A Case Study of the Greece Debt Crisis

Case Study: Greece Debt Crisis
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Case Study: Greece Debt Crisis
Abstract
A debt crisis occurs when a country cannot sustain its economy while at the same time paying both internal and external debts (Serafein, 2017). The cause of this crisis can be over-borrowing from foreign lenders or overreliance on a single industry to sustain the economy. Before 2013, Greece depended on service sector that supported the eighty percent of the country’s GDP and the remaining sixteen percent was supported by the industry sector. Agriculture only supported an estimate of four percent of the economy. The problem with Greece is that it depended on overspending on paying pensions to the aging population. This paper addresses the causes of Greece’s debt crisis and suggests some of the economic policies that could help the country solve this crisis. While it is not guaranteed that the proposed solution may not be a hundred percent efficient, it is expected that Greece should opt for a solution that can cause the least amount of damage to its ailing economic stability. The real solution to this crisis lies in the economic reforms that support the adoption of the value of liability and the value of assets such as the International Financial Reporting Standards (IFRS) (Serafeim, 2017).
Introduction
The Greek debt crisis refers to the huge amount of money that Greece owes other countries in the European Union (EU) (Armadeo, 2018). While it is true that a country can borrow to sustain its economy and development programs, every government that opts for borrowing has to make sure that the borrowed amount is spent appropriately. Greece’s debt crisis is tied to both the economic and political policies that have failed to take into consideration the huge debt that the country owes the EU. Greece has different potential solutions to its problems, even though these solutions do not guarantee that the country will break free from the debt crisis that has had adverse effects on its citizens. The Greece debt is already unsustainable. The only intervention that Greece deserves is to be forgiven the debt before the country decides to default. On the other hand, the lenders are focused on defending the stability of the euro by lending additional funds at cheap interest rates with the hope that Greece will stabilize and pay its initial loans.
Problem statement
Greece can only embark on the path to economic recovery after it has paid off its debts. The other option is to default on the debts it owes the Eurozone. According to Mavridis (2018), Greece cannot extricate itself from this crisis through defaulting. Defaulting occurs when the country is not in a position to pay its debts. However, before delving into analyzing the cause of this crisis, it is important that one understands what led to the crisis. During a good time when the country’s economy was stable, the government borrowed billions of money from the Eurozone (Serafeim, 2017). The problem is not all about borrowing, but the economic policies that did not provide the government with the procedures and methods of tracking how the funds were used. As a result, a significant amount of money was stolen due to lack of proper IFRS. When Greece threatened to default on its debt in 2010, the EU added it another debt money for it to work and develop to pay the initial debts. The debt crisis cannot be solved by increasing borrowing. It can only be solved by having in place solid economic policies that curb excessive policies and enhance liability and financial accountability and reporting. Unless Greece has developed the IFRS standards, it defaulting is inevitable.
Analysis and findings
One of the questions that a person will always ask when reading the case of Greece debt crisis is how the country got to the current situation. According to Serafeim (2017), Greece did not have accrual measures to help report the value of its liabilities and assets according to the IPSAS. Instead of using the IPSAS system to monitor and evaluate the market value of its assets and account for its liabilities and assets, Greece used amortized costs using the interest rates method. In the amortized interest rate method, the borrower calculates every year the carrying amount of the liability times the effective interest rate as an expense. The change between the cash amount and the expense is then carried forward as a liability. This can only be accounted for in the presence of proper IPSAS standards which Greece did not have in place even when its economy was thriving. As a result, the accumulation of carry-forwards spelled doom for the country’s potential economy. Armadeo (2018) explains that Greece’s debt crisis dates back to 2001 when the country shifted to the euro as its primary currency. The reason for this adoption was for the country to attract loans from the Eurozone. Germany and its bankers were the first to embrace Greece with the hope that the country will strengthen the euro.
According to Serafeim (2017), fair value is another principle that Greece ignored or misused. Instead of applying fair value as an entity-based principle, it was applied as a market-based principle. The Eurozone was determined to make sure that Greece The market fluctuates and cannot be relied on as a measure of fair value. Serafeim (2017) explains that the misuse of fair value gave a higher priority to the unadjusted prices in the market. When the economic crisis of 2008/2010 hit the countries, Greece was left in a crisis that has left it struggling to recover. Any attempt to recover from this crisis has relied on cheap borrowing which does not take into consideration the policies of spending or utilizing the money in the programs that could help the country solve the debt crisis.
In the process of attempting to break free from the debt, Greece has relied on the lenders in the EU with the hope that they could help it solve the debt crisis. This is not the desired solution as the masters would wish that the country remains in the economic crisis where it has plunged. Additionally, the lenders are not pursuing similar common goals. If the EU lends money to Greece, it is not doing that to help Greece repay its loans. It is only trying to defend the stability of the euro which could attract adverse consequences if Greece was to default on its loan. If indeed the lenders wanted to set Greece free, they could forgive it the debts and let the country embark on the economic stability. As a result, there is a need for austerity measures regarding economic principles with the goal of utilizing economic measures that promote the desired results. The primary focus for Greece at the moment should not be only about overcoming the adverse impacts of the debt but also making sure that there is a lasting solution to prevent the country from walking the path that led it to this historical debt crisis. This has to start with a change in both economic and political policies.
Economic policies have to address how the government spends the cheap loans it acquires. These policies have to start by introducing the desired measures that tame the country’s budget. In 2009, Greece’s domestic budget exceeded fifteen percent of its gross domestic product (GDP). This was a clear indication that the country had taken a wrong path and it was unlikely to recover from the consequences. Greece had become a slave to the lenders and wanted the EU to forgive some of the debt. The EU was not ready to forgive the debt, especially because it had vested interests in the country. Another reason was for punishing the country so that it can take a lesson on spending, considering that it had made massive borrowing without proper financial planning and recording. Instead of bailing the country out of its debt crisis, the EU added another debt with conditions on how Greece was to use the funds.
Germany and its bankers, for instance, thought that bailing Greece out could not solve the debt crisis. They championed for an approach that could increase the country’s competitiveness in the EU market (Mavridis, 2018). While the approach of increasing the competitiveness of Greece in the EU and later the global market is desirable, it has to be followed by changes that reflect the commitment to end the crisis and return to the path of the economic recovery. In the process of these adjustments, the government has to start by making sure that proper liability and asset reporting is done in a manner that does not mislead the market. One of the desired measures in curbing expenses is for the country to reconsider its pension program. According to Mavridis (2018), workers in Greece were objected to the idea of working hard in their occupations so that the aging populations could earn higher pensions. This policy had made it impossible for the country to collect enough taxes to stabilize its economy while at the same time being ready to offset its debts.
Both the U.S Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) could be potential solutions to Greece’s debt crisis. Serafeim (2017) defines GAAP as the primary accounting rules used in the United States to organize, present, and report financial statements for an assortment of entities. This is the best process of tracking how the money is spent in the economy. The advantage of utilizing GAAP financial principles is that it takes into consideration an estimate of the future cash flows and the expectations of the future variations in the market. As a result, it is possible for the country to be prepared for future changes that are likely to crop while at the same time spending within its capacities. Another advantage of this principle is the risk-free interest rate as explained by Serafeim (2017). Risk-free interest rates apply on monetary assets with maturity dates that coincided with the period covered by the cash flows and the ones that had not posed a risk of defaulting. This could best apply to the creditors, who are the EU members in this case.
On the use of IFRS principles, the liabilities facing Greece can be addressed by making sure that there is a defined exchange and understanding of the information between the lender and the borrower. The first approach that the lender has to take into consideration is to make sure that the borrower has proper financial reporting plans in place that do not pose a risk of defaulting. EU members such as Germany and its bankers assumed this and blindly credited Greece with money in the hope that the country could repay. The loopholes in the country’s financial reporting made it impossible for the government to collect enough revenue to pay the debts. Additionally, the poor financial reporting and management of funds discouraged workers and companies who felt that they were working hard to pay pensions instead of helping the country overcome the economic crisis and embark on the path of economic recovery.
One cannot, however, ignore the role of the creditors in Greece’s debt crisis. The creditors have a responsibility of making sure that the borrower can repay the debt. The EU and its members and also the International Monetary Fund (IMF) did not consider the financial programs that the c...