In order to facilitate our study, we will attempt, in advance, to classify economic crises, thus establishing the overall framework for our analysis. In terms of context, economic crises are divided into the following seven main categories: 1) conjunctural and growth crises; 2) inflation crises; 3) structural crises and commodity market bubbles (2008 property market bubble, 17th century “tulip mania”); 4) sovereign debt crises (Greece being a recent case); 5) exchange rate crises (the cases of Russia and South East Asia); 6) financial crises, which are divided into a) banking crises (e.g. the recent 2007/8 financial crisis of in the US) and b) stock market crises. However, crises are quite often of a mixed nature, combining features of more than one category (Kotios & Pavlidis, 2012: p. 53).

The term “sovereign debt” denotes the sum of the government’s financial obligations, which result from the conclusion of loan agreements either by itself, or by agencies under its control. Public loan agreements are usually concluded with the issuance of bonds (transferable securities) (Kotios & Pavlidis, 2012: p. 53). Sovereign debt problems emerge in the case of countries that, with the creditors consent, have borrowed way beyond the level that they could afford and that would ensure the repayment of the loans, thus leading to over-indebtedness. Over-indebtedness may lead to the non-sustainability of public debt¹ and, consequently, to a sovereign debt crisis (Woodward, 1992: p. 23).

A sovereign debt crisis includes the partial, or total, inability to repay debts (Kotios & Pavlidis, 2012: p. 56), the default of the borrower’s loan obligations, and the restructuring of the borrower’s debts on less favourable, as compared with the original, terms for the lender (Reinhart & Roggof, 2010: p. 6). Economists have grappled with this phenomenon since the era of Adam Smith, who, in his Wealth of Nations, states that at certain times it “becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so” (Smith, 1776). However, over-indebtedness does not automatically and inescapably lead to sovereign default, and this situation may be reversible (Kotios & Pavlidis, 2012: p. 56).

The emphasis on the analysis of debt crises is due to the fact that they directly lead to the alteration of a country’s business cycle, because of the disruption of its relations with its lenders, as well as the consequent austerity (Cohn, 2009: pp. 261-264). Now we will examine the factors that help increase sovereign debt.

The size of a country’s sovereign debt is expressed as a percentage of GDP and is affected by the factors of the following equation:

D t − d t − 1 = p d t − n d f s t + r t − g t 1 + g t d t − 1

(Pinto and Prasad, 2009: p. 182)

where dt is the debt-to-GDP ratio at the end of a time period, pd is the primary deficit to GDP ratio, gt is the real growth rate, and ndfs is the non-debt financing sources to GDP ratio. According to the above function, any changes in the debt-to-GDP ratio are explained by the primary deficit, the real interest rate, and the real growth rate. There are also other factors, including privatisations as a non-debt financing source, that can play a key role (albeit only as regards the reduction of the debt-to-GDP ratio). The above factors, either individually or combined, can affect the level of debt as a percentage of GDP, being potential causes of over-indebtedness and sovereign debt crisis (Table 1).

Debt is linked to budget deficits via government revenue and expenditure. The fiscal deficit is determined by: 1) the primary deficit (pd) of an economy’s government budget (central government revenue minus expenditure); and 2) the loans’ servicing costs (determined by the size of a country’s total debt and borrowing rate)² (Pantelakis, 1995: p. 25; Krugman, 2008). Economies that show fiscal deficits resort to borrowing in order to cover them. Therefore, the accumulation of primary deficits over time is one of the main reasons behind a ballooning

Source: Pinto and Prasad, 2009: p. 185.

public debt. Moreover, interest payments increase the deficit for the current year and, consequently, total indebtedness (Kazakos et al., 2016: p. 51).

Based on the above, sovereign debt stabilisation is achieved through the reduction of the budget deficit to manageable levels, as well as with the pursuit of strong growth rates. Indeed, as debt is not examined as an absolute figure, but as a percentage of GDP (debt/GDP ratio), any increase in GDP reduces the debt-to-GDP ratio. Therefore, primary surpluses are not panacea, since the existence of a manageable deficit for investment activities and, by extension, the managed maintenance of moderate debt levels, is necessary for financing sustainable economic growth in deficit countries and has a positive effect on the sustainable reduction of the debt-to-GDP ratio (Sidiropoulos, 2009; Krugman, 2011; Kazakos et al., 2016: p. 51; Wolfson, 1994: p. 221; Gaston Gelos et al., 2004). However, the occurrence of the problem was due to the high indebtedness and the manner in which this debt was used. According to research on a database that comprises 18 member countries of the OECD for the past thirty years, debt levels of more than 85% of GDP constitute an impediment to growth (Cecchetti et al., 2011).

On the other hand, budget deficits, in combination with current account deficits, suffocate public finances (particularly when the economy lacks adjustment tools such as monetary and foreign exchange policy). Chronic current account deficits are linked to a lack of competitiveness in an economy, i.e. a country’s capability to sell goods and services abroad, a fact that is related to the efficiency and productivity of the economic system (Malliaropoulos, 2011; Kollintzas, 2011; Davradakis, 2011). As regards the consequences of budget deficits and sovereign debts, there are three different approaches in economic theory: Ricardian equivalence, the Neoclassical perspective, and Keynesian analysis.

First, Ricardian equivalence says that government bonds, i.e. sovereign debt, do no increase real wealth in an economy, because rational³ consumers realise that increased government borrowing in the present implies increased taxes in the future, since these taxes will be necessary for servicing the debt. Therefore, the expectation of increased taxes in the future means that an increase in government borrowing will not lead to an increase in consumption, and, as a result, the overall effect of borrowing on the economy is zero (Kazakos et al., 2016: p. 49). The Neoclassical perspective differs from Ricardian Equivalence as regards human behaviour. Indeed, the horizon of a person’s consumption planning is strictly identified with the expected duration of their limited life,thus rendering any increase in the taxes for future generations irrelevant. According to this view, budget deficits increase the total lifelong consumption of the current generation and, by extension, disposable incomes as a whole, and may have a temporary beneficial effect on the real economy, at the expense of future generations (Kazakos et al., 2016: p. 51).

Keynesian analysis, which is based on the established IS-LM model, argues that the substituting borrowing for taxation, given the level of public expenditure, boosts total effective demand and, consequently, increases disposable incomes, having a beneficial effect on the unemployment rate. However, inflation erodes the real value of sovereign debt and, as a result, offsets any increase in the real wealth of private actors (Dalamagas 2003 in Kazakos et al., 2016: pp. 51-52). In conclusion, consumers are not rationally thinking but, on the contrary, are carried away by the increase in borrowing and consume more, and thus borrowing leads to a rise in GDP. Increased consumption will inevitably lead to inflation.

In summary, the theoretical review of economic crises and, in particular, sovereign debt crises, aims at providing us with the interpretative tools required for analysing the weaknesses of the Greek economy over time. Now it is deemed useful to examine the fiscal position of the Greek economy.

According to the European Commission, private consumption during the period leading to the manifestation of the economic crisis (2000-2009) represented 73% Greek GDP (the largest percentage in EU-27), as compared to a eurozone average of 58.8% (Anastasatos, 2009: p. 5). The high share of consumption in the makeup of Greek GDP also resulted from the incessant annual increase of private and public consumption during the twenty years that preceded the outbreak of the economic crisis (Table 4 and Table 5).

We can see that consumption is a major determinant not only of GDP, but also of its year-on-year growth rate (% growth) during the last decade. The point is to explore the contribution of various factors of the Greek economy (investment, consumption, and external sector) to its growth.

In 2000-2008, the Greek economy experienced a period of uninterrupted strong economic growth, at an average annual rate of almost 3.4% (Table 2), against an EU-16 average of 2.1%. That said, the economy was growing faster than its long-term potential output growth rate suggested, taking into account the sources of this growth (Anastasatos, 2009: p. 4).

We will examine the contribution of the three variables of the GDP formula (GDP = C + I + G + NX), which are: consumption, investment, and net exports, to the economy’s growth. When studying the contribution of private consumption to the growth of Greek GDP, we can see that it stood at 65.5%, against a eurozone average of 52.7%. This sustains a vicious spiral of growth and consumption.

Source: European Economy Forecast Spring 2011 in Kotios & Pavlidis, 2012: pp. 208-209.

Source: European Economy Forecast Spring 2011 in Kotios & Pavlidis, 2012: pp. 208-209.

As a direct consequence of increased private consumption, savings suffered a steep fall of −12% of GDP. In 1975, savings had reached their peak, exceeding 25% of GDP, and started to decrease since then, without any interruption until the advent of the crisis. During Greece’s EMU membership, savings in Greece remained at consistently negative rates, whereas in the other countries of the European South, excluding Portugal, the national savings rate is also positive, and the same is true for the average savings rate in the eurozone, which stands at 5% of GDP (EEAG, 2011: p. 107). From 1989 onwards, this drop in the savings rate of the Greek economy is wholly attributed to the decrease in private savings from 27% in 1988 to 11% in 2008, thus leading to a scarcity of investment capital (Kotios & Pavlidis, 2012).

Total investment accounted for 23.4% of economic growth, as compared to an average of 21.2% in the eurozone. However, almost 1/3 of these investments concerned home construction (Anastasatos, 2009), as a result of the economy’s specialisation in the production of non-tradeable goods. Indeed, according to Christodoulakis (2009), the Greek economy remains capital intensive in the sector of non-tradeable goods. This specialisation persisted in the EMU era, thus funnelling foreign direct investment in the non-tradeable goods sector (home-hotel construction sector), at the expense of tradeable goods. This leads to the crowding out of the participation of productive and sustainable investments to the growth of the Greek economy, with obvious effects on supply and the makeup of the economy’s productive structure⁷, which affect it’s international competitiveness and, ultimately, imposes a burden on the trade balance, as the examination of the economy’s external sector will show.

The contribution of the external sector to Greece’s economic progress prior to the crisis had been feeble. Indeed, exports of goods and services accounted for 30.8% of economic growth, against a eurozone average of 87.5%, highlighting the problem of limited openness, which is also a consequence of Greece’s productive specialisation and reduced international competitiveness. Moreover, imports absorbed resources equivalent to 35.4% of economic growth, more-than-offsetting the positive contribution of exports. In other words, the external sector of the economy is an impediment to economic growth, as it deprives it of resources⁸ (Anastasatos, 2009).

A more thorough investigation of Greece’s external sector reveals a large expansion of both the current account deficit and the trade deficit, which stood at 14.1% and 18% of GDP, respectively, in 2007, demonstrating the problem of the economy’s twin deficits (Alogoskoufis, 2009: pp. 71-73). At this point we will try to analyse Greece’s position, as regards its trade relations with foreign countries. In the period 2000-2008, the total growth of Greek exports stood at 36.25% Greek imports during the same period increased by 67.36%. We can see that, overall, import growth was higher (by 31.11%) than the growth of exports (Table 6 and Table 7).

Table 8 shows that, throughout the entire period under review (2000-2008)

Source: ELSTAT, 2017.

Source: ELSTAT, 2017.

Source: ELSTAT, 2017.

Greece’s trade balance has been persistently in deficit, which increased by a total of 84.18%. The trade deficit rose from 15.92% of GDP in 2000, to 18.22% in 2008. Exports accounted for 8.05% of GDP in 2000 and 8.32% in 2008, while imports rose from 23.97% of GDP in 2000 to 26.55% respectively.

The source of the current account problem is the trade balance (Konstantakopoulou, 2012). More specifically, analysing the evolution of the components of Greece’s current account balance in the period 2000-2009, we can see that exports declined, whereas imports were on the rise. On the other hand, the improvement in the services balance was not enough to offset the deterioration of the trade balance. Capital inflows and direct investments are at low levels. At the same time, both the incomes balance and the transfers balance also deteriorated (Bank of Greece, 2010). It is a fact that the capital outflows related to the current account deficit are offset by capital inflows from abroad. However, this was not the case in the Greek economy, reflecting the dynamic relationship between the current account deficit and the accumulation of external debt.

The deterioration of the trade balance is due to the lack of competitiveness and openness of the Greek economy, as well as to high domestic demand for, and consumption of, imported goods (Sidiropoulos, 2016), while we should not ignore the economy’s position in the overall division of production. In the face of these problems, Greece was experiencing economic growth.

The economic growth experienced by Greece prior to the crisis did not match the competitiveness of its economy or the productivity of labour. Both figures are key determinants of sustainable economic growth.

The difference between per capital GDP and labour productivity in the Greek economy is both the outcome, and the cause, of the growth model that prevailed in Greece. Indeed, as mentioned in a previous section, from 2001 onwards Greece saw one of the highest growth rates, which on average stood at 3.4% per annum, leading to the rise of per capita GDP and the country’s convergence with its EU partners.

Indeed, between 2000 and 2009, gross per capita income in Greece rose by 32%, as compared to 11% in France, 16% in Germany, 2% in Italy, and 10% in Portugal. In addition, “for the first time since 1981, Greece’s living standard, measured in terms of private consumption, exceeded the EU-15 average, rising from 98.5% to 107.9% of the average for the 15-member European Union in 2008” (Sidiropoulos, 2016: p. 245).

Given that all the aforementioned countries have a common currency, this rise in Greek incomes could only be sustainable if labour productivity grew faster than in the other countries, thus justifying the fact that wages in Greece grew faster than in the other countries of the eurozone. However, this is not verified by the facts. The productivity of one hour of labour increased by 26% in Greece during 2000-2009, as compared to 20% in France, 18% in Germany and Portugal, and 3% in Italy. Thus, we can conclude that the growth of productivity in Greece was not sufficient to justify such a large rise in incomes (Sidiropoulos, 2016: pp. 245-246).

Excessive and imbalanced income growth gave rise to imbalances in the economy. More specifically, prices were on the rise, increasing by 37% during the ten-year period, as compared to 18% in Germany, 20% in France, 26% in Italy, and 29% in Portugal. The rise of the price level had a detrimental effect on the competitiveness of Greek products and the trade balance, as mentioned above (Sidiropoulos, 2016: pp. 245-246).

The study of the mismatch between the economy’s competitiveness and per capita GDP for 2011, presented in Table 9, can lead to important conclusions. In terms of income, Greece was ranked 31st in the world, whereas in terms of competitiveness it was ranked 90th. In order to understand the magnitude of this mismatch, we can just say that in terms of per capital GDP Italy was ranked 29th in the world, while in terms of competitiveness it was ranked 41st. Spain was ranked 27th and 37th respectively; these are discrepancies that are not encountered in developed countries.

This corroborates the fact that Greece was living beyond its financial means (Naftemboriki, 2017). That said, the productive specialisation of the economy, as well as the heavy propensity to consume, were, to a great extent, related to the financing of the economy by the banking system. Therefore, we need to examine the role of the banking sector in the ascendancy of this specific growth model.

There is a strong interaction between the banks and the macroeconomic environment in which they operate. The degree of this interaction depends on the policies choices of the banking system (Drimpetas & Kalogeridis, 2016: p. 69). In successful economic growth models, such as that of South Korea, the lending

Source: Processing of IMF data.

options of the banking system were put to the service of the government’s economic growth priorities (Kohli, 2004). However, in the Greek economy, banking operations shy away from the above practices.

According to research by Drimpetas & Kalogeridis, the Greek banks’ mode of operation fuelled the consumption-based growth model of the Greek economy. Indeed, in 1990-2000 the Greek banking system operated under strict regulations and under conditions of high stability, while the loans-to-deposits ratio stood at 0.40 in 1993 and rose to almost 0.56 in 2001⁹. At the same time, banking assets more-than-doubled, from 49.16 billion euros in 1993 to 162.42 billion euros in 2001. Loans quadrupled from 15.61 to 74.36 billion euros, while deposits proportionately increased by a factor of 3.5, from 38.94 to 131.32 billion euros. However, the Greek banking system, adjusting to the requirements of international competition, embarked on a new mode of operation.

In the next decade, 2000-2010, Greek banks continued to grow at rates higher than those of the previous period, in an effort to utilise a portion of their deposits that remained idle and caused the efficiency of the banking system, and the economy as a whole, to lag. In fact, the loans-to-deposits ratio rose from 0.64 at the beginning of the decade to 1.17 in 2010; this led to the reduction of safety margins and left commercial banks vulnerable to economic downturns¹⁰. During the same period, the sector’s assets increased by 133%. Deposit growth stood at 50.62% and was disproportionate to the increase in loans, which stood at 176.25%, thus pointing to the responsibility of the central bank as the supervisor of commercial banks. However, the challenge for the economy is to utilise loans for investment purposes (Drimpetas & Kalogeridis, 2016).

The allocation of the loans managed by Greek banks had an effect on the structure of the Greek economy. Based on the data presented in Table 10, the number of total loans extended to the three industries in which Greece enjoys a comparative advantage, i.e. agriculture (?.5 billion), tourism (?.3 billion) and shipping (?4.2 billion) stands at ?3 billion, whereas consumer loans exceed ?2 billion (Papadogiannis, 2012).

By comparing the data and examining the ratio of consumer loans to loans extended to manufacturing and construction, we can see that consumer loans exceeded loans to manufacturing by 45% and loans to construction by 215% (Papadogiannis, 2012).

It is worth noting that consumer lending accounted for 14% of total loans, while mortgage lending accounted for a further 32%. Therefore, 46% of total loans were extended for consumption, as well as for housing (Papadogiannis 2012), which is considered to be an in-between good, covering both consumer

Source: Papadogiannis, 2012.

and investment purposes (Orleans, 2010: p. 23), albeit as an investment good it does not contribute to sustainable growth. Responsibility for the above structure of lending does not only lie with commercial banks, but also with the Bank of Greece and the political leadership that failed to properly oversee the banking system.

It is worth noting that the banking system could have positively contributed to the reformation of the Greek economy’s productive structure, by giving emphasis to the financing of innovative investment schemes with sound long-term profitability, differentiation, and an outward-looking orientation.