Historic Greek Debt Relief Deal and the Lessons for Other Nations from this Crisis

Historic Debt Deal

The Greek Debt Crisis is over, so proclaimed Finance Ministers from the Eurozone Countries who gathered in Brussels, on June 21st in talks that went into the early hours of the day. By saying so, they paved the way for Greece to emerge from a nearly decade long bailout process wherein it had to depend on successive tranches of creditor money to stay afloat.

The long drawn Greek Debt Crisis with all its highs and lows and shenanigans was likened to an ancient Greek Drama that could end in both tragedy and tragicomedy. Thus, it was a relief for international investors to witness what was described as a “historic” deal that would end the misery of Greeks and make the country competitive again.

Background to the Greek Crisis

So, what exactly is the Greek Debt Crisis and what contributed to it and what are the lessons other nations and emerging economies, in particular, can learn from it. To start with, the root cause of the Greek Sovereign Debt crisis was its propensity to fudge its numbers and claim to be in a fiscally healthy situation to gain entry into the Eurozone.

This happened in 2001 when the Eurozone expanded in an aggressive manner and Greece, realizing that it had a good chance to belong to a Single Currency Zone wherein it can reap the benefits of belonging to an exclusive club of nations bound together by history and plain necessity.

Like some entrants into such clubs who misled the existing members about their actual financial and personal status, Greece too was alleged to have cooked its books and made its finances rosier than they actually were.

Context to the Greek Drama

Once after gaining entry into the Eurozone, Greece continued with its fiscal profligacy and irresponsibility in managing its finances. Moreover, its extravagant spending was not matched by equal or at least decent tax collections due to the fact that a majority of its population simply did not and continues not to pay taxes.

Thus, the end result was a ballooning credit crisis and that too one where both the government, its banks, and the private sector firms were all engulfed in leading to its near collapse as an economic entity once the Global Financial Crisis of 2008 morphed into the Sovereign Debt Crisis of 2009.

This began a never ending saga of bailouts and handouts that stretched the patience of everyone thin and which included “near death” scenarios such as Greece walking out of the Eurozone and leading to the collapse of the Single Currency Zone.

Way Ahead for Greece

Now with some amount of breathing space after its creditors agreed to defer their loans, including interest and the principal for another 10 years on the strict condition that further Debt Relief would be extended only if Greece maintains its promises of fiscal responsibility, it is time now to ask what next for the country and its people and are some of the promises made by them feasible.

Moreover, another pertinent question here is what are the lessons from this Greek Drama for other nations and emerging economies in particular including India, which is now in the midst of an economic boom.

Indeed, the whole Greek Affair has implications for the way in which economies are run and the way in which international financial institutions and investors behave when confronted with grave and existential financial crises.

Lessons for Other Countries

For one, the most important lesson for any nation is that living beyond one’s means often leads to a day of reckoning which if improperly managed can result in disaster.

Indeed, while all of us know that we can only spend that much without saving and living an extravagant life without adequate backups in place, we are also sometimes guilty of cognitive dissonance where we believe in a rosy future that can alleviate our debts when they come due.

In other words, while we do feel guilty when we max our credit card bills, we are also prone to blinkered thinking that when the time comes to pay the bills, something would turn up that can rescue us.

Similarly, any nation that continues to be fiscally irresponsible has to realize that the Day of Reckoning cannot be postponed indefinitely and creditors would sooner or later come knocking on the door for their unpaid debts.

What This Means for India

India too has been in a similar situation before wherein in 1991, it came close to defaulting on its loans and had to be bailed out by the IMF (International Monetary Fund).

While much water has flown under the Ganges after that and the Indian Economy is now on a firm footing, the fact remains that fiscal management should be the first priority of any government.

Indeed, at the moment, there is a lively if not confrontational debate going on in the Capitals of the states and the Country about the populism versus fiscal rectitude which is especially relevant in an election year when the tendency to loosen the strings is high.

Thus, it is our view that learning from the Greek experience, India must balance these aspects along with more emphasis on making its citizenry pay taxes and be engaged in productive occupations.

Concluding Thoughts

Lastly, all this is easier said than done and as the Greece continues to reform, there would be stumbling blocks as well as treacherous bumps and it remains to be seen how long its euphoria over its Historic Debt Deal lasts.

To conclude, Greece is turning the corner and its destiny lies entirely in its hands and it is up to it to remain committed to reforms and not lapse into its earlier behavior.