The Greek Crisis: Tragedy or Opportunity

9-711-088 REV: SEPTEMBER 16, 2011 DANTE ROSCINI JONATHAN SCHLEFER KONSTANTINOS DIMITRIOU The Greek Crisis: Trag k gedy or Oppor rtunity? - The Greek Crisis: Tragedy or Opportunity introduction?? ? By November 2010, Georg Papaconst y ge tantinou, the Greek fina e ance minister was pract r, tically oblivi ious to the daily chants of protesters in Constituti d o ion Square outside his of ffice. He pon ndered wheth the polici his gover her ies rnment had adopted over the past yea would allo it to avoi the a r ar ow id restru ucturing of it public deb ts bt—in effect, partial defau ult—that man saw as li ny ikely, even if only f severa years ahead al d.

Du uring his Oc ctober 2009 electoral cam e mpaign, Geor rge Papandre eou, leader o the Panhe of ellenic Social list Movemen (PASOK), had promised to stren nt , ngthen social protection. But the pre evious gover rnment’s estim mates of the 2009 deficit— —rising from 3. 7% of GDP to 6. 7% of G P GDP—had proven wildly optimistic. 1 Almost as so as PASO took office and Papaco y oon OK e, onstantinou w named finance was minis ster, he had co oncluded that the deficit would be twice as high: 12. 7 of GDP. 2 A by Nove t w e 7% ember And 2010, the deficit for 2009 was de r etermined to have reached 15. % of GD 3 h DP. As the deficit numbers wors s n sened, nervou financial m us markets had k kept demand ding higher in nterest rates on governm ment debt. At one point, interest rates reached alm i s most 19%. In the end, on an n nly emerg gency loan from the Europ pean Union (EU) and the International Monetary F ( l Fund (IMF) in May n 2010 had allowed Greece to avoid default In return t a t. the governme had enac ent cted a harsh fiscal retren nchment, red ducing salarie and pensi es ions for pub blic employee raising th retirement age, es, he t cuttin services, and increasing taxes.

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Now Papandreou was calling for a drast decrease i the ng a w u g tic in numb of public employees. 4 ber e Ini itial protests had been vio olent but bac ckfired when rioters set fi to a bank in central At ire thens, killing three peopl and shocking the publi Subsequen protests ha been mute as if the mood g le ic. nt ad ed, was more one of resignation th of fury. PASOK surviv the Nove m han ved ember 7, 2010 local electio on 0, ons which Prime Minis Papandre h ster eou, forced to reverse polic o cies, had stak his future. ed Gr reek bond yie elds had fallen since the EU and IMF lo n U oans, but by l late October y yields on two o-year bonds still stood at 8. 7%. Such steep intere rates wou not cause immediate t s a h est uld trouble for G Greece, since EU and IMF loans would meet its need for the nex three years But they po ds xt s. ointed to long g-term questi ions. When th EU and IM loan program ended, w he MF would Greece h have its fiscal house in ord or l der, would it ultimately be forced to default or re d y o estructure its d debt? Al lthough Greece represente only 2. % of the GDP of the euro a ed area—the gro oup of 17 cou untries that had adopted the euro as a common cur h t rrency—succe or failure of the govern ess nment’s attem to mpt _______ __________________ _________________ __________________ __________________ _________________ _________________ __________________ _______ Senior Lecturer Dante Ros L scini, Research Asso ociate Jonathan Sch hlefer, and Konstan ntinos Dimitriou (M MBA 2009) prepare this case. HBS c ed cases are develop solely as the ba for class discus ped asis ssion.

Cases are no intended to serv as endorsements sources of prima data, or illustra ot ve s, ary ations of effective or ineffective man e nagement. Copyrig © 2011 Presiden and Fellows of Harvard College. To order copies or request permission to reproduce ma ght nt H T n aterials, call 1-800-5 545-7685, write Ha arvard Business School Publishing, Bo oston, MA 02163, or go to www. hbsp o p. harvard. edu/edu ucators. This publica ation may not be d digitized, photoco opied, or otherwise reproduced, poste or transmitted, without the permis ed, w ssion of Harvard Bu usiness School.

Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? restore fiscal sustainability was loaded with significance for Europe as a whole. 5 Greece had catalyzed a Europe-wide sovereign debt crisis that was testing European unity. Greek History Europe’s Forbear Greece—officially the Hellenic Republic—stood at the tip of the Balkan peninsula in the eastern Mediterranean Sea, a strategic but historically unstable crossroads dividing Europe from the Middle East. See Exhibits 1a and 1b. ) Greece was, of course, the cradle of European civilization. The very name Europe derive from the Greek myth of Europa, said to have been queen of Crete, the cultural center of early Greece. 6 Even under Rome, Greek remained the language of learning. However, for almost two millennia Greece had been separated from Europe proper. When pressed by northern invaders in 324 A. D. , the Roman Emperor Constantine moved his capital to a Greek city, then named Constantinople (now Istanbul), in what is today Turkey.

The eastern Greekspeaking Byzantine Empire never rejoined the western Roman Empire that evolved into Europe. Beginning in the seventh century A. D. , dynamic Islamic nations started encroaching on the Byzantine Empire, and after Constantinople finally fell in 1453, Greece came under Turkish rule. A Greek diaspora escaped to Europe and Russia, while a small merchant elite emerged on the islands. The Greek diaspora, supported by Britain, France, and Russia, initiated a war of independence in 1821 and won at last in 1832. The parliamentary monarchy that emerged was an unstable polity.

Greece defaulted four times on its debt in the nineteenth century, and depreciations of the currency, the drachma, were frequent. 7 Between 1909 and 1940, Greece saw four kings, 10 coups or coup attempts, 38 governments, and 20 prime ministers. 8 After World War I, a Greek military campaign against the collapsing Ottoman Empire was unsuccessful. The nineteenth-century economy was based on agriculture and shipping. In the early twentieth century, protectionism helped create manufacturers of consumer goods, but industry still comprised only 16% of GDP by the onset of World War II. 9

A Prospering Post-World War II Economy Hitler conquered Greece in April 1941 and drained its resources, causing 250,000 deaths from famine. 10 A resistance movement fought the occupation, but opposing factions also fought each other. The largest, the Communist-dominated National Liberation Front, captured extensive rural areas. After the Allies liberated Greece, a government was formed that attempted to include all factions, but the Communist Party broke off and civil war ensued. The government only won in 1949 after both sides had committed brutalities, polarizing Greek society.

The Communist Party was outlawed, and the fiercely anti-leftist security establishment saw itself as loyal to the king rather than the government. In the early post-war era, two political dynasties were founded. Constantine Karamanlis, prime minister from 1955 until 1963, would dominate conservative Greek parties until 1995, serving as prime minister three more times. His nephew Kostas Karamanlis would head a conservative government in the mid-2000s. George Papandreou, who led the initial post-war government, founded a political family that would dominate progressive parties.

His son would be prime minister through the 1980s, and it was his grandson, also named George Papandreou, who became prime minister in 2009. 2 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 The Greek Crisis: Tragedy or Opportunity? 711-088 The governments of the 1950s adopted conservative fiscal and monetary policies. 11 A Currency Committee regulated banks, allocated credit, and constituted a de facto planning agency. 12 Banks were required to hold 18% of their deposits in low-yielding treasury bills, which the government used to finance extensive infrastructure. 3 The Currency Committee directed private loans to financing trade and high-value-add industries such as oil refineries, shipyards, fertilizer plants, and sugar mills. 14 Offering splendid natural beauty and culture, Greece became an important tourist destination, and its shipping capacity grew six-fold from 1949 to 1961. Shippers invested in the economy; for example, Aristotle Onassis transformed a bankrupt state-owned air carrier into Olympic Airways. Receipts from shipping and tourism, along with remittances from Greeks working abroad, earned foreign exchange.

Real per-capita GDP grew rapidly, on average 6. 0% per year from 1950 to 1970. 15 Winning the premiership in 1963, Papandreou formed a left-leaning government, which retained continuity in most economic policies while introducing some income redistribution. But tensions accumulated between left and right, and when Papandreou resigned in 1965 in a dispute with the king over control of the military, politics was thrown into turmoil. On April 21, 1967, a military coup led by little-known colonels overthrew the regime, claiming to protect the country from Communism.

The junta’s expansionist policies pushed growth to 8%. But after the collapse of the Bretton Woods system, which had regulated international exchange rates, and the eruption of the first oil crisis, inflation soared. It reached 29. 9% in 1974, even as real GDP fell 6. 4%. The junta tried to assassinate the president of Cyprus, a Greek-speaking island off Turkey, to pressure it to join Greece. When the attempt failed, and a third of Cyprus came under Turkish control, the junta imploded. Responding to a call from senior military officers, Karamanlis returned from exile to lead a transition government.

The New Greek Polity This time Greeks sought to build a sturdy democracy. Karamanlis founded the center-right New Democracy (ND) party; Andreas Papandreou, a Harvard-educated economist and son of George Papandreou, founded the PASOK. The ND won a large majority of delegates in elections to choose a constitutional assembly. The new constitution, ratified in 1975, attempted to bring a rapprochement between left and right, abolishing the monarchy, proclaiming that the state should “seek to create conditions of employment for all citizens,” and requiring all universities to be public. 6 Aspects of the new democracy would come to be seen as problematic. Greece lacked “a culture of civic society,” charged Stavros Katsios, a professor at the Ionian University in Greece. 17 “They call you stupid if you follow the rules,” he explained. Tax evasion and bribery became endemic. 18 A government official told the Wall Street Journal in 2010 that tax collectors sometimes operated on a “44-2 system”: a taxpayer who owed €10,000 might pay the collector €4,000, keep €4,000, and pay only €2,000 in taxes.

According to Transparency International, 18% of Greeks claimed they had paid bribes over the course of a year, compared with 14% of Romanians and only 2% of Finns. 19 Karamanlis served as prime minister until 1981. Eager to prove his credentials as socially conscious, he nationalized Olympic Airways and Commercial Bank, owned by collaborators of the junta. He raised defense spending in response to perceived threats from Turkey, but he reduced public investment, shelving significant infrastructure projects. Fiscal deficits were less than 3% of GDP for the rest of the 1970s (see Exhibit 4).

GDP growth peaked at 7. 2% in 1978, and unemployment touched only 2% to 3% of the workforce (see Exhibit 3). In 1975, Karamanlis proposed joining the European Community (EC)—the European economic project that preceded the EU—declaring that “Greece belongs and desires to belong in Europe, where 3 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? she has been placed by her geopolitical position, history and tradition. ”20 The European Commission, the EC’s administrative body, declared that Greece had too far to catch up. 1 But the heads of EC states ultimately treated the decision as political. “Greece, only recently returned to the democratic fold, would march in future with the Community of European nations,” declared the German foreign minister. Greece became the ninth EC member in January 1981. The political scientists Elena Iankova and Peter Katzenstein argued that a longstanding “institutional hypocrisy” in the EC—a gap between the 100,000-odd pages of laws and regulations required of members and their actual practices—was exacerbated by the incorporation of Greece, Spain, and Portugal. 2 Institutional underdevelopment and political pressure—for example, from industries that would be hurt by opening government procurement to competition—impeded Greek compliance. 23 However, Greece did not sit still. In 1981 it faced more than a thousand directives requiring it to harmonize laws and practices with EC standards, but by 1992 it had implemented the entire backlog. 24 Iankova and Katzenstein concluded that institutional hypocrisy was actually a useful mechanism to bring laggards such as Greece into compliance. The 1980s: Populist Years

In 1981 PASOK won a landslide victory calling for social protection and income redistribution. Andreas Papandreou served as prime minister for the rest of the decade (see Exhibit 2). He increased real minimum wages and pensions, granted large raises to public-sector employees, passed laws that favored unions in bargaining with employers, and established a universal free National Health System. Automatic wage indexation was introduced to prevent inflation from eroding real wages, and employees’ protection against dismissal was strengthened. 5 Papandreou increased the weight of the public sector, nationalizing many companies in industries such as shipbuilding, cement, textiles, paper, and plastics. He brought the Bank of Greece, and therefore monetary policy, under direct political control. The Bank of Greece also set mandatory investment criteria for banks. 26 The government’s Industrial Reconstruction Organization, along with an array of state-controlled banks, took over 21 loss-making firms labeled “problematic. ”27 During the 1980s public spending soared from 29% to 48% of GDP, and deficits averaged 10% of GDP. 8 Government guarantees for debts of private and public firms constituted 32% of GDP by 1989, and half of them went bad in the early 1990s. 29 Meanwhile, GDP growth slowed to less than 1% (see Exhibit 3). Public debt as a percent of GDP tripled from 28% in 1980 to 89% in 1990. 30 Interest payments on debt, rising to 10% of GDP in 1990, themselves began substantially worsening deficits. 31 Ignited by the oil shocks of the 1970s and sustained by fiscal deficits, increases in the money supply, and automatic wage indexation, inflation averaged almost 20% during the 1980s. 2 Greece had three balance of payment crises, but current account deficits remained small on average, and devaluations easily resolved the crises. 33 Unemployment remained below the EC average. 34 The 1990s: European Union In 1992 the EC members, now numbering twelve, signed the Maastricht treaty forming a more comprehensive European Union (EU) and calling for a common currency. Politics weighed heavily in this decision. Within their lifetimes the French had fought two devastating wars against Germany and feared its reunification after the Berlin Wall fell in 1989.

French President Francois Mitterrand saw a common currency as cementing a more peaceful Germany. Despite Germans’ fears of giving up their cherished deutschmark, Chancellor Helmut Kohl made a deal with Mitterrand to support a 4 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 The Greek Crisis: Tragedy or Opportunity? 711-088 common currency in exchange for French backing of rapid German unification. 35 Kohl also saw the EU and currency union as providing a core of European stability after the Soviet Union’s collapse. 36 On paper, the Maastricht criteria for a nation to join the currency union were strict.

Budget deficits had to be less than 3% of GDP and national debt less than 60% of GDP. Inflation had to be no more than 1. 5% higher and long-term interest rates no more than 2% higher than in the three lowestinflation members. 37 However, a weighted majority vote of member governments would actually decide which nations could enter common currency. 38 When the decision came, political criteria prevailed over the figures. 39 The public debts of Italy and Belgium were twice the allowed level, and those of five other nations, including Germany, exceeded the 60% limit. 0 The euro was launched on January 1, 1999. Britain and Denmark opted out; Greece was deemed not to have met the criteria. The Council of Ministers, comprised of ministers from each member country, had decisionmaking power. The European Commission formed the administrative branch, and the European Central Bank (ECB) managed the common currency. Nations managed their own government budgets. A seemingly stern Stability and Growth Pact (SGP) required euro members to continue to comply with the original deficit and debt limits. Violators would be monitored under an “excessive deficit procedure. However, in practice, the SGP proved malleable. In 2003, when Germany and France exceeded the deficit limits, the European Commission sought to implement an excessive deficit procedure—but the Council of Ministers suspended it. 41 By 2010, 25 of the 27 EU member states exceeded either deficit or debt limits. 42 By the 1990s Greek opinion broadly supported joining the euro. The ND began to reverse the populism of the 1980s, but after 1993 Prime Ministers Andreas Papandreou and Constantine Simitis, both of PASOK, supported much the same change of economic direction.

They cut deficits, controlled the money supply, stabilized the exchange rate, and generally began liberalizing the economy. 43 At first, tight monetary policies drove interest rates to 16% above German levels; these high rates pushed the public debt to 110% of GDP in 1993. 44 But Simitis restored political independence to the Bank of Greece in 1994, and monetary reforms continued. The government broadened the tax base, establishing a new tax authority with the power to arrest. 45 It installed Greece’s first computerized tax-collection system, randomly sampled small business accounts, and regularly audited large firms.

The primary budget balance (excluding interest) improved from a deficit of 5. 1% of GDP in 1990 to a surplus of 4. 2% in 1994, and it remained in surplus for the rest of the decade. 46 The European Commission declared on May 3, 2000, that the Greek fiscal deficit, including interest, was only 1. 6% of GDP; inflation was only 2. 0%; and Greece met all Maastricht requirements except for its total government debt, a shortcoming that was hardly unique. 47 Greece joined the euro area on January 1, 2001. With national pride, 70% of Greeks favored this transition. 48 Banking on Europe

Greece had made enormous economic progress. A poor nation after World War II, it achieved a per-capita GDP of €20,900 in 2009, in range of the euro-area standard of €27,200, and Greek life expectancy was virtually at the euro-area average of 80 years. 49 From 2001 through 2008, Greek economic growth rate averaged 3. 9%, almost twice the euro-area average of 2. 0%. 50 5 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? Greek inflation converged toward the low levels of the euro area (see Exhibit 3).

As adoption of the euro virtually eliminated exchange-rate risk, capital poured in, reducing interest rates precipitously (see Exhibit 8). And while Greek public debt remained stubbornly above the euro-area average of 70% of GDP, it did stabilize at about 100% of GDP through 2008 (see Exhibit 4). Trouble in the Public Sector However, Greece faced deep economic problems. Most notorious was its public-sector deficit. Having touched 3. 1% of GDP in 1999 (the earlier 1. 6% figure was revised upward), the deficit rose steadily past the Maastricht limit, from 3. 7% of GDP in 2000 to 9. 6% of GDP in 2008, before surging to 15. % of GDP in 2009. (See Exhibit 4. ) One outsized component of government expenditure was employee compensation. According to the Foundation for Economic and Industrial Research in Athens, government employee compensation comprised 32% of total economy-wide compensation, far above the 22% average for the mostly advanced nations of the Organization for Economic Co-operation and Development (OECD). 51 Pensions also weighed heavily on public finances. On average, Greeks retired at 58 years and received 96% of pre-retirement income, while OECD workers typically retired at 63 years and received only 61% of pre-retirement earnings. 2 In 2007, Greek pensions absorbed 12% of GDP, a little above the EU average of 10%, but by 2060 they were projected to rise to 24% of GDP, far above the 13% estimated for the EU. 53 Additionally, the Greek pension system was called “complex, inequitable, inefficient and ripe for fraud. ”54 Greek contributions to social welfare programs fell behind the benefits paid, causing this share of the deficit to balloon from €3 billion in 2000 to €19 billion in 2009. 55 And because of concerns about Turkey, military spending was high, averaging 3. 7% of GDP versus the euro area’s 1. 7%. 56 Problems with Taxes

On the revenue side, tax evasion continued. Although national income was over €20,000 per person (including children and the unemployed), two-thirds of employed workers declared earning less than €12,000, exempting them from income taxes altogether. Only 6% reported earning more than €30,000. 57 A study by the Brookings Institution claimed that tax evasion, combined with politicians’ patronage spending to buy support, cost the Greek government a staggering 8% of GDP. 58 The study claimed that if Greece had collected just half of that amount, it would have had no fiscal deficit problems.

An important cause of tax evasion was the large presence of microenterprises and of the selfemployed—respectively 60% of all enterprises and 34% of the workforce, both twice the equivalent figures for the EU. 59 Indeed, the informal economy, firms not even on the tax rolls, constituted 25% of the Greek economy, nearly twice the average for advanced nations. 60 Also, the high 2009 fiscal deficit was partly caused by a relaxation of tax collection during the election season, according to Nikos Christodoulakis, finance minister in the early 2000s. 1 Efforts to buy political support also caused overstaffing. Just before the 2009 election, 27,000 individuals were reportedly added to the public payroll, many without even offices to go to. 62 As well, official data disguised the size of fiscal deficits. Christopher Patten, a former external relations EU commissioner, quipped: “It was a case of: ‘We all pretend to believe them, and they all pretend to be doing enough for us to believe them. ’”63 6 Purchased by mohammad farsi ([email protected] com) on April 25, 2012

The Greek Crisis: Tragedy or Opportunity? 711-088 Each political party did raise doubts about data generated by its opponent. In 2004 Prime Minister Karamanlis of ND, vowing to “reestablish the state,” ordered the National Statistical Service to audit deficit data generated by PASOK. 64 Deficits were found to be higher than claimed. Greece landed in the EU’s excessive deficit procedure, and the European Commission determined that it had actually never complied with the 3% of GDP deficit limit since joining the euro area. 5 Now the government again sought to strengthen the statistical office and upgrade tax collection, among other things, introducing electronic cross-checking of receipts and invoices. It raised the value-added tax, sold off several public-sector banks, and curtailed infrastructure investment, unfortunately losing some “structural support” funds for infrastructure from the EU. 66 At the same time, the ND government re-calculated GDP, this time including the informal economy, and concluded that output was actually 26% greater than thought—thus deficits and debt were much lower as a portion of GDP. 7 Eurostat, the EU’s statistical agency, granted Greece a 10% one-time boost in its gauge of GDP. 68 In 2007, the European Commission sounded the all-clear, declaring that Greece had adopted fiscal reforms “mainly of a permanent nature. ”69 Structural Challenges Greece also faced structural economic problems. The European Commission judged its business climate inhospitable. 70 The World Bank’s Doing Business Report ranked Greece 109 out of 183 countries in 2010—behind Albania, Bulgaria, or Romania. 1 The report counted six procedures to start a typical small business in Portugal versus 15 in Greece; it gave Greece an investor protection rating of 3. 3 versus a rating of 6 for Portugal. Many foreign investors took a dim view of Greece, too: in 2005, it ranked 23rd out of 25 EU members in the amount of foreign direct investment received. 72 Greek industrial structure had both weaknesses and strengths. Agriculture declined from 6. 6% of output in 2000 to 4% in 2009, while industry declined from 21% of output to 16. 9%, and services grew from 72. 5% to 79. 1%. 3 Manufacturing was concentrated in low to low-intermediate skill sectors, particularly food and drinks, as well as refined petroleum. 74 Greek hourly productivity was 44% below the average of euro-area countries in 2009 (see Exhibit 6), perhaps partly because of the large portion of small- and medium-sized enterprises. 75 R&D spending was less than a third of the EU average (see Exhibit 6). And Greek educational achievement scores in the Programme for International Student Assessment were 460 as opposed to 492 for the OECD in reading, and 459 in math versus 498. 6 A 2000 OECD survey found that Greek labor protections against dismissals and layoffs, restrictions on temporary employment, and working-hour limits were some of the most restrictive among industrialized countries. 77 While Germany ran a 5% of GDP trade surplus in the 2000s, Greece ran a deficit exceeding 10% of GDP (see Exhibit 3). German exports rose 5% over the decade, as a share of total euro-area exports, even as Greek exports fell 12% (see Exhibit 11). And while German unit labor costs rose 16% in nominal terms over the decade, Greek unit labor costs rose 40% (see Exhibit 9).

Still, the Greek export sector was diversified. For one thing, Greece ran a large surplus on services—mainly shipping and tourism—making up more than a third of its deficit on goods (see Exhibit 5b). Among goods exports, food and drinks was the largest category, at 20% of the total. 78 Greece’s potential comparative advantages in manufactured exports were thought to lie in textiles, clothing, and refined petroleum products. 79 A bright spot was the Greek financial sector. It was healthy except for government debt problems. 80 In 2009 Greek private-sector debt was 92% of GDP, compared, for example, with France 7

Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? at 117% of GDP, Germany at 129%, and Britain and Ireland in excess of 200%. 81 The Greek shipping industry had 30% of global capacity, though 70% of the fleet was under foreign flags. 82 As northern European nations such as Germany controlled wage costs, achieved growth through trade surpluses, and lent their surpluses abroad, Greece and some other southern European nations let wage costs rise, ran trade deficits, and borrowed from abroad. Greek current-account deficits averaged 9. % of GDP from 2001 through 2009 (see Exhibit 3). Greek growth was based largely on consumption, accounting for 90% of GDP, plus a boost from hosting the 2004 Olympics. Membership in the euro narrowed Greece’s options. In the first decade of the 2000s, its consumer price index rose 15% more than average for the euro area (see Exhibit 10), and, as mentioned, its unit labor costs rose 25% more than Germany’s. The IMF estimated that the Greek real exchange rate was overvalued by 20% to 30%. 83 Had Greece retained the drachma, devaluation might have solved these problems.

But with the euro, Greece could only painfully wring out price increases by deflation. A 20% deflation would be comparable to that experienced during the Great Depression. Deflation would also aggravate Greece’s fiscal woes. As deflation lowered nominal GDP (for a given level of real GDP), it would worsen the important measure of debt as a percentage of GDP. Gathering Troubles In the wake of the 2008 global financial crisis, the Greek economy slowed as tourism and shipping suffered from the European recession and the decline in global trade. 4 Mounting unemployment among the young, reportedly 20% in 2008, provoked demonstrations, and a 15-year-old student was shot and killed by police. 85 Unable to push through economic reforms in Parliament, where he held a razor-thin majority, Prime Minister Costas Karamanlis (ND) called an early election seeking a new mandate. Beset by several scandals, however, he did not succeed. George Papandreou led PASOK to victory on October 4, 2009. He chose George Papaconstantinou, an experienced economic advisor to PASOK and ex-OECD official, as finance minister.

On October 19, Parliament gave the new government its vote of confidence. 86 Papaconstantinou had two weeks to submit his 2010 budget. “We knew of the longstanding issue of the public sector’s poor productivity, and we knew that the actual deficit had been underestimated by the previous government,” Papaconstantinou said. “What we didn’t know was by how much. ”87 After he and his team scoured public-sector accounts, they estimated that the 2009 budget deficit would be 12. 5% of GDP, over triple the 3. % that the previous government had projected in the spring before revising the deficit upward to 6. 7%. 88 Meeting with EU leaders in Brussels, Papandreou decided to come clean about Greece’s problems. He not only reported that the deficit would be twice as large as previously stated but announced that fiscal procedures were in disarray, tax evasion epidemic, and corruption extensive. 89 The new government set out an austerity program aiming to lower the deficit to 8. 7% of GDP in 2010. 90 Rather than reassuring markets, Papandreou’s frank statement spooked them.

Doubts about sovereign debt had recently reached the forefront of investor preoccupations when Dubai World, the Emirate of Dubai’s ambitious investment company, announced it was seeking to delay repayment on some of its bonds. Yields on two-year Greek government bonds doubled from 2. 0% in November to 4. 0% in December; yields on 10-year bonds rose from 4. 7% to 5. 8%. 91 (See Exhibit 14. ) To show markets it was serious, the government passed three deficit-reduction packages in as many months in early 2010, cumulatively cutting the deficit by 5% of GDP. 92 Revenue measures 8

Purchased by mohammad farsi ([email protected] com) on April 25, 2012 The Greek Crisis: Tragedy or Opportunity? 711-088 included a higher value-added tax; higher taxes on fuel, tobacco, and alcohol; and a “crisis levy” on profitable firms. Expenditure reductions included a freeze on public-sector wages, as well as cuts in public-sector bonuses and state-funded pensions. Longer-term structural reforms were legislated to make the labor-relations system more flexible, lift regulations on many products, reform pensions and the tax system, and encourage investment. 3 But things kept going wrong. Eurostat determined in mid-January that the Greek statistical office had been falsifying data. 94 The official in charge was fired, and Parliament established an independent statistical office. 95 Soon afterwards, the press reported that the previous government had enlisted Goldman Sachs in 2001 to allegedly mask some of its debt through opaque derivatives. 96 After narrowing briefly, the spread of Greek government bond rates above German rates widened again. “Our cuts always seemed to be just one step behind the markets’ expectations,” remarked Papaconstantinou. 7 The three largest rating agencies kept downgrading the Greek government’s debt (see Exhibit 13). It was forced to pay rising interest rates and faced a tight deadline: it had to borrow or refinance €53 billion in 2010, more than €20 billion of it in April and May. 98 Eventually, Greece might engineer a massive fiscal retrenchment to stabilize its debt and might force wages and others costs down enough to make exports more competitive, but it became ever clearer that such measures could not be implemented fast enough to persuade financial markets to lend at viable rates in the short run.

Increasingly Greek officials saw no plausible way to escape default without help from abroad. Greece had to turn to international institutions. The Troika Three international institutions might help prevent a Greek fiscal collapse: the European Council, comprised of heads of EU member states; the European Central Bank (ECB), a politically independent arm of the EU; and the International Monetary Fund (IMF), the global financial rescue team. These three institutions came to be known in Greece as “the Troika. ” This word, meaning “triumvirate” in Russian, referred to notorious panels of judges who had condemned dissidents in the Stalinist era.

The EU The Greek crisis presented the EU with its worst dilemma since the creation of the euro. The problem was especially difficult since the Maastricht treaty explicitly forbade bailing out member states through others’ assuming their debts. 99 Thus, any solution would have to be invented on the fly, and—since it would de facto alter the treaty—would have to be approved by the Council of Ministers, particularly by the 17 euro-area nations that would shoulder most of the costs. 100 Greece’s repeated statistical misstatements and failure to tackle its other problems did not help its case.

Nations outside the euro area, notably Britain, ruled out participating in a rescue, and a group in the euro area was reluctant. Germany feared it would bear the brunt of the cost of Greek aid. German tabloids conducted a virulent campaign against a bailout, calling Greece “lazy” or suggesting it leave the euro. In one poll, 71% of German voters opposed helping. 101 Moreover, a May 9 election in North Rhine-Westphalia, the most populous state, was seen as a key test for Chancellor Angela Merkel’s Christian Democratic Union: a loss would cost her government its majority in the upper house of the legislature. 02 “Merkel was fanatically against providing aid,” said Stavros Lambrinidis, head of the PASOK delegation to the European Parliament. 103 9 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? Fears of moral hazard were widespread: if the EU bailed out Greece, what would stop other governments from spending recklessly and expecting to be rescued? Germany’s representative on the executive board of the ECB, Juergen Stark, feared that a possibly expensive rescue “would give the wrong incentives and would burden countries with more solid public finances. 104 However, France and several other nations in the euro area supported assisting Greece. A poll showed that two-thirds of the French public favored the idea. 105 French President Nicolas Sarkozy declared, “Not only does Greece have political support, it will be supported in all aspects. ”106 Moreover, the EU might have to support Greece to sustain the euro and the European ideal. Already the euro accounted for 37% of global foreign exchange transactions, and Europe hoped it would prove an alternative to the U. S. dollar as a reserve currency. 07 But as fears of default spread to Portugal, Ireland, Spain, and, to a lesser extent, Italy, they created a spike in bond yields. In varying degrees, these countries also suffered from high public debts and current-account deficits (see Exhibit 6). If markets progressively denied them access to refinancing as well, the euro area could plunge into a potentially irreversible crisis. From a value of $1. 50 in October 2009, the euro fell to $1. 20 by mid-June 2010 (see Exhibit 16). Already some Baltic states that had been preparing to adopt the euro were growing less enthusiastic about the idea. 08 EU members also had self-interested reasons to support Greece. Euro-area banks, mostly in France and Germany, were estimated to hold €60 to €120 billion of Greek government bonds; other banks, mainly in European nations outside the euro area, such as the United Kingdom and Switzerland, were estimated to hold another €25 to €50 billion of the bonds. 109 A Greek default could spark wider financial panic, a catastrophic prospect for a banking system still reeling from the effects of the global financial crisis.

State rescues of the banks might well cost more than a loan to Greece. The European Central Bank The ECB’s role was to maintain price stability and act as a lender for euro-area banks. When the crisis hit, the ECB was the only independent EU authority that could act quickly in response. The ECB had several standard financing tools. It used its weekly main refinancing operations (MROs) to influence the rate at which banks lent to and borrowed from each other overnight.

It set a minimum interest rate, assessed the market’s liquidity needs, and determined the volume of funds to offer in loans with weekly maturities against qualified collateral. Banks bid for these loans, those that offered the highest rates receiving loans until the allotted funds ran out. The ECB also conducted long-term refinancing operations (LTROs) that worked similarly but had a maturity of three months. Finally, the ECB had two overnight facilities to put a cap and floor on interest rates. Banks could deposit idle funds at an interest rate normally lower than the overnight rate in the interbank market.

And banks in trouble that could not borrow from their peers could use a “marginal lending facility,” posting collateral to obtain overnight liquidity at a rate normally higher than that of the interbank market. As the global financial crisis began to spread, the ECB first conducted an expansionary monetary policy by lowering its benchmark rate on MROs to 1%. After the collapse of Lehman Brothers, it introduced non-standard measures. It no longer fixed the volume of loans it would make in the MROs, but set an interest rate and loaned all the funds banks requested at that level.

It also introduced loans in its LTROs with longer six-month and one-year maturities to give banks more breathing space. Finally, after October 2008, the ECB broadened the range of assets it would accept as collateral against short-term loans to national banks, extending it to paper rated BBB-. The ECB announced it would reverse these non-standard measures by the end of 2010. 10 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 The Greek Crisis: Tragedy or Opportunity? 711-088 The International Monetary Fund

The IMF provided loans to governments of nations in financial trouble, contingent on reforms— “conditionalities”—intended to address the underlying causes. It disbursed loans over time in “tranches,” after verifying that promised reforms were being implemented on schedule. In dealing with debt crises such as in Asia in 1998-1999, the IMF earned a reputation for imposing excessive fiscal austerity and being politically insensitive. In the absence of major crises it had been dormant since the early 2000s, but in 2009 it was granted significantly greater resources to deal with effects of the global financial crisis.

Under the leadership of Dominique Strauss-Kahn, an ambitious former socialist French finance minister, it became what BusinessWeek called a “kinder and gentler” IMF, less obsessed with fiscal austerity and more concerned about social safety nets. 110 The IMF had never lent to a euro-area nation. It had made emergency loans to Hungary, Latvia, Romania, and Iceland in the wake of the global financial crisis, but the last time it had intervened in a core western European country dated back to 1976, when it gave assistance to Great Britain. Mounting Pressure The markets aren’t silly,” said Steven Major, global head of fixed-income research at HSBC Holdings. “They need to see the color of the money. ”111 In early 2010 Papaconstantinou asked the EU repeatedly for a “loaded gun,” a real commitment of emergency funds to allay investor fears and allow Greece to continue borrowing in the market. He told Eurogroup meetings of euro-area finance ministers and Ecofin meetings of all EU finance ministers that “the markets might shut their door before the effects of our policies become clear, so we need a plan B. ”112 Europeans issued only generic statements of support.

After an Ecofin meeting on February 11, Jose Manuel Barroso, president of the European Commission, said, “The Commission is ready to propose an instrument for coordinated assistance to Greece. The creation of this instrument does not imply its immediate activation. ”113 There was no indication of the size of a possible package, maturity of the loans, or any activation mechanism. Markets took little notice. As the EU did not seem able to produce a backstop for Greece that investors found credible, the Greek government began to explore alternatives with the IMF. 14 In January 2010 the IMF sent a special team to Athens, ostensibly to provide technical advice. 115 As well, Strauss-Kahn—a possible contender for the French presidency in 2012—was seen as keen to get involved and present the fund as a potential savior of Europe. 116 If Greece asked the IMF to intervene, he said, “We will do it. ”117 Many European officials perceived IMF intervention as a humiliation. 118 Olli Rehn, head of the economic division of the European Commission, said it was “essential” that Europe take the lead in any rescue. 119 Sarkozy was particularly against involving the IMF. 20 Jean Claude Trichet, the French president of the ECB, said, “If the IMF or any other authority exercises any responsibility instead of the Eurogroup, instead of the governments, this would clearly be very, very bad. ”121 However, in late March, in a startling volte-face, Germany decided to support involving the IMF. 122 It ultimately saw advantages in engaging an external institution, independent of European political pressures, that could push for unpopular measures. As well, it recognized the technical expertise that the IMF would bring in the financial rescue of a highly indebted government.

Meanwhile, the ECB worried about the effects of the Greek crisis throughout the southern euro area and on Greek banks in particular. According to Apostolos Tamvakakis, CEO of the National 11 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? Bank of Greece, Greece’s largest bank, “Greek banks entered the crisis with strong balance sheets and did not own the toxic assets that weighed on some European competitors. But the deteriorating Greek economy, the falling value of the government bonds they held, and deposit flight all put pressure on them.

Although it later subsided, between January and August 2010, Greek banks saw an outflow of 25 billion euros, about 10% of deposits. ”123 Effectively shut out of the European interbank lending market, Greece depended on the ECB for liquidity. 124 Reversing his previous promise of a return to normal operations in late 2010, Trichet said that the ECB would continue to accept bonds rated BBBor above as collateral for loans to banks. 125 Finally, on March 25, France and Germany reached a compromise. Germany agreed in principle to a loan but demanded that Greece implement even more radical reforms in exchange.

Merkel insisted that any element of subsidy be kept to a minimum. 126 At the end of two weeks of continual work, after a rare Sunday conference call on April 11, Ecofin announced details of a proposed rescue. The EU would pledge a three-year €30 billion loan package, while the IMF would pledge another €15 billion. The EU announced that interest rates would be based on the Euribor, the interbank loan rate in the euro area. Some loans would be variable-rate, matching the three-month Euribor rate, and some would be fixed-rate, matching the Euribor rate for the relevant maturity—“around 5%. 127 The package was aimed at reassuring investors by providing an explicit pledge that Greece would have enough liquidity to get through its fiscal adjustment. The expectation was that more confident investors would demand lower yields and allow Greece to continue to borrow in the market. The EU announcement stressed that Athens had not requested the plan to be activated. 128 But the “bond vigilantes” remained unconvinced. On Monday the yield on two-year Greek bonds initially fell, but then increased amid concerns that European parliaments might delay approval of the loans.

The spread of 10-year Greek bonds versus German bonds tightened less than hoped, falling only to 6. 5%—equivalent to a 10% interest rate—and then climbing to 7. 4% within four days, as markets worried that the measures might not avert a debt restructuring in the longer term. 129 Crunch Time Faced with a looming repayment deadline and rising borrowing costs, on April 23 Greece formally requested activation of the rescue package. On April 24 the IMF agreed to provide €15 billion. But uncertainty about the package remained.

Four days after the Greek request, Chancellor Merkel requested tougher austerity. Guido Westerwelle, the German foreign minister, said, “The government decision can go in different directions. ”130 Concerned that austerity measures would be a drag on growth and hence on Greece’s ability to reduce its debt burden, Standard & Poor’s downgraded Greek bonds on April 27 by three notches to BB+, or “junk” status. It added that bondholders were likely to receive 30% to 50% of their principal in the worst case of restructuring. 131 On the same day, it also downgraded Portugal and Spain.

Greek bonds were sold heavily—some institutional funds were prohibited from holding assets below investment grade—and the yield on the two-year bonds reached almost 19%. Greece had effectively lost access to capital markets. Thomas Mayer, chief economist at Deutsche Bank, declared that Greece had entered “a death spiral of government insolvency. ”132 Clearly, the €45 billion package was not enough to convince investors that it would solve the country’s financing needs. 133 For European officials, even the thought of a debt restructuring was 12 Purchased by mohammad farsi ([email protected] com) on April 25, 2012

The Greek Crisis: Tragedy or Opportunity? 711-088 taboo. Herman von Rumpuy, President of the European Council, said it was “out of the question. 134 Barroso said it “was not an option. ” A solution had to be found. Second Attempt: €110 Billion The EU now negotiated a larger safety net and austerity package. On May 2, again a Sunday, Papandreou announced “an unprecedented support package for an unprecedented effort by the Greek people. ”135 This EU and IMF aid package was for €110 billion over three years, 46% of Greek GDP in 2009 and almost three times larger than the package announced three weeks earlier. The number was based on an allowance of €100 billion so Greece could stay out of the markets for three years, plus an added €10 billion for the safety of the banking system,” Papaconstantinou explained. Euro-area countries would provide €80 billion, and the IMF the remaining €30 billion (see Exhibit 17). Greece would pay a roughly 5% interest rate and repay the principal of the loan over five years. 136 The loans would be disbursed in tranches between May 2010 and the second quarter of 2013 (see Exhibit 19).

The agreement stipulated that Greece would be able to roll over 100% of its existing debt in the private market by 2013. It would begin repaying the EU-IMF loans in the third quarter of 2013 and, on paper, would finish repaying them in 2018. 137 However, as early as October 2010, the IMF, considering this schedule very tight, was proposing to give Greece longer terms to repay its loans. 138 Greece agreed to draconian reforms, reducing the fiscal deficit by 11% of GDP on top of the 5% already achieved, bringing the total reduction to 16% over three years (see Exhibit 18). 39 The IMF declared the size of this fiscal adjustment “unprecedented. ”140 The goal was to lower the deficit below 3% of GDP by 2014 and stabilize the level of public debt as a percent of GDP. 141 These conditions were laid out in a memorandum of understanding that came to be known in Greece simply as “the memorandum. ”142 Progress on deficit reduction targets would be monitored in quarterly reviews by the IMF and the EU before they disbursed ongoing tranches of the loans. As well, Greece undertook structural reforms to improve growth, largely by lifting onerous regulations deemed to undermine efficiency. 43 For example, regulations guaranteeing pharmacies a 35% profit margin on drugs increased medical costs and caused a proliferation of pharmacies— almost four times as many per capita as in Germany. An index of market regulation compiled by the OECD put Greece at nearly three times the level of Britain and nearly twice that of Germany. “We believe these strong measures by the Greek government, along with the significant risks of spillover to other countries, merit an exceptional level of access to IMF resources,” Strauss-Kahn explained: “This represents the largest access granted to a member country. 144 The IMF contribution was 3200% of Greece’s quota, the amount it had on deposit with the fund. The IMF normally let member countries borrow 200% of their quota annually and 600% cumulatively. 145 It provided such large resources notwithstanding the fact that Greece’s debt as a percent of GDP was higher than that of most countries to which the IMF had previously lent. (See Exhibit 12. ) Each euro-area country needed parliamentary approval of the agreement. In a rare display of European coordination, the process went smoothly, and the first loan disbursement came through one day before a looming €8. billion May repayment was due. Still, markets were not placated. On May 3, the first trading day after the announcement, global stock markets plunged, and the euro reached a fresh 15-month low against the dollar (see Exhibit 16). Reversing past pledges not to favor one country, the ECB announced it was suspending the minimum credit-rating requirement for using Greek government bonds as collateral. It thus 13 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? eliminated worries that Greek banks would not be able to tap the ECB for emergency funds. 46 But as violent protests against the memorandum rocked Athens, euro-area leaders watched the borrowing costs of Portugal, Ireland, and Spain rise to levels not seen since the introduction of the euro (see Exhibit 15). Fear was beginning to spread in signs of incipient global financial panic. 147 Even bolder action was needed. The New Safety Net: €750 Billion On Sunday, May 9—when Merkel’s party in the end lost the regional election—after yet another all-night session of the Ecofin, the EU and IMF unveiled an unprecedented financial safety net for the entire euro area.

It would provide assistance estimated at €750 billion to countries that might find themselves in difficulty, equivalent to 8% of euro-area GDP. 148 These loans would not need parliamentary ratification from member nations and could therefore be provided much faster than the one to Greece. The package comprised three elements: ? Up to €440 billion from a new “European Financial Stability Facility” (EFSF), incorporated for a three-year period. Unlike the package for Greece, which consisted of bilateral loans pooled together, the EFSF could make loans directly.

It could seek funds in the market, backed by guarantees from euro-area member states, and was designed to have a AAA rating. Conditions for loans would be similar to those required of Greece. As if to underline the centrality of Germany to this process, the facility would be managed by a former German finance official, and capital would be raised through the German Debt Management Office. Up to €60 billion from the “European Financial Stabilisation Mechanism” (ESFM). This existing vehicle allowed the European Commission to raise funds in the capital markets guaranteed by the EU budget.

An IMF component estimated by the EU and analysts at €250 billion. ? ? The final piece of the “shock and awe” strategy toward the markets came from the ECB. 149 On Monday it declared that it would purchase government bonds in the market outright “to calm dysfunctional markets” and, though in limited quantities, it proceeded to do so the same day. 150 Given uncertainties about implementation of the package, intervention by the ECB, the only European institution that could act rapidly, “was the strongest signal to the markets that Europe was serious,” said Papaconstantinou.

The Governing Council of the ECB did not agree without internal dispute to this U-turn. 151 Critics said it indicated that the bank was losing independence from political pressures. Axel Weber, head of Germany’s Bundesbank and a candidate to succeed Trichet at the ECB, publicly criticized the decision for fear it would ultimately stoke inflation. 152 The agreement was the largest step the euro area had taken toward fiscal union. States could request assistance in exchange for rigorous oversight, foregoing some fiscal sovereignty.

Echoing market views, the chief European economist at Goldman Sachs called the reaction “impressive. ”153 Finally, investors reacted positively. Global stock markets experienced their best day in over a year on Monday, May 10, regaining most of the losses from the previous week. Yields on Greek government bonds finally fell sharply: those on 10-year bonds fell from 12% to 8%. 14 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 The Greek Crisis: Tragedy or Opportunity? 711-088 What Would the Future Hold? Could Greece muster the will to change?

As a result of ideological polarization and the political pendulum, each party had tried to secure power through “populist policies,” manipulating government programs and hiring public-sector workers to secure votes, argued Alexander Macridis (MBA ‘91), a Greek businessman and a board member of the National Bank of Greece (NBG), the country’s largest bank. The state had been unable to forge stable compromises on policies that made sense over the long term. Macridis summarized his concern: “It is about leadership. The Greek elites must be united enough to transform the business and political model of the last 35 years.

They should first agree on how to grow the national pie and then debate on how to divide it. ”154 As he pondered the situation in November 2010, even though markets remained nervous and fretted over Ireland and Portugal, Papaconstantinou saw encouraging signs. The Greek fiscal adjustment was broadly on track; the deficit had narrowed by 40% in the first half of the year. 155 In their first two review missions, the EU, ECB, and IMF assessed the program positively. 156 Greece had demonstrated its willingness to address its problems. After PASOK won the November 7 local elections, the political situation in Greece improved.

Its parliamentary majority was solid and social unrest contained. Privatizations could raise new revenues. And some confidence was returning: the National Bank of Greece successfully tapped the equity market. Greece had powerful motives not to default. True, Argentina had defaulted in 2002 and, after a drastic decline that year, began growing at a brisk rate, averaging 9% over the next five years. 157 But Greece was not a stand-alone nation. It had struggled to join the EU and the euro zone—becoming a full contemporary member as well as historical founder of Europe.

Facing a thousand directives to bring its practices up to EC standards in 1981, it had resolved them all. As long as Greece remained current with debt payments, the ECB could lend Greek banks reserves using government bonds as collateral. But if Greece defaulted, the central bank would almost surely find that practice impossible, and a Greek banking crisis would erupt. Moreover, if Greece did default on or restructure its debt, it would have to do so in a major way. The agreement with the EU and IMF projected that Greece would have to sustain a fiscal surplus of 6% of GDP to stabilize total public debt. 58 With future interest rates on that debt estimated at 5% to 6%, relaxing that level even to a still-stringent 3% of GDP fiscal surplus would require slashing total debt by around 50% of GDP. Risk premia and interest rates of fellow EU members—Ireland, Portugal, Spain, Italy—could soar. French and German banks that held Greek debt would also face losses. The sense of national Greek disappointment would surely be palpable. But could Greece stabilize its debt-to-GDP ratio? Attaining the necessary primary budget surplus would mean raising taxes on the rich.

Increasing trade competitiveness would require deflation to push down export costs. But fiscal stringency and deflation could themselves undermine growth. Would a protracted recession itself worsen deficits and debt as a percent of GDP? In the IMF’s base case estimate, debt would peak at 160% of GDP in 2013 before declining. 159 Moreover, even if fiscal austerity and structural reform were socially and politically supportable in 2010, could that support be sustained for several years? And could the structural reforms strengthen Greek industry enough to promote healthy growth over the medium term?

Might financial markets be spooked again, driving up interest rates and ultimately forcing Greece to default or restructure debt? If debt restructuring was inevitable, why not do it immediately, rather than drag the painful process out? 15 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? More broadly, was this the beginning of the crisis that would unravel the European monetary union? Were the costs and consequences of abandoning the euro conceivable? Some had seen the euro as an impossible project from the beginning, given the deep differences among nations.

Jean Monnet, one of the founding fathers of the European project, had said that Europe is the sum of the solutions to its crises. Would this crisis force Europe to find the strength to take a further step towards integration? If so, what form might it take? 16 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 -17- Exhibit 1a: Location of Greece betwe Europe and Middle East t o een d Exhibit 1 Map of Gre                      1b: eece Purchased by mohammad farsi ([email protected] com) on April 25, 2012 Exhibit 2: Greek prim ministers and governing pa t me arties since 1974

Novemb 1974 ber Novemb 1977 ber October 1981 r June 198 85 June 198 89 Novemb 1989 ber April 19 990 October 1993 r Septemb 1996 ber March 2 2000 March 2 2004 Septemb 2007 ber October 2009 r ND (Con nstantine Karam manlis) ND (Con nstantine Karam manlis) PASOK (Andreas Papan ndreou) PASOK (Andreas Papan ndreou) ND in Co oalition (Tzanni Tzannetakis) is National Unity (Xenoph Zolotas) hon ND (Con nstantine Mitsotakis) PASOK (Andreas Papan ndreou) PASOK (Constantine Si imitis) PASOK (Constantine Si imitis) ND (Cos Karamanlis) stas ) ND (Cos Karamanlis) stas ) PASOK (George Papand dreou) d Picture sourc CIA Factbook, w ces: www. cia. gov/library/publications/the-wor / rld-factbook, accesse Feb. 24, 201 10. Source: Ge eorge Alogoskoufis (Greek minister of economy and finance, 2004 through 2008), ( 2 “The Greek Economy after the Crisis,” unpublished paper provided to th authors, Oct. 2, 2010. k d he 711-088 -18- Exhibit 3: Greek national accounts, inflation, productivity, and demographics 1960-69 6. 8 82. 8 20. 6 2. 8 -7. 6 42. 1 8. 5 2. 0 12,051 6. 0 9. 4 8. 6 4,911 5. 1 2000 137. 9 90. 2 21. 6 1. 7 -13. 5 136. 3 4. 5 3. 2 32,028 3. 1 4. 1 10. 9 12,483 11. 2 10. 9 12,968 10. 11. 0 13,368 10. 3 33,329 3. 0 4. 1 33,716 0. 8 1. 2 35,303 3. 9 4. 7 11. 0 14,117 9. 7 142. 0 4. 2 3. 4 146. 9 3. 4 3. 6 155. 6 5. 9 3. 5 162. 4 4. 4 2. 9 35,937 1. 6 1. 8 11. 1 14,676 10. 5 90. 0 21. 6 1. 6 -13. 2 91. 2 22. 5 -0. 2 -13. 5 87. 8 23. 3 1. 2 -12. 3 87. 6 22. 0 0. 5 -10. 1 89. 3 20. 0 -0. 2 -9. 0 166. 1 2. 3 3. 5 36,465 0. 8 1. 5 11. 1 14,954 9. 9 2001 146. 4 2002 156. 6 2003 172. 4 2004 185. 3 2005 194. 8 2006 209. 9 89. 8 21. 0 -0. 2 -10. 6 173. 6 4. 5 3. 2 36,885 1. 3 1. 2 11. 2 15,562 8. 9 8. 9 8,340 2. 7 9. 3 9,840 1. 9 9. 8 10,124 5. 4 10. 0 10,313 6. 8 10. 4 10,713 7. 10. 6 10,817 9. 2 10. 7 10,994 9. 6 2007 225. 5 90. 0 21. 1 0. 9 -12. 0 181. 0 4. 3 2. 9 37,797 2. 0 2. 5 11. 2 16,160 8. 3 21,726 2. 3 5. 3 26,111 2. 8 4. 6 26,431 -2. 0 -1. 3 26,422 0. 3 0. 8 27,650 -0. 4 0. 1 27,783 1. 0 1. 2 28,547 2. 0 2. 8 29,733 3. 2 4. 2 10. 8 11,323 9. 8 2008 235. 7 92. 1 19. 2 1. 6 -12. 9 183. 2 1. 3 4. 2 38,199 0. 3 1. 1 11. 2 16,298 7. 7 74. 1 5. 7 10. 5 91. 6 5. 3 14. 1 99. 0 -0. 2 21. 8 103. 2 1. 8 17. 2 111. 0 0. 8 16. 2 115. 0 2. 1 8. 9 117. 7 2. 4 8. 2 122. 0 3. 6 5. 5 126. 1 3. 4 4. 8 29,854 0. 7 0. 4 10. 8 11,641 10. 8 2009 233. 0 94. 3 17. 2 -0. 7 -10. 179. 0 -2. 3 1. 2 37,592 -2. 2 -1. 6 11. 3 15,893 9. 5 73. 2 25. 4 7. 9 -8. 1 76. 5 25. 6 2. 8 -6. 7 80. 8 22. 7 0. 9 -6. 9 82. 9 20. 2 2. 4 -7. 9 87. 0 19. 4 1. 7 -10. 0 89. 1 17. 0 1. 4 -8. 9 88. 9 17. 8 1. 5 -9. 6 88. 0 18. 1 1. 5 -9. 1 87. 7 19. 4 1. 5 -10. 2 86. 7 20. 8 1. 2 -10. 5 130. 4 3. 4 2. 6 30,771 2. 2 3. 1 10. 9 11,986 12. 0 2010 229. 9 93. 4 14. 8 -0. 8 -7. 3 171. 6 -4. 2 4. 6 37,045 -2. 5 -1. 5 11. 4 15,072 12. 5 2 1 Nominal GDP, bn euros Composition of GDP, % Consumption, private and government Gross fixed capital formation Changes in inventories Trade balance on G&S 970-74 15. 6 1 1975-79 30. 2 1 1980-84 50. 2 1 1985-89 60. 3 1 1990-94 85. 2 1 1995 100. 7 1996 109. 7 1997 119. 9 1998 122. 0 1999 132. 0 Real GDP, bns of year 2000 euros Real GDP growth, % Change in in CPI, % Output per worker (year 2000 euros) Total factor productivity growth Labor productivity growth (per worker) Population, mns GDP per capita (year 2000 euros) Reported unemployment, % Nominal GDP, bn euros Composition of GDP, % Consumption, private and government Gross fixed capital formation Changes in inventories Trade balance on G&S Purchased by mohammad farsi ([email protected] om) on April 25, 2012 Real GDP (bns of year 2000 euros) Real GDP growth, % Change in in CPI, % Output per worker (year 2000 euros) Total factor productivity growth Labor productivity growth (per worker) Population, mns GDP per capita (year 2000 euros) Reported unemployment, % Note 1: Average for years given. 2: Projected as of Nov. 29, 2010. Source: European Commission Directorate for Economic and Financial Affairs (ECFIN), AMECO (annual macro-economic database) http://ec. europa. eu/economy_finance/ameco/user/serie/ResultSerie. cfm. Database updated Nov. 29, 2010. Accessed Feb . 23, 2011 711-088 -19-

Exhibit 4: Greek government fiscal accounts and debt, % of GDP 1 1970-79 Total revenue 24. 8 Direct taxes on income and wealth 3. 6 Social contributions 8. 0 Total expenditure excluding interest 25. 0 Employee compensation 8. 2 Social benefits 8. 4 Surplus or deficit excluding interest -0. 2 Interest 1. 1 Surplus or deficit -1. 3 Government debt 19. 3 1 1980 26. 2 4. 5 9. 3 26. 8 9. 3 9. 3 -0. 6 2 -2. 6 21. 9 1991 31. 8 5. 0 10. 1 33. 1 10. 2 12. 8 -1. 3 8. 6 -9. 9 73. 4 2001 40. 9 8. 6 12. 6 38. 8 10. 4 15. 4 2. 0 6. 5 -4. 4 103. 7 2002 40. 3 8. 6 13. 6 39. 5 11. 1 15. 4 0. 7 5. 6 -4. 8 101. 7 2003 39. 7. 8 13. 8 39. 8 10. 8 15. 9 -0. 7 5. 0 -5. 7 97. 4 2004 38. 1 8. 0 13. 3 40. 7 11. 5 15. 6 -2. 6 4. 9 -7. 4 98. 9 2005 38. 6 8. 5 13. 4 39. 3 11. 5 16. 3 -0. 7 4. 6 -5. 3 100. 3 2006 39. 4 8. 1 12. 8 40. 8 11. 6 17. 0 -1. 4 4. 7 -6. 0 106. 8 1992 33. 2 4. 5 9. 9 33. 9 9. 8 12. 8 -0. 7 10. 3 -10. 9 78. 3 1993 34. 5 5. 0 10. 8 35. 2 9. 8 13. 0 -0. 7 11. 3 -11. 9 98. 2 1994 36. 3 6. 1 10. 9 32. 1 9. 5 13. 3 4. 2 12. 4 -8. 3 96. 4 1995 36. 7 6. 6 11. 2 34. 5 10. 1 13. 5 2. 2 11. 2 -9. 1 97. 0 1996 37. 4 6. 4 11. 5 33. 6 9. 6 13. 7 3. 9 10. 5 -6. 6 99. 4 1997 39. 0 7. 0 11. 9 35. 6 10. 3 13. 9 3. 4 9. 3 -5. 96. 6 2007 40. 1 8. 1 13. 4 42. 0 11. 7 17. 7 -2. 0 4. 8 -6. 7 105. 8 1998 40. 5 8. 5 12. 1 36. 2 10. 4 14. 1 4. 3 8. 2 -3. 8 94. 5 2008 39. 9 7. 9 13. 5 44. 4 12. 2 19. 2 -4. 6 5. 0 -9. 6 110. 9 1999 41. 3 8. 8 12. 2 37. 0 10. 5 14. 1 4. 3 7. 4 -3. 1 94. 0 1981 25. 6 3. 8 9. 5 31. 9 9. 9 10. 8 -6. 4 2. 6 -9 26. 9 1982 28. 5 4. 8 10. 6 32. 5 10. 4 12. 6 -4 2. 8 -6. 8 30. 1 1983 29. 6 4. 5 11. 1 33. 5 10. 6 12. 9 -3. 9 3. 6 -7. 5 34. 2 1984 30. 3 4. 9 11. 4 34. 3 10. 8 13. 3 -4 4. 3 -8. 3 41. 2 1985 30. 3 4. 6 11. 6 37 11. 4 14. 1 -6. 7 4. 9 -11. 6 47. 7 1986 31. 6 5 11. 2 35. 8 10. 8 14. 2 -4. 1 5. 2 -9. 49. 8 1987 32. 4 5 11. 4 35 11 14. 6 -2. 5 6. 5 -9. 1 55. 8 1988 31 5. 3 10. 8 35 11. 1 14. 7 -4 7. 4 -11. 4 61. 2 1989 29. 6 4. 5 11. 2 36. 4 12. 1 15. 1 -6. 8 7. 5 -14. 2 64. 2 Total revenue Direct taxes on income and wealth Social contributions Total expenditure excluding interest Employee compensation Social benefits Surplus or deficit excluding interest Interest Surplus or deficit Government debt 2000 43. 0 9. 7 12. 5 39. 3 10. 5 14. 8 3. 6 7. 4 -3. 7 103. 5 1990 30. 8 4. 9 10. 4 35. 9 11. 1 13. 0 -5. 1 8. 9 -14. 0 71. 0 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 Total revenue Direct taxes on income and wealth Social contributions Total expenditure excluding interest Employee compensation Social benefits Surplus or deficit excluding interest Interest Surplus or deficit Government debt 2009 38. 1 8. 3 13. 2 48. 3 13. 6 21. 0 -10. 2 5. 3 -15. 5 127. 9 2010 40. 5 7. 8 12. 4 44. 2 12. 4 20. 6 -3. 7 6. 0 -9. 7 141. 4 Notes: 1. There is a break in the series in 1990. 2. The data for 2010 are projected as of November 29, 2010. Sources: For 1960-1989: Directorate-General for Economic and Financial Affairs, European Economy: Statistical Annex, Number 71, 2000.

T ables 72a, 56a, 57a, 75a, 69a, 62a, 65a, 74, 77a , 66a, and 76a. Expenditures without interest are derived by subtraction. For 1990-2010: ECFIN, AMECO database. http://ec. europa. eu/economy_finance/ameco/user/serie/ResultSerie. cfm. Database updated Nov. 29, 2010. Accessed Feb . 23, 2011 Series URT G, UT CT , UT YG, UT SG, UUT GI, UUCGI, UWCG, UYT GH, UKT GT , UBLGI, UYIG, UBLG, UDGGL, and UVGD. 711-088 -20- Exhibit 5a: Greece abbreviated balance of payments, 1976-2009, and international investment position, 2000-2009, bns of USD 1981 -2. 4 -5. 3 2. 2 -0. 5 1. 2 0. 0 1. 8 0. 0 0. 5 0. 0 1. n. a. 0. 4 0. 2 2000 -9. 8 -20. 2 8. 0 -0. 9 3. 4 2. 1 10. 8 -2. 1 1. 1 0. 8 10. 7 0. 3 -0. 5 -2. 6 -7 -8 -49 12 Current account Goods balance Services balance Income balance Transfers balance Capital account Financial account Direct investment abroad Direct investment in Greece Equity securities balance Debt balance (1) Net financial derivatives Errors and omissions Reserves and related 2001 -9. 4 -19. 1 7. 9 -1. 8 3. 6 2. 2 0. 5 -0. 6 1. 6 0. 8 -1. 3 0. 1 1. 0 5. 7 -7 -5 -60 6 1980 -2. 2 -5. 5 2. 5 -0. 3 1. 1 0. 0 2. 5 0. 0 0. 7 0. 0 1. 8 n. a. -0. 4 0. 1 2002 -9. 6 -21. 5 10. 3 -2. 0 3. 5 1. 11. 6 -0. 7 0. 1 1. 1 11. 3 -0. 2 -1. 7 -1. 9 -7 -5 -107 9 1982 -1. 9 -4. 7 1. 8 -0. 6 1. 6 0. 0 1. 3 0. 0 0. 4 0. 0 0. 8 n. a. 0. 0 0. 6 2003 -12. 8 -25. 6 13. 0 -4. 5 4. 3 1. 4 6. 4 -0. 4 1. 3 2. 1 3. 3 0. 1 0. 3 4. 7 -10 -11 -138 6 1983 -1. 9 -4. 3 1. 4 -0. 8 1. 8 0. 0 2. 4 0. 0 0. 4 0. 0 2. 0 n. a. -0. 3 -0. 2 2004 -13. 5 -31. 6 19. 1 -5. 4 4. 5 3. 0 6. 8 -1. 0 2. 1 3. 5 2. 7 -0. 4 0. 4 3. 3 -15 -22 -158 3 1984 -2. 1 -4. 2 1. 4 -1. 0 1. 6 0. 0 2. 2 0. 0 0. 5 0. 0 1. 7 n. a. -0. 2 0. 2 2005 -18. 2 -34. 3 19. 2 -7. 0 3. 9 2. 6 15. 6 -1. 5 0. 7 4. 1 12. 3 0. 0 -0. 1 0. 1 -16 -30 -165 2 1985 -3. -5. 0 1. 2 -1. 1 1. 7 0. 0 2. 9 0. 0 0. 4 0. 0 2. 5 n. a. 0. 0 0. 4 2006 -29. 6 -44. 3 19. 4 -9. 0 4. 3 3. 8 25. 7 -4. 2 5. 4 4. 6 19. 0 0. 9 0. 4 -0. 3 -19 -47 -223 3 1986 -1. 7 -4. 4 1. 6 -1. 3 2. 4 0. 0 2. 4 0. 0 0. 5 0. 0 1. 9 n. a. -0. 1 -0. 7 2007 -44. 6 -57. 0 22. 8 -12. 5 2. 1 6. 0 38. 0 -5. 3 2. 0 10. 3 31. 7 -0. 6 1. 1 -0. 5 -22 -73 -304 4 1987 -1. 2 -5. 4 2. 6 -1. 4 3. 0 0. 0 2. 0 0. 0 0. 7 0. 0 1. 3 n. a. 0. 2 -1. 0 2008 -51. 3 -65. 0 25. 6 -16. 0 4. 2 6. 0 44. 2 -2. 8 5. 3 -1. 2 43. 6 -0. 7 1. 1 0. 0 -1 -8 -331 4 1988 -1. 0 -6. 0 2. 9 -1. 5 3. 6 0. 0 1. 9 0. 0 0. 9 0. 0 0. 9 n. a. . 0 -0. 9 2009 -35. 9 -42. 8 17. 8 -12. 5 1. 7 2. 8 35. 1 -2. 1 2. 4 -0. 2 36. 1 -1. 2 -0. 8 -1. 2 -3 -3 -375 6 1989 -2. 6 -7. 3 2. 4 -1. 6 4. 0 0. 0 2. 8 0. 0 0. 8 0. 0 2. 0 n. a. -0. 5 0. 3 1990 -3. 5 -10. 1 3. 6 -1. 7 4. 7 0. 0 4. 0 0. 0 1. 0 0. 0 3. 0 n. a. -0. 2 -0. 3 1991 -1. 6 -10. 0 4. 0 -1. 8 6. 2 0. 0 4. 0 0. 0 1. 1 0. 0 2. 8 n. a. -0. 2 -2. 2 1992 -2. 1 -11. 6 5. 0 -2. 1 6. 5 0. 0 2. 6 0. 0 1. 1 0. 0 1. 5 n. a. -0. 9 0. 4 1993 -0. 7 -10. 5 4. 7 -1. 4 6. 5 0. 0 4. 8 0. 0 1. 0 0. 0 3. 8 n. a. -0. 6 -3. 4 1994 -0. 1 -11. 3 5. 4 -1. 2 6. 9 0. 0 6. 9 0. 0 1. 0 0. 0 5. 9 n. a. -0. 4 -6. 3

Purchased by mohammad farsi ([email protected] com) on April 25, 2012 1995 1996 1997 1998 1999 -2. 9 -4. 6 -4. 9 n. a. -7. 3 Current account Goods balance -14. 4 -15. 5 -15. 4 n. a. -18. 0 Services balance 5. 2 5. 1 4. 6 n. a. 7. 3 Income balance -1. 7 -2. 2 -1. 6 n. a. -0. 7 Transfers balance 8. 0 8. 0 7. 5 n. a. 4. 1 0. 0 0. 0 0. 0 n. a. 2. 2 Capital account 3. 2 8. 7 0. 1 n. a. 7. 5 Financial account Direct investment abroad 0. 0 0. 0 0. 0 n. a. -0. 5 Direct investment in Greece 1. 1 1. 1 1. 0 n. a. 0. 6 Equity securities balance 0. 0 0. 0 0. 0 n. a. -2. 8 Debt balance (1) 2. 1 7. 6 -0. 9 n. . 9. 8 Net financial derivatives n. a. n. a. n. a. n. a. 0. 4 -0. 3 0. 1 0. 2 n. a. 0. 0 Errors and omissions 0. 0 -4. 2 4. 5 n. a. -2. 4 Reserves and related International net investment positions (stocks of assets minus liabilities) Net direct investment Net equity investment Net debt (2) Reserves Notes: 1: Debt balance is change in assets minus liabilities of portfolio debt (bonds) and “other investment” (mainly deposit accounts). 2: Net debt (corresponding to debt balance above) includes stock of portfolio debt (bonds) and “other investment” (mostly deposit accounts) assets minus liabilities.

Source: International Financial Statistics, www. imfstatistics. org/imf, accessed Feb. 24 and March 2, 2011. The Greek Crisis: Tragedy or Opportunity? 711-088 Exhibit 5b: Greece balance of payments and international investment position, 2007-10 (billions of euros) Current account Trade balance Exports Imports Services balance, of which: (Tourism and travel balance) (Shipping and transport balance) Income balance Current transfers Capital transfers (mainly from EU) Financial account Residents’ investment abroad Direct investment Portfolio equity (mainly stocks) Portfolio debt (mainly bonds and ills) Other debt (loans, deposit accounts, repos) Loans to non-residents Residents’ deposits and Repos Other Non-residents’ investment in Greece Direct investment Portfolio equity (mainly stocks) Portfolio debt (mainly bonds and bills) Other debt (loans, deposit accounts, repos) Loans to residents, of which: (Loans to government) Non-residents’ deposits and Repos Other Errors and omissions Change in reserves Total net international investment position (1) Direct investment abroad Direct investment in Greece Portfolio equity assets Portfolio equity liabilities Portfolio debt assets (mainly bonds and notes) Portfolio debt liabilities (mainly bonds and notes) Net financial derivatives Net other investment (mainly loans, deposit accounts, repos) Monetary authority assets Financial institution assets Other sector assets Monetary authority liabilities Government liabilities Financial institution liabilities Other sector liabilities Foreign reserves 2007 -32. 6 -41. 5 17. 4 -58. 9 16. 6 8. 8 9. 2 -9. 3 1. 6 4. 3 27. 9 -36. 5 -3. 8 -0. 5 -15. 9 -16. 3 -0. 4 -15. 8 -0. 64. 3 1. 5 8. 1 25. 7 29. 0 -2. 6 -2. 3 31. 7 -0. 1 0. 7 -0. 3 -214 22 36 14 64 73 173 1 -53 2 59 18 11 11 97 13 2 2008 -34. 8 -44. 0 19. 8 -63. 9 17. 1 9. 0 9. 9 -10. 6 2. 8 4. 1 29. 9 -29. 7 -1. 7 2. 9 -3. 2 -27. 8 -0. 8 -27. 0 0. 0 59. 7 3. 1 -3. 7 20. 4 39. 9 -0. 9 -0. 6 40. 9 -0. 1 0. 8 0. 0 -179 27 27 12 17 77 192 1 -61 2 89 16 35 10 110 13 3 2009 -25. 8 -30. 8 15. 3 -46. 1 12. 6 8. 0 6. 5 -9. 0 1. 3 2. 0 24. 5 -29. 1 -1. 5 -0. 7 -3. 1 -23. 9 -0. 3 -23. 4 -0. 2 53. 6 1. 8 0. 5 31. 1 20. 2 4. 6 -2. 3 15. 6 0. 0 -0. 6 -0. 1 -200 27 29 18 20 75 219 2 -57 2 112 16 49 8 112 18 4 2010 -24. 0 -28. 3 17. 1 -45. 4 13. 2 7. 4 7. 3 -9. 2 0. 2 2. 21. 8 19. 9 -1. 0 -1. 1 14. 4 7. 6 0. 1 7. 7 -0. 1 1. 9 1. 7 -1. 1 -33. 0 34. 4 30. 5 30. 0 3. 9 -0. 2 0. 0 0. 2 -228 28 25 18 12 57 164 1 -135 2 102 24 88 38 125 12 4 Note 1. International investment stock at end of period. 2010 figure is preliminary for the third quarter. Sources: Bank of Greece, Statistics Department, Balance of Payments Statistics Division, T ables 1 and 2: Balance of Payments, T able 18: Financial Account, 15/11/2010 and 24/02/2011; and T able 21: International Investment Position, 24/02/2011. 21 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity?

Exhibit 6: Comparative data for 2007: Greece, European Union, large nations, southern nations European Union Nominal GDP Billions of euros 12,396 Percentage of euro area 16 137. 5 Euros per capita 25,000 Euros per capita, purchasing power3 25,000 GDP growth rate, % 3 Trade in goods and services, % of GDP Balance 0. 5 Exports 40. 1 Imports 39. 6 Nominal GDP per capita (euro) 25,000 Nominal GDP per capital (PPP)3 25,000 Labor productivity (euros per hour) 28. 4 Nominal labor cost index (2000=100) 110. 5 Consumer price inflation, % 2. 4 10-year government bond yields, % Fiscal data, % of GDP Government revenue 44. 7 Government expenditure 45. 6 Government primary balance 1. 8 Government deficit (-) / surplus (+) -0. 9 Government gross debt 58. 8 Population, millions 495. 3 Unemployment rate, % 7. Educational attainment, % of total population Ages 20-24 with at least secondary 78. 1 Ages 25-64 with at least secondary 70. 7 Ages 30-34 with university 30 R&D expenditure, % of GDP Total 1. 85 Private sector 1. 18 General government 0. 24 Euro area1 9,018 100 27,700 27,300 2. 8 1. 5 41. 4 39. 9 27,700 27,300 32. 7 111. 6 2. 1 Greece2 Germany 227 2. 5 20,300 22,900 4. 3 -11. 9 22. 7 34. 6 20,300 22,900 18. 2 124. 5 3 4. 3 39. 8 46. 5 -1. 9 -6. 4 105. 1 11. 2 8. 3 82. 1 59. 8 26. 2 0. 58 0. 16 0. 12 2,432 27 29,600 28,900 2. 7 7. 1 46. 9 39. 8 29,600 28,900 39. 7 99. 3 2. 3 4. 0 43. 8 43. 6 3. 0 0. 3 64. 9 82. 3 8. 4 72. 5 84. 4 26. 5 2. 53 1. 77 0. 35 United France Kingdom 1,895 21 29,700 27,000 2. 4 -1. 9 26. 5 28. 29,700 27,000 40. 9 114. 3 1. 6 4. 1 49. 6 52. 3 0. 0 -2. 7 63. 8 63. 6 8. 4 82. 5 68. 5 41. 5 2. 07 1. 31 0. 34 2,053 22. 8 33,700 29,000 2. 7 -3. 1 26. 6 29. 7 33,700 29,000 39. 1 119. 7 2. 3 4. 9 41. 3 44. 0 -0. 5 -2. 7 41. 5 60. 8 5. 3 78. 1 73. 4 38. 5 1. 78 1. 11 0. 16 Spain 1,054 11. 7 23,500 26,200 3. 6 -6. 7 26. 9 33. 6 23,500 26,200 23. 6 124. 3 2. 8 4. 1 41. 1 39. 2 3. 5 1. 9 36. 1 44. 5 8. 3 61. 1 50. 4 39. 5 1. 27 0. 71 0. 22 Italy 1,546 17. 1 26,000 25,900 1. 5 -0. 2 29 29. 2 26,000 25,900 28. 2 121. 3 2 4. 3 46. 4 47. 9 3. 5 -1. 5 103. 6 59. 1 6. 1 76. 3 52. 3 18. 6 1. 18 0. 61 0. 17 Portugal 169 1. 9 15,900 19,600 2. 4 -8 32. 3 40. 15,900 19,600 13. 8 118. 9 2. 4 4. 2 40. 9 43. 8 0. 0 -2. 8 62. 7 10. 6 8. 1 53. 4 27. 5 19. 8 1. 17 0. 6 0. 11 45. 3 46. 0 2. 3 -0. 6 66. 2 325. 2 7. 5 74. 9 66. 3 30. 8 1. 88 1. 2 0. 26 General note: Comparisons were made for 2007 to give a comparative picture before the financial crisis began. 1. Only 16 euro nations are included in the euro area for lack of some data on all 17 members. 2. Some Greek data are provisional. 3. Eurostat actually uses a “purchasing power standard” comparable to purchasing power parity. Sources: Eurostat http://epp. eurostat. ec. europa. eu/portal/page/portal/statistics/search_database, accessed Feb. 26. 2011 and Mar. 5, 2011.

Series are as follows: Nominal GDP: nama_gdp_c-GDP and main components – Current prices; GDP growth: nama_a-Main aggregates – annual data; Trade: nama_gdp_cGDP and main components – Current prices; Nominal GDP per capita: nama_aux_gph-GDP per capita Annual Data; Labor productivity: nama_aux_lp-Labour productivity – Annual data; Labor cost index: nama_aux_ulc-Unit labour cost – Annual data; Consumer price inflation: prc_hicp_aind-HICP (2005=100) – Annual Data (average index and rate of change); Government bond yields: irt_lt_gby10_a-Government bond yields, 10 years’ maturity – Annual data; Fiscal data: naga_a-Government accounts – annual data; Population: demo_pjan-Population on 1 January by age and sex; Unemployment: une_rt_a-Unemployment rate, annual average, by sex and age groups (%); Education: lfsi_edu_a-Youth education, lifelong learning, early leavers from education and training – Annual data; R&D: rd_e_gerdtot-Total intramural R&D expenditure (GERD) by sectors of performance. 22 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 The Gr reek Crisis: Trag gedy or Opportu unity? 7 711-088

Exhibit 7: Greek exchange rate: Europ k pean curren units (ECUs) per dr ncy rachma ECU cent (1/100th of ECU) per drachma 3. 50 3 3. 00 3 2. 50 2 2. 00 2 1. 50 1. 00 0. 50 0 0. 00 0 1960 1965 197 70 1975 1980 1985 1990 1 199 95 2000 Source Calculated from Global Financ Data, ticker EURGRD, http: e: m cial ://www. globalfin nancialdata. com accessed m, March 5, 2010. Exhibit 8: Convergence to Maastricht: Southern E M : European v versus Germ bond yields man Source Eurostat, series Eurostat irt_lt_ e: _gby10_m-Gove ernment bond yie elds, 10 years’ m maturity – Month data, updated hly d Feb. 16 2011; accessed Feb. 22, 2011. 6, . 23 Purchased by mohammad farsi ([email protected] om) on April 25, 2012 711-088 8 The G Greek Crisis: Tragedy or Opportunity? Exhibit 9: Nomi inal unit lab cost indi bor ices, Greece and Germ e many (2000=100) Exhibit 10: Rela ative inflatio harmonized consum price in on: mer ndices (2000 0=100) Exhibit 11: Expo perform ort mance: Index of share o all euro 16 exports x of 6 Sources All are calculate from Eurostat. Exhibit 9: lc_lci_r2 s: ed E 2_a-Labour cost in ndex – Annual data (Nace R2), updat Feb. 16, 2011, a ted extracte Feb. 16, 2011. Exhibit 10: prc_hic ed E cp_aind-HICP (2005=100) – Annual Data (average ind and rate of cha l dex ange), updated Feb 28, b. 2011, ex xtracted Mar. 3, 20 Exhibit 11: te 011. t00002 – External trade, by declarin country, updated Feb. 15, 2011, extracted Feb. 16, 2 ng d 2011. 24 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 The Gr reek Crisis: Trag gedy or Opportu unity? 7 711-088 Exhibit 12: Debt levels of co t ountries rec cently receiv ving excepti ional access to IMF loa s ans Source International Monetary Fund, “Greece: Staff Report on Reque st for Stand-By Arrangement,” C e: M “ R Country Report No. 10/110 (May 2010), Fi 0 igure 1: Debt Ra atios for Recent Exceptional Acc E cess Arrangemen p. 126. nts, 25 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088

The Greek Crisis: Tragedy or Opportunity? Exhibit 13: Greek government’s foreign currency long-term debt ratings Fitch Rating BBBBBB BBB BBB+ BBB+ AA A+ A+ A ABBB+ BBB- Date 13-Nov-95 4-Jun-97 10-Aug-99 25-Oct-99 13-Mar-00 27-Jul-00 20-Jun-01 20-Oct-03 28-Sep-04 16-Dec-04 22-Oct-09 8-Dec-09 9-Apr-10 Moody’s Watch Date 24-May-94 4-Nov-96 23-Dec-96 20-Feb-98 7-May-98 14-Jul-99 4-Nov-02 29-Oct-09 22-Dec-09 22-Apr-10 14-Jun-10 Rating Baa3 Baa3 Baal Baal Baal A2 Al Al A2 A3 Ba1 Standard & Poors Watch Date Rating + – 7-Dec-92 30-Nov-98 24-Nov-99 13-Mar-01 10-Jun-03 17-Nov-04 9-Jan-09 14-Jan-09 7-Dec-09 16-Dec-09 16-Mar-10 27-Apr-10 BBBBBB AA A+ A A AABBB+ BBB+ BB+ Watch + + – – – – – –

Note: Beginning in 2001, there was no distinction between foreign and local (euro) currency. Source: Bloomberg: Ratings for Hellenic Republic Government Bonds, accessed October 25, 2010. Exhibit 14: Spreads of 2-year and 10-year Greek versus German government bonds 20 spread over German bonds, % 18 16 14 12 10 8 6 4 2 0 Mar-09 May-09 Mar-10 May-10 Oct-09 Jan-09 Jun-09 Nov-09 Dec-09 Jan-10 Jun-10 Oct-10 Nov-10 Feb-09 Aug-09 Sep-09 Feb-10 Aug-10 Sep-10 Apr-09 Apr-10 Jul-09 Jul-10 Greek 2-year bonds Greek 10-year bonds Source: Global Financial Data, series IGGRC2D, IGGRC10D, IGDEU2D, IGDEU10D, www. globalfinancial data. com, accessed Feb. 21, 2011. 26 Purchased by mohammad farsi ([email protected] com) on April 25, 2012

The Greek Crisis: Tragedy or Opportunity? 711-088 Exhibit 15: Spreads of 10-year government bonds of European periphery over 10-year German government bonds 10 9 8 7 6 5 4 3 2 1 0 Jan-07 Jan-08 Jan-09 Jan-10 Apr-07 Apr-08 Apr-09 Apr-10 Oct-07 Oct-08 Oct-09 Oct-10 Oct-10 27 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 Jul-07 Jul-08 Jul-09 Greece Ireland Italy Portugal Spain Source: Global Financial Data, www. globalfinancialdata. com, series IGGRC10D, IGIRL10D, IGITA10D, IGPRT10D, IGESP10D, and IGDEU10D, accessed Mar. 6, 2011. Exhibit 16:Euro area exchange rate: value of euro in U. S. dollars 1. 60 1. 50 U. S. dollars 1. 40 1. 30 1. 20 1. 10 1. 0 May-09 May-10 Mar-09 Nov-09 Dec-09 Mar-10 Oct-09 Nov-10 Feb-09 Feb-10 Jan-09 Jun-09 Jan-10 Aug-09 Sep-09 Jun-10 Aug-10 Sep-10 Apr-09 Apr-10 Jul-09 Jul-10 Source: Source: Global Financial Data, www. globalfinancialdata. com, series __EUR_D, accessed Feb. 26, 2011. Jul-10 711-088 The Greek Crisis: Tragedy or Opportunity? Exhibit 17: International Monetary Fund’s and euro-area nations’ contributions to May 2, 2011, emergency loans to Greece, billions of euros International Monetary Fund (IMF) Total for euro-area nations: Germany France Italy Spain Netherlands Belgium Austria Portugal Finland Ireland Slovakia Slovenia Luxembourg Cyprus Malta Note: Nations’ contributions are in proportion to their capital quotas in the European Central Bank.

Source: Jan Strupczewski, “Factbox: Progress towards approving emergency loans to Greece,” Reuters, May 7, 2010, http://uk. reuters. com/article/2010/05/07/uk-eurozone-greece-loanprogress-factbox-idUKTRE64654X2010050, accessed Feb. 27, 2011. 30 80 22. 33 16. 77 14. 74 9. 8 4. 7 2. 86 2. 29 2. 06 1. 48 1. 31 0. 82 0. 39 0. 21 0. 16 0. 07 Exhibit 18: Greek fiscal measures required for IMF-euro area loans (% of GDP) 2010 2011 2012 2013 Overall total Yearly total 2. 5 4. 1 2. 4 2 11. 1 Revenue increases 0. 5 3 0. 8 -0. 3 4 Excise tax 0. 2 0. 3 0. 1 0. 6 value-added tax 0. 3 0. 9 0. 2 1. 5 Property tax 0. 8 0. 1 0. 9 Other taxes 1 0. 3 -0. 3 1 Expenditure cuts 2 1. 1 1. 7 0. 5 5. 3 Wages 0. 5 0. 2 0. 3 0. 2 1. 2 Pensions 0. 8 0. 3 0. 1 0. 1 1. Social benefits 0. 2 0. 2 0. 4 Current spending programs 0. 3 0. 4 0. 2 0. 2 1. 1 Subsidies 0. 7 0. 7 Investment 0. 2 0. 2 0. 2 0. 7 Structural reforms 1. 8 1. 8 Source: International Monetary Fund, “Greece: Staff Report on Request for Stand-By Arrangement,” IMF Country Report No. 10/110 (May 2010), p. 11, Box 3: “The Adjustment Measures. ” 28 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 -29- Exhibit 19: Greek financing needs and EU-IMF loan disbursement schedule, 2010? 2013, billions of euros1 2010 2 2 2011 Q1 12. 9 2. 7 0. 3 9. 8 4 5. 8 0. 1 0 9. 8 4 5. 8 100% 100% 3. 1 6 1. 6 4. 4 100% 100% 3. 1 2 0. 5 1. Q2 18. 7 2. 7 0. 3 15. 6 4 11. 6 0. 1 0 15. 6 4 11. 6 2012 2013 Program Total 192. 8 48. 5 4. 5 138. 3 50 88. 3 1. 5 10 93. 5 51 42. 5 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Public sector financing need (a) 27 13 10. 4 9. 4 18. 4 17. 7 15. 5 10 23. 2 17. 3 16. 7 9. 6 Fiscal deficit 6. 1 3. 1 4. 6 4. 6 4. 1 4. 1 4. 1 4. 1 3. 6 3. 6 3. 6 3. 6 Public-enterprise borrowing 0. 7 0. 3 0. 3 0. 3 0. 4 0. 4 0. 4 0. 4 0. 4 0. 4 0. 4 0. 4 Amortizing existing bonds 20. 1 9. 5 5. 4 4. 4 13. 8 13. 1 10. 8 5. 4 19. 1 13. 2 12. 6 5. 5 of which short-term … 0 4. 6 4. 3 4 4 4 4 4 4 4. 5 4. 5 of which long-term … 9. 5 0. 8 0. 1 9. 8 9. 1 6. 8 1. 4 15. 1 9. 2 8. 1 Stock flow adjustment 0. 1 0. 1 0. 1 0. 1 0. 1 0. 1 0. 1 0. 1 0. 1 0. 1 0. 1 0. 1 Funds for bank support (b) 0 5 5 0 0 0 0 0 0 0 0 0 Borrowing on market (c) 28. 9 0 4 4 4 4 4. 5 4. 5 15. 3 10. 9 11. 1 5. 8 of which short-term … 0 4 4 4 4 4. 5 4. 5 4 4 5 5 of which long-term … 0 0 0 0 0 0 0 11. 3 6. 9 6. 1 0. 8 Note: The amounts of market borrowing are equivalent to rolling over the following percentages of the amortization of existing bonds: Short-term bonds … 0% 87% 93% 100% 100% 113% 113% 100% 100% 111% 111% Long-term bonds … 0% 0% 0% 0% 0% 0% 0% 75% 75% 75% 75% Net financing need (a+b-c) -1. 9 18 11. 4 5. 4 14. 4 13. 7 11 5. 5 7. 9 6. 4 5. 6 3. Loan disbursements 0 20 9 9 15 12 8 5 10 6 6 2 of which IMF 0 5. 5 2. 5 2. 5 4. 1 3. 3 2. 2 1. 4 2. 7 1. 6 1. 6 0. 5 of which EU 0 14. 5 6. 5 6. 5 10. 9 8. 7 5. 8 3. 6 7. 3 4. 4 4. 4 1. 5 109. 2 110 30 80 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 Notes: 1. This table represents the program as presented in May 2010. It was subject to revision. 2. In 2010, Q1 includes January through April; Q2 includes May and June. 3. The fiscal deficit given here includes public-enterprise borrowing plus a small stock-flow adjustment. Source: Adapted from International Monetary Fund, “Greece: Staff Report on Request for Stand-By Arrangement,” IMF Country Report No. 0/110 (May 2010), Attachment I: Greece: Memorandum of Economic and Financial Policies, Table 4. “Greece: Fiscal financing gap and disbursement schedule, 2010? 2013,” p. 90. 711-088 The Greek Crisis: Tragedy or Opportunity? Endnotes European Commission, “Report on Greek Government Deficit and Debt Statistics,” Brussels, August 1, 2010, p. 3, http://epp. eurostat. ec. europa. eu/cache/ity_public/com_2010_report_greek/en/com_2010_report_ greek-en. pdf, accessed February 14, 2011. On PASOK’S October 2010 estimate: Dina Kyriakidou and Paul Taylor, “Interview: EU should spell out Greek support—minister,” Update 1, Reuters, February 18, 2010 (revised 14:01). On the final November 2010 deficit figure: Eurostat: “Provision of deficit and debt data for 2009 – Second notification,” Eurostat news release 170/2010, November 15, 2010. 4 2 1 “Neither a borrower nor a lender be,” The Economist, May 1, 2010, p. 65. 5 On Greek GDP as a portion of euro-area GDP: Eurostat, National Accounts, Annual GDP and main components (year 2009), http://epp. eurostat. ec. europa. eu, accessed December 29, 2010. 6 See “Europa,” Encyclop? dia Britannica Online, http://www. britannica. com, accessed November 28, 2010. 7 On the four defaults: Carmen Reinhardt and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009), p. 91. 8 M. Zoumboulakis, C.

Kollias, C. Naxakis, and M. Chletsos, “?????? ??? ????????? ???? ???????? ????????? ,” ????????? ???????????? ??? ????????? ?????????? (Athens: Pataki Publishing, 2005), p. 32. 9 Zoumboulakis et al. , p. 45. 10 Thanos Veremis and Giannis Koliopoulos, “????? – ? ???????? ???????? : ??? ?? 1821 ????? ?????? ,” second edition (Athens: Kastaniotis Publishing, 2006), p. 451. Vassilios G. Manessiotis and Robert D. Reischauer, “Greek Fiscal and Budget Policy and EMU,” in Ralph C. Bryant, Nicholas C. Garganas, George S. Tavlas, eds. , Greece’s Economic Performance and Prospects (Athens: Bank of Greece, and Washington: Brookings Institution, 2001), p. 110.

George Pagoulatos, Greece’s New Political Economy: State, Finance and Growth from Postwar to EMU (New York: Palgrave McMillan, 2003), p. 58. 13 14 12 11 Pagoulatos, Greece’s New Political Economy, p. 57. Pagoulatos, Greece’s New Political Economy, p. 72. 15 Authors’ calculations based on International Financial Statistics, http://www. imfstatistics. org/imf, accessed February 28, 2009. The Constitution of the Hellenic Republic, English translation, http://www. ministryofjustice. gr/ eu2003/constitution. pdf, accessed April 25, 2009. 17 18 16 Marcus Walker, “Tragic Flaw: Graft Feeds Greek Crisis,” Wall Street Journal, April 15, 2010. Account of corruption, except as otherwise noted, from Walker, “Tragic Flaw. ” Other publications ran similar accounts. 9 Alexander Macridis, “Greece: From the edge of the precipice to laying the foundations for health and prosperity,” Harvard Business School European Leadership Council, October 21, 2010, p. 9. 20 Nikos Nikolaou, “??? ? ?????????? ??? ????? ??????? ??? ????? ??? ??????? ,” Kathimerini, June 28, 2008, http://news. kathimerini. gr/4dcgi/_w_articles_columns_1_28/06/2008_275792, accessed April 25, 2009. (The translation is the authors’. ) On Greek entry to the EC in the rest of this paragraph: Desmond Dinan, Ever Closer Union: An Introduction to European Integration, third edition (Boulder: Lynne Rienner Publishers, 2005), p. 100. 30 Purchased by mohammad farsi ([email protected] com) on April 25, 2012 21 The Greek Crisis: Tragedy or Opportunity? 711-088 Elena A.

Iankova and Peter J. Katzenstein, “European Enlargement and Institutional Hypocrisy,” in Tanja A. Borzel and Rachel A. Cichowski, eds. , The State of the European Union: Law, Politics, and Society, vol. 6. (Oxford: Oxford University Press, 2003). 23 24 22 Iankova and Peter J. Katzenstein, “European Enlargement,” p. 279. Iankova and Peter J. Katzenstein, “European Enlargement,” p. 281. 25 Ralph C. Bryant, Nicholas C. Garganas, and George S. Tavlas, “Introduction,” in Bryant, Garganas, and Tavlas, eds. , Greece’s Economic Performance and Prospects (Athens: Bank of Greece, and Washington: Brookings Institution, 2001), pp. 11-12. 26 27 Bryant et al. , pp. 1-12. Pagoulatos, Greece’s New Political Economy, p. 103. 28 European Commission, Directorate-General for Economic and Financial Affairs, European Economy, no. 71, Statistical Annex, 2000, Table 75a, “Total expenditure; EU Member States: former definition,” and Table 76a, “Net lending (+) or net borrowing (–); EU Member States: former definition,” http://ec. europa. eu/economy_ finance/publications/european_economy/index_en. htm, accessed February 18, 2011. 29 George Alogoskoufis, former Greek minister of economy and finance, “The Greek Economy after the Crisis,” unpublished paper provided to the authors, October 2, 2010. 30 European Economy, No. 1, Statistical Annex, 2000, Table 78, “General government consolidated gross debt. ” 31 Interest payments as percent of GDP from European Economy, No. 71, Statistical Annex, 2000, Table 66a, “Interest; EU Member States: former definition. ” The deflator for consumption expenditure rose 19. 0% annually from 1981–1990, compared with 6. 4% to 6. 7% in various groupings of EC nations. See European Economy, Statistical Annex, 2000, Table 25, “Price deflator private final consumption expenditure. ” 33 32 Alogoskoufis, “The Greek Economy. ” 34 European Commission, Directorate General for Economic and Financial Affairs, “Unemployment rate: total: Member States: definition (ZUTN),” AMECO database, http://ec. uropa. eu/economy_finance/ameco/ user/serie/SelectSerie. cfm, accessed November 10 2010. John Major, The Autobiography (London: HarperCollins, 1999), p. 150, and Geoffrey Garrett, “The Politics of Maastricht,” Economics and Politics 5, no. 2 (July 1993), pp. 115-116. German unification occurred before Maastricht was signed, but it would have been very difficult for Kohl to go back on the deal, Garrett notes. On Kohl seeing the euro as providing a stable European anchor as the Eastern Bloc broke off from the Soviet Union: Garrett, “The Politics of Maastricht,” p. 107. 37 There were other criteria as well. For the complete list, see Charles R.

Bean, “Economic and Monetary Union in Europe,” Journal of Economic Perspectives 6, no. 4 (Fall 1992), p. 44. 38 39 36 35 Garrett, “The Politics of Maastricht,” p. 106. Norman Lamont, In Office (London: Little, Brown, and Co. , 1999), p. 118-119. (Lamont was U. K. chancellor of the exchequer. ) 40 41 Dinan, Ever Closer Union, p. 504. Tony Barber, “Saving the euro: Tall ambition, flawed foundations,” Financial Times, October 11, 2010. 42 Rebecca M. Nelson, Paul Belkin, and Derek E. Mix, Greece’s Debt Crisis: Overview, Policy Responses, and Implications, Congressional Research Service, May 14, 2010, http://www. crs. gov, accessed October 5, 2010, pp. 2-3. 31

Purchased by mohammad farsi ([email protected] com) on April 25, 2012 711-088 The Greek Crisis: Tragedy or Opportunity? 43 Alogoskoufis, “The Greek Economy. ” 44 In 1993 German long-term bond yields were 6. 5%, while yields of comparable Greek bonds were 23. 3%: European Commission, Directorate General Economic and Financial Affairs, European Economy, Statistical Annex, spring 2010, Table 49, “Nominal long-term interest rates,” http://ec. europa. eu/economy_finance/publications/ european_economy/index _en. htm, accessed February 24, 2011. On government debt as percent of GDP: European Economy, Statistical Annex, 2000, Table 78: “General government

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