Bailouts will always fail no matter what. Running a huge fucking deficit isn't going to help your economy in any way. Why should traders give a fuck? Their job is to make money from investments, and it shows when they walk away from a country means you guys are fucking too much shit up.
Overcoming the Greek Debt Crisis
Beginning in April 2010, the Greek government faced a sovereign debt crisis, which has led to their debt to become unbearable, as it stands today at $468.8 (147% of GDP) Billion (Eurostat). The debt was a result of reckless government expenditure against very little government revenue, breaking the rules of the government budget constraint. It is necessary for the Greek government to balance its budget, cutting back government expenditure while increasing tax revenue in order to bring the country out of massive debt. If the country does not do so, the government may have to default on its debts, causing a flight of foreign and local capital from the Greek economy due to a lack of financial confidence within the economy.
One cause of the crisis was the large increase of Greek government debt increasing during the late 2000s, as Greek government debt went from 96% of the GDP in 2006, to 116% in 2010(Shostak). One of the major factors for the reason behind Greece's large increase in government debt is that the government betted on its ability to repay their debts based on their economic growth rate. From 2007 to 2008, Greece's economy increased by 4.2% of its GDP (Eurostat), however it came to a recession when it shrunk by -0.3% from 2008-2009.
The Greek government broke the government budget constraint on a large amount, where their current deficit stands at -$34.5 Billion (10.5% of GDP) in 2010. This massive spending and breaking the government budget constraint is the lead cause to the Greek sovereign debt crisis. Raising the interest rates to 17% (Cochrane and Kashyap), also proves unviable as the government would further be unable to pay off such a large amount of interest to the already large amount of debt. The interest rate also led the debt to rise from 127.1% to 141.8% (2009-2010) in just one year (Eurostat), thus further making the debt more difficult to restructure.
In accordance to the government budget constraint, it is vital that the Greek government to make its deficit of -10.5% (Eurostat) to a surplus and increase economic growth if it wishes to repay its debts. Borrowing money from either the European Central Bank (ECB) or the International Monterey Fund (IMF) is a temporary solution to a permanent issue, as the government will need to pay back its loans from such funds. Austerity measures must be taken in favour of a tax increase, as raising taxes drives away incentives to invest capital and wealth creation within a nation (Shostak).
The Greek government expenditure currently stand at 49.5% of its GDP while its revenue is only at 39.1% of GDP (Eurostat), which demonstrates that the government participates in an extremely active role in the economy of the nation. Such expenditure hinders wealth creation, as governments are not wealth generating entities, but merely re-allocate resources from the wealth creators and inhibits economic growth (Shostak).
In order to solve the sovereign debt crisis, it is vital that the Greek government take massive austerity measures in order to prevent a further increase in debt and generate economic growth, the S&P index claims that a 50% "haircut" in the amount of debt may advert Greece to default on its debt (Manasse). An option to the Greek government is to privatize public assets such as telecom companies, energy industries and infrastructure in order to shave off expenditure from public resources and increase economic growth through means of privatization.
Another method is to lower the interest rates on the debt in order to prevent further increase in public debt and to prevent a government default on its debts (Manasse). Defaulting on their debts will have a wider affect not only on the Greek economy, but the economies of Spain, Italy, Ireland and other Eurozone nations with large amounts of debt (Wyplosz). Another issue with the government budget is the unreliability and accusations of data manipulation (Manasse), it is necessary to balance the books and investigate any claims in order to reassure investor confidence within the economy.
The Greek government has continued to violate the budget constraint by increasing its interest rates, sustaining a large government deficit and borrowing money from Eurozone governments while failing to keep control their national debt (Wyplosz). The benefit of violating a government constraint is increase growth in the infrastructure sector of the economy due to the use of public works, however the costs of intergenerational equity and crowding out effects outweighs the rate of return for infrastructure investments.
Intergenerational equity traps are the deadliest as governments need to borrow money to pay off old debt, which does not absolve the issue but adds more money onto the already large debt held by the government and forcing future generations to pay off the economic irresponsibility of the current generation (Cochrane). The necessity to pay off these debts usually come in the form of tax hike, which inhibits wealth creation as there are less incentives to invest in your country and a capital flight will occur where most business will start to move overseas, thus losing a large amount of taxable income (Cochrane).
In conclusion, the only method to overcome any sovereign debt issue is to keep a balanced budget where the government has the ability to pay off the debts in the future instead of borrowing money to pay off old debts. Austerity measures must be taken in order to prevent further addition to government debt and create incentives to generate wealth. Privatization of non-essential government assets is a necessary measure to cut down on expenditure while maintaining a relatively low tax level to encourage business and foreign direct investments to your economy. Relying on future growth to pay off debts will also create issues, as we saw Greece's inability to handle their future debts while betting on a higher growth rate to pay off their debts.
