The Economy of Greece - Essay Example

Economy of Greece Table of Contents Introduction 3 The Soundness and Sustainability of Financial Market 3 2.Efficiency of the Financial s 7 3.Determination and Competitiveness of the Interest Rate Policy of Greece 9 4.The Effect of The Financial Crisis On Greece and Its Financial Market 12 5.The Role of Central Bank 12 6.Effectiveness of Monetary Policy of Greece with Examples 14 7.Suggestions 15 Conclusion 16 References 17 Introduction Financial viability of any nation generally depends on its economic growth, which is again subjected to the monetary and fiscal policy implementations by the government. It is thus that due to the persistence imbalances in micro and macro structures of the country, the financial markets of a particular country tend to be strongly influenced. For instance, in the year 2009, Greece faced massive financial crisis, and in subsequence, the soundness as well as the sustainability of its financial market underwent a critical situation. Owing to the financial gap that occurred during the period, Greece had to witness a much sluggish economic growth, burdened with increased unemployment and worsening debt scenario (Levy Economics Institute of Bard College, 2014). Emphasizing this particular notion, the essay intends to elaborate and analyze the soundness as well as the sustainability of financial markets of Greece and the efficiency of its financial institutions with regard to interest rate policies, lending and borrowing that helped the economy regain its pace of growth. 1. The Soundness and Sustainability of Financial Market It is worth mentioning that transformation of national GDP rates mainly occur due to the variations observed in import as well as export ratings and change in other buisness policies. Similarly, prior to the year 2008, the weak economic condtions of Greece imposed strong negative impacts on the overall performance in the fiancial markets that were pertinent within the nation for several years. It will be vital to mention in this regard that the prime intent of designing effective economic policies is to achieve sustainable growth with respect to the performances of the nation’s financial markets. Irrespective of these qualities, sustsinability in the financial market of the country was affected much strongly due to limitations in its transparency when documenting financial disclosures. To be noted in this context, to gain the membership of Eurozone, Greece government was accused to have falsified its total deficit figures in the year 2000. This eventually imposed negative impacts on the soundness along with the sustainability of its financial markets during reccession, as members states seemed reluctant and rather offended to the issue. Moreover, the situation also made Greece government to roll over debt in 2009, which certainly produced a contagion to other eurozone economies, such as Portugal, Spain and Italy (Levy Economics Institute of Bard College, 2014). The below diagrammatical representation depicts Eurozone’s real GDP per capita rate of diifferent cities. Source: (European Union Committee, 2011) From the above graphical illustration, the real per capita GDP rate of Greece moved declined massively, as compared to other selected countries in Euro area during the recession period. As per the report, before 2008, Greece derived significant benefits from Euro areas. In 2000 as well, the per capita income rate of Greece moved to around 67 percent. To maintain this per capita income rate, Greece developed a massive budget deficit during 2009 and subsequently, its financial markets began engaging with varied investment procedures and accept the proposal of similar financial matters (European Union Committee, 2011). The change in fiscal policies has certainly produced an unnatural deficit amid the financial markets of Greece and other EU countries. To reduce this gap between GDP rates and improvise the conditions of the financial markets, a currency changeover approach was arranged by the Greek government. Due to fiscal deficit, varied problems were faced by the EU member countries, which were identified in the forms of corruption, unemployment, tax avoidance and bureaucracy amid inefficient public sector among others. These factors eventually contributed in deteriorating the performance of its financial markets during the mentioned period (LEITAO, 2010). The below diagram herewith depicts the Real Effective Rate of Interest (REER) of the Euro area in total and Germany, to be compared with the performance of Greece. As observable, the rate seems to be highly fluctuating, which analysts depicted as the result of fiscal deficit, which imposed considerable impacts on Greece’s financial market. Source: (LEITAO, 2010) Drawing reference from analysts’ debate, the financial markets of Greece faced lower economic growth rate, which made it much challenging for the investors and for the needy parties to raise money when conducting future performances. It is worth mentioning that in order to encourage the soundness as well as the sustainability of financial markets operating in Greece, governments and civil societies have been apparently observed to implement certain effective strategies (LEITAO, 2010). These functions can be traced as providing sustainability to the financial institutes operating in Greece and delivering sound economic help to the nation with the aim of raising money despite of the prevailing adverse financial conditions. Apart from the above-discussed facts, the banks of Greece continued to monitor liquidity in banking sector to avoid false GDP deficit rates. Its banking sector correspondingly adopted new bank resolutions to follow a more transparent and reliable legal framework when presenting the GDP rates. During the same period, the Greek Ministry of Finance announced the establishment of an interim credit institution to remove funding gaps considering the fact that due to the persistence of maximum fiscal deficits and funding gaps, different financial institutes or markets of Greece faced massive financial loss (LEITAO, 2010). By studying the soundness and the sustainability of the financial markets of Greece, it can be apparently noted that its domestic banks will need to pursue consolidation strategies for coping up with financial crisis. Due to the prevalence of this crisis, most of the banks and other financial markets of Greece underwent difficult phases and thus, faced problems that eventually hampered their financial viability by a considerable extent. To address the above stated adverse situation, the EU government and the international organization, International Monetary Fund (IMF) agreed providing loans to Greece for minimizing its funding gaps, which might aid the financial markets of Greece to ensure their respective sustainability as well as soundness during the period of worldwide financial crisis. In order to raise money and secure funding, the financial markets of Greece have been noted to adopt and follow effective monitoring policies (Gatzonas & Papaioannou, 1997). 2. Efficiency of the Financial Institutions Greece, being one of the developed nations in this modern world, possesses numerous financial institutions that encompass commercial banks, insurance companies, investment banks and mutual funds. The major commercial banks of Greece are identified to be Alpha Bank, Attica Bank, New TT Hellenic Postbank, Piraeus Bank and National Bank of Greece. Forming the base of Greek financial market, insurance companies and investment banks have been playing an important role in developing the financial conditions of the country. Notably, Agrotiki Asfalistiki, Aspis Pronoia, Europaiki Pisti and Phoenix Metrolife are a few insurance companies operating in Greece. Notably, Investment Bank of Greece provides brokerage and investment banking services. Apart from these, this financial institution also offers foreign stock markets access, financial analysis and consulting services (Gatzonas & Papaioannou, 1997). During the financial crisis, approximately 100 million funds were shown as bonuses. To overcome budget deficit, Greece felt the necessity of borrowing funds from other countries (Gatzonas & Papaioannou, 1997). In order to acquire a brief idea about the size of the financial institutions of Greece in terms of assets, it can be ascertained that the banking sector of the nation is mainly featured by high concentration of market shares in terms of assets. This can be justified with reference to the fact that the six leading companies of the nation, namely Agricultural Bank of Greece, Alpha Bank, Emporiki Bank, National Bank of Greece, Piraeus Bank and Eurobank-Ergasias, hold in excess of 70% of market shares in terms of total assets during the period of worldwide financial crisis (Georgantopoulos & Tsamis, 2013). It is worth mentioning that different financial institutions throughout the globe have provided active economic support to Greece for addressing as well as mitigating the adverse conditions faced by the nation due to financial crisis. Illustratively, one of the financial institutions of Germany, namely Commerzbank, provided 2.9 billion Euros to Greece for coping up with the aforementioned adverse situation. Besides, Generali Group from Italy was also observed to provide 3 billion Euros to the nation. While determining the efficiency of financial institutions in Greece, Federal Saving and Loan Insurance Corporation (FSLIC) acted as one of the efficient financial institutions, but had to merge with Federal Deposit Insurance Corporation Fund (FDIC) to ensure adequate assistance to the country. Notably, the FDIC took control of such financial intuitions of Greece that were affected due to financial crisis and hence, formed a centralized financial framework, following which, FDIC sold the assets of those banks that went bankrupt during recession time to cover losses (Monogios, 2011). On the other hand, to reduce funding gaps from the EU countries and improve the conditions of the financial institutions, different kind of policies were formulated and executed by the European Council and Parliament. One of those policies included the Six-Pack policy. The Six-Pack policy is also acknowledged as Stability and Growth Pact (SGP), which focused on monitoring the financial institutions with the agreed targets for minimizing budget deficits. Correspondingly, the nation’s focus shifted from correction to prevention that would reward long-term sustainability and correct unstable policies before the emergence of any sort of critical problem in economics field. On the other hand, this policy also identified the causes of determined economic discrepancies prevailed within the financial institutions of Greece. It is worth mentioning that the previously mentioned policy endeavors to improve competitiveness within all the financial institutions of the nation with fare calculation and increasing GDP rates (Monogios, 2011). 3. Determination and Competitiveness of the Interest Rate Policy of Greece The economic growth of Greece is identified to be fluctuating from the post war period. Since 19th century, Greece’s economic conditions deteriorated deeply. To overcome this crisis situation and become a member of Eurozone, Greece falsified GDP rate calculations. This can be duly considered as one of the factors, which contributed in changing the interest rate policies of Greece time-to-time. The overall pattern of interest rates of Greece can be mainly determined based on the situations revealed with the outbreak of the financial crisis. The Euro and non-Euro members, like Belgium, Denmark, Germany, France, Austria, Poland, Finland, Sweden and United Kingdom, were identified to attain highest revenues due to change in interest rates during the year 2008 (Harker & Zenios, 2000). At the end of the year 2013, Greek experienced a massive fall in its financial performance. The falsified deficit rate has stagnated overall growth of the EU countries. The Greek economy also suffered from lack of competitiveness in the Eurozone. On the other hand, rising production and higher labor costs produced a non-competitive situation for the EU countries, including Greece (Pasiouras, 2012). Due to this particular reason, the employment rate in Greece diminished as compared to the previous years. On the other side, the rate of foreign direct investment dramatically increased in these countries. Better incorporation of world market tax associated with export orientation, certainly enabled Greece to facilitate liberal attitudes in imports (IndexMundi, n.d.). Due to high unemployment rates, the competitiveness of the interest rate policies with respect to Foreign Direct Investment (FDI) was largely affected in Greece. However, as per the financial reports, in the year 2011, Greece’s FDI net outflow was recorded as 0.63 per cent, while in the year 2010, it was 0.58 per cent. Nevertheless, with the help of increased interest rate, Greece’s FDI net outflow has increased in recent years. To be mentioned in this context, the latest value for FDI in Greece was $725, 543, 600, 00 euro in 2011 (IndexMundi, n.d.). The below graphical illustration herewith depicts FDI inflow in Greece for the period of 2004-2012. Source: (IndexMundi, n.d.). Notably, the financial institutes of Greece have applied various techniques for enhancing capital inflow within the country during recession. For instance, higher interest rates have helped EU countries to improve foreign direct investment growth in recent times. To increase foreign direct investment, Greek government might implement ODCE model, which would eventually aid in devising effective and better import along with export policies (European Union Committee, 2011). The fluctuation in interest rates has certainly imposed positive as well as negative impacts on borrowing and lending in Greece. In terms of positive impacts, it can be inferred that the fluctuation in the interest rates has certainly revealed valuable information regarding cost of price of borrowing or gain from lending. Conversely, the variation in the interest rates certainly imposed negative impact on borrowing as well as lending aspect in the form of augmenting funding gaps. It is worth mentioning that long-term interest rates have improved lending and borrowing rates of investments in Greece. With the help of long-term and short-term interest rates, the competitiveness of the interest rate policies in Greece with respect to borrowing and lending has certainly improved by a considerable extent. For instance, during the financial crisis, Greek government has borrowed money from Germany, France and Italy among others. On the other hand, Greek government also lends money to its various financial institutes. It was because of high interest rates that Greece has been able to raise huge figure of capital for developing its economy in a better manner (European Union Committee, 2011). 4. The Effect of The Financial Crisis On Greece and Its Financial Market The occurrence of the financial crisis had imposed crucial impact on the economic conditions of the nations and their respective financial markets by a considerable extent, which can be clearly understood from the above discussion. Similarly, various Eurozone countries were also witnessing massive redundancies and complexities due to the worldwide financial crisis, amongst which, Greece was also recorded to be one. The effects of this crisis witnessed by Greece indicated a huge figure of public debt and massive budget deficits prima facie. The effects of the crisis was so strong that it also triggered historical change in the financial structure of the nation, in terms of raising interest rates, augmenting the amount of borrowings as well as lending and most crucially, lessening the abilities of debt repayment (Nelson & et. al., 2011). 5. The Role of Central Bank In light of the financial crisis, the role played by the Central Bank in Greece is quite noteworthy. Identifiably, the Central Bank announced about providing major financial aid packages to this nation in order to respond such adverse situation (Nelson & et. al., 2011). In the year 2009, despite fall in economic conditions, Hungary and Romania remained highest amid the EU nations in terms of attaining greater level of revenues by change in interest rates. Specially mentioning, to improve the economic conditions, Greece’s financial institutions have introduced long-term interest rates. During the previous few years, the financial institutes belonging to Greece can be apparently recognized to set interest rates of around 6 to 8 percent. As a member of European Union, Greece’s benchmark interest rate has set by European Central bank. Presently, Greece’s interest rate has reached 4.75 percent. Long-term interest rates certainly became one of the convergence principles for European countries. Moreover, long-term interest rates of Greece can be determined based on central governmental bond revenues (Pasiouras, 2012). Based on the above discussion, the below diagrammatical representation depicts long-term interest rates of Greece. Source: (Pasiouras, 2012) 6. Effectiveness of Monetary Policy of Greece with Examples In the year 2013, a new legislation came into force in EU countries, which was called two-pack legislature. This two-pack legislature holds two major objectives. One of such objectives can be ascertained as enhancing budgetary coordination by introducing common fiscal rates for Euro member states. It is also anticipated that this particular objective will certainly aid the financial institutions of Greece to assess national budgetary plans prior to their adoption of funds. The other objective can be found as developing economic surveillance in Euro area through effective incorporation of technological systems (Halkos & Salamouris, 2004). Notably, from October’2013, two-pack legislature was introduced with the aim of developing fiscal policies of the EU countries. However, due to certain difficulties, this legislature failed to make a mark on the developmental path of EU economic conditions. In the year 2011, Euro areas and eight non-Euro countries also established a treaty based on the aspects of stability, coordination and governance. This treaty aimed at strengthening fiscal disciplines by ensuring strong rules, regarding balanced budget provisions at constitutional level. This new legislature also strengthened budget policies as well as GDP rate calculation. In this similar year, to avoid financial crisis, the EU government established New Supervisory authorities. These authorities included “European Banking Authority”, “European Insurance and Occupational pension authority”, “European Securities and markets Authority” and “European systemic Risk Board for macro prudential supervision.” Specially mentioning, the common aim of all these authorities laid in ensuring a secured transactional process. Moreover, these authorities also ensured banking sector to conduct safe and reliable transactions and minimize unsecure tax gaps for developing adverse economic conditions. In present scenario, financial transactions became much improved and error free in Greece. These eventually raised the efficiency of the financial institutions belonging to Greece in the form of maintaining security based transactions and taking the initiatives of developing GDP rates among others (Harker & Zenios, 2000). 7. Suggestions Greece is currently regarded as one of the largest economies in the world. As a developed country, Greece attained highest human development index in the year 2012, which framed one of the basic tenets to its sustainable financial market. However, due to recession, the GDP rate of the nation declined from 94% to 75% in 2012, which apparently indicated that focusing only on human development was not enough for the economy to surmise such a challenge. Contextually, Greece is categorized as a high-income economy by several economists and thus, it enjoys substantial inflow of capital within its financial market. The root to its such unique characteristic as compared to other European nations or the developing world at large, can be found in the mid of 19th century, which brought about significant changes in its financial market structure due to industrial revolution. Again, Greece experienced a gradual developmental change in 2006. Since then, Greece has been primarily based on the income gained from varied industries or businesses that entail metal products, chemicals, mining, petroleum, tourism, shipping, textiles and food processing among others (Levy Economics Institute of Bard College, 2014). Suggestively, it can be affirmed that Greece may continue in adopting Euro as its national currency, which will result in strengthening its financial and economic performance. This could be in the form of dropping borrowing along with lending costs and lessening interest rates. Apart from this, it is also suggested that the nation needs to adhere with the regulations laid down by the different monetary policies such as two-pack legislature for strengthening its financial performance. Conclusion From the above analysis and discussion, it can be ascertained that the economic crisis faced by Greece has certainly hampered the financial stability of EU countries by a considerable level. To become a member of Eurozone, Greece has falsified its GDP deficit numbers. Due to this particular reason, Greece as well as other European countries faced massive financial crisis. To overcome from this crisis, Greece borrowed funding from various countries including Italy, France and Germany among others. It is worth mentioning that the prevalence of higher interest rates has certainly make Greece economy more stable than past times. In recent years, due to the persistence of highest interest rates, the FDI of European countries including Greece improved by an extensive level. The prevalence of long and short-term interest growth rates improved the economic conditions of Greece at large. Thus, to improve FDI, the European countries entailing Greece need to remain much focus on developing long-term interest growth rates. Justifiably, long-term interest rates have created a positive impact on the overall financial performance of the financial institutions operating in Greece and other European countries specifically during economic crisis. In conclusion, it can be inferred that to attract FDI and attain higher level of improvement in borrowing as well as lending aspects, the respective government of Greece need to maintain long-term interest growth rates in future. References European Union Committee, 2011. The Future of Economic Governance In The EU: 12th Report Of Session 2010-11, Vol. 2: Evidence. 12th Report of Session 2010-2011. [Online] Available at: http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeucom/124/124ii.pdf [Accessed December 23, 2014]. Gatzonas, E. K. & Papaioannou, M. G., 1997. Financial Innovations Involving the Greek Drachma. International Monetary Fund. [Online] Available at: https://www.imf.org/external/pubs/ft/wp/wp9714.pdf [Accessed December 23, 2014]. Georgantopoulos, A. G. & Tsamis, A. D., 2013. Introduction. Assessing the Efficiency of Commercial Banks in Greece during the Financial Crisis: A Linear Approach in Conjunction with Financial Analysis. [Online] Available at: file:///C:/Users/WIN/Downloads/PUBLISHED%20PAPER!!!!!!!.pdf [Accessed December 23, 2014]. Halkos, G. E. & Salamouris, D. S., 2004. Efficiency Measurement of the Greek Commercial Banks with the Use of Financial Ratios: A Data Envelopment Analysis Approach. Management Accounting Research. 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