s statistical data. The report revealed that previous administrations had concealed the actual level of public debt and the deficit figure for 2009 was revised upwards from the 3.7% of GDP figure given the previous April, to over 12%. The commission said that deficits from previous years were also likely to be greater than had been thought. Greece also admits to falsifying data representing its social security surplus in 2001 in order to gain euro membership.

The revelation of the real state of Greece’s public finances served to instill aversion in the markets to Greek government bonds, raising fears of a possible sovereign default by Greece and its secession from the single currency. In early 2010, Greece attempted to persuade the Chinese government to invest in a hefty government bond, but was unsuccessful. By May 2010, the EU and IMF had together agreed to provide Greece with a debt financing package totaling €110 billion, which Greece called upon soon after. The loan package comes on the condition that Greece enact sweeping spending cuts in order to curb the budget deficit from 13.6% of GDP, recorded in 2009, to less than 3% of GDP by 2014.