Monday, May 23, 2011

Greece Will Default

The biggest problem with Greece is that they are not competitive within the Eurozone. Iceland did not suffer as much because they were able to devalue their currency, making themselves competitive again. Greece has the Euro, so their only option is to undergo a long and sustained deflation until their wages and productivity become in-line with the rest of the Eurozone.

According to

"Approximately one million people, or one out of four working Greeks, is employed by the state. More than 80% of public expenditure goes toward the wages, salaries and pensions of these public-sector workers."

These workers only work 37.5 hours a week and the average retirement age is 61. It's not only that these public sector workers are unproductive, they also received massive wage and benefit increases within the past decade as Greece was able to reduce its debt interest payments costs thanks to joining the Euro.

"Greece went on a spending spree, allowing public sector workers' wages to nearly double over the last decade, while it continued to fund one of the most generous pension systems in the world. Workers when they come to retire usually receive a pension equating to 92 per cent of their pre-retirement salary. As Greece has one of the fastest ageing populations in Europe, the bill to fund these pensions kept on mounting."

"The government is planning a pay freeze for all public sector workers.

Some pay cuts will also be implemented, and public sector contract workers are set to lose their jobs.

This follows several years of continuous increases in pay, with salaries rising by an average of 30% since 2006.

Annual bonus payments - paid as 13th and 14th month salaries - will also be scrapped for high earners and capped for lower earners."

This crisis didn't just come out of left field, it arose due to years of overspending and pay increases for an already under-productive government workforce. A 100% increase in wages over a decade without a corresponding rise in productivity is a recipe for disaster. Austerity, meaning a cut to reasonable wages and benefits is definitely called for.

However it will take time for Greece to restructure its economy and time is what they don't have. They dug a hole so deep that it's just not possible for them to continue on with the debtload that they have. I believe that they will have to default (restructure in PC speak). Another round of loans from the EU will just delay the inevitable, Greece needs economic growth to reduce their debt/GDP ratio, but it takes time for laid-off public sector workers to transition into the private sector. At this point, austerity measures will only decrease GDP making things worse. Unless Greece can get a large enough EU bailout that will finance all their needs for the next decade, they will have to default.

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