The Greek sovereign debt crisis : lessons for developing economies.

Abstract

This paper aims to provide a qualitative as well as a quantitative analysis of the determinants that caused the Greek public debt problem. It will also serve as an interesting case study on lessons on public debt for developing economies. Firstly, we will give a brief introduction to the background of the Greek economy, which will be useful in understanding the fundamental causes that resulted in the Greek debt crisis. Throughout the years, Greece has been experiencing the twin deficits (government budget deficit and current account deficit) since the 1980s. These deficits were masked by the real Gross Domestic Product (GDP) growth rate of 3 per cent on average. The Global Financial Crisis and the announcement in 2009 by finance minister George Papakonstantinou exposed the Greek debt problem, which resulted in Greece being unable to roll over its debt. It had detrimental consequences on the economy such as deep recession, high unemployment rate and bank runs. Using quarterly data from 2001 to 2012, we found that the interest rate and output growth rate are statistically significant factors affecting Greece’s debt-GDP ratio. As the result may be affected by the sample period, the primary deficit ratio is not found to be statistically significant as the fundamental cause of the debt-GDP ratio. The paper suggests that policy can focus on growing the economy by improving competitiveness and productivity. However, more research is required to determine the specific industries to target.