AbdulMalik Al Balushi 88080 4/1/2012

Country Report: Greece

I. Introduction to the country: geography, location, area

The Republic of Greece is a country in Europe. Although geographically located at the continent's southeast, it is generally included in Western Europe. Greece has land borders with Albania, the Republic of Macedonia and Bulgaria to the north, and Turkey to the east. The Aegean Sea lies to the east of mainland Greece, the Ionian Sea to the west, and the Mediterranean Sea to the south. Greece has the twelfth longest coastline in the world at 13,676 km (8,498 mi) in length, featuring a vast number of islands (approximately 1,400, of which 227 are inhabited), including Crete, the Dodecanese, the Cyclades, and the Ionian Islands among others. Eighty percent of Greece consists of mountains, of which Mount Olympus is the highest at 2,917 m (9,570 ft.).

In 1981, Greece joined the EC (now the EU); it became the 12th member of the European Economic and Monetary Union in 2001. In 2010, the prospect of a Greek default on its euro-denominated debt created severe strains within the EMU and raised the question of whether a member country might voluntarily leave the common currency or be removed. Athens is the capital and the largest city in the country (its urban area also including Piraeus).

In term of natural resources, Greece is graced with lignite, petroleum, iron ore, bauxite, lead, zinc, nickel, magnesite, marble, salt, and has potential for hydropower. In addition to this, the country has a strategic location dominating the Aegean Sea and southern approach to Turkish Straits.

Its population is 10,760,136 as of an estimate done in July 2011. The following shows the age structure:

AbdulMalik Al Balushi 88080 4/1/2012

0-14 years: 14.2% (male 787,143/female 741,356)

15-64 years: 66.2% (male 3,555,447/female 3,567,383)

Total population 10,760,136

65 years and over: 19.6% (male 923,177/female 1,185,630)

Figure 1 Age Structure in Population, 2011

II.

The Country Economics Structure

The countrys GDP comes from three sectors. Agriculture accounting for 3.3%, Industrial sector accounting for 17% and the services sector accounting for 79% as per 2010 estimates. The Gross Domestic Product of the country is $305.4 billion (2010 est.) with a real growth rate of -4.5%. The sectors of the economy share a labor force of 5.013 million (2010 est.). The distribution is shown in the diagram below :

services: 65.1%

industry: 22.4% agriculture: 12.4%

Figure 2 Employment Per Sector

The unemployment rate in the country is 18.3% as of 2011. Greece has a deficit in its budget as per 2010 estimate of -10.4% of GDP. The public debt is 142.7% of the GDP (2010 est.). The inflation rate in 2011 was 2.9%.

AbdulMalik Al Balushi 88080 4/1/2012

III.

Main challenges the economy faces

In 2009, the government of George Papandreou revised its deficit from an estimated 6% (8% if a special tax for building irregularities were not to be applied) to 12.7%. In May 2010, the Greek government deficit was estimated to be 13.6% which is one of the highest in the world relative to GDP. Greek government debt was estimated at 216 billion in January 2010. Accumulated government debt was forecast, according to some estimates, to hit 120% of GDP in 2010. The Gr

From late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels. This led to a crisis of confidence, indicated by a widening of bond yield spreads and risk insurance on credit default swaps compared to other countries, most importantly Germany.

Downgrading of Greek government debt to junk bond status created alarm in financial markets. On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed on a 110 billion loan for Greece, conditional on the implementation of harsh austerity measures.

In October 2011, Eurozone leaders also agreed on a proposal to write off 50% of Greek debt owed to private creditors, increasing the EFSF to about 1 trillion and requiring European banks to achieve 9% capitalization to reduce the risk of contagion to other countries.

Geek government bond market relies on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally.

Estimated tax evasion costs the Greek government over $20 billion per year. Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January). According to the

AbdulMalik Al Balushi 88080 4/1/2012

Financial Times on 25 January 2010, "Investors placed about 20bn ($28bn, 17bn) in orders for the fiveyear, fixed-rate bond, four times more than the (Greek) government had reckoned on." In March, again according to the Financial Times, "Athens sold 5bn (4.5bn) in 10-year bonds and received orders for three times that amount."

IV.

Alternative policies to address challenges

There have been many suggestions around the world from a lot of economist, institutes and policy makers on how to solve the problems faced by the Greek economy. However, I think the following are the most feasible options:

1.

Debt buybacks

European officials must come up with a new strategy for reducing the excessive debt stock. The need to buy back bonds as part of the solution to the peripheral debt crisis. Given the huge discount at which Greek bonds now trade in secondary debt markets, debt buybacks are clearly the obvious policy. The face value of debt relative to GDP would drop, calming financial markets. While austerity gradually cures the underlying fiscal disease, Greece could finance its public deficits by placing bonds in the private market at reasonable interest rates.

2.

Address current account imbalances

Regardless of the corrective measures chosen to solve the current predicament, as long as cross border capital flows remain unregulated in the Euro Area, current account imbalances are likely to continue. A country that runs a large current account or trade deficit (i.e., it imports more than it exports) must ultimately be a net importer of capital; this is a mathematical identity called the balance of payments. In

AbdulMalik Al Balushi 88080 4/1/2012

other words, a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those imports. Conversely, Germany's large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital, lending money to other countries to allow them to buy German goods.

3.

European Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests to transform the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. Given the backing of the entire Eurozone countries and the ECB. To ensure fiscal discipline despite the lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet agreed on fiscal and macroeconomic criteria. Governments that lack sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates.

V.

Conclusion

Greeces Debt Crisis has uncovered a lot of imperfections in the world economy. It has put a country in the bankruptcy list and turned an advanced economy and population to poverty. It has put the EU under the scope, & it has shifted the attention to the efficiency & the success of the Euro-zone. Its considered as probably the biggest test the EU (& the EMU-in particular) has gone through. How the EU & Greece are handling the crisis with the whole bail-out plan will reflect to what extent the EU is able to function on its own as a powerful economic entity.

AbdulMalik Al Balushi 88080 4/1/2012

References :

The economist CIA Country Report Voxeu.org