Borrowing Cost as a Crucial Factor for Sustainable Fiscal Consolidation & for Exiting the Current Crisis

Abstract

1. Introduction The worst economic crisis of the Greek economy after World War II, is continuing to deepen for the second consecutive year. In an international relatively favorable economic environment, Greece is the only euro zone country in such a deep recession and lasting debt crisis. The persistent fiscal crisis continues to have severe implications for the whole economy, creating also significant contagious negative effects for the rest of euro zone. Despite the first and second bailout economic packages, no signs of recovery, fiscal consolidation and debt stabilization conditions appear in a context of very poor results of implemented policies. The country's return to financial markets seems also to be impossible for the upcoming years, a factor with significant implications for the economy's financing, public and private. By this paper, we aim to explore the role of the borrowing cost as a determinant factor in the country's current fiscal stance and crisis conditions. In section 2, we present shortly the main points of a process which led to current crisis and also the main characteristics of a precise diagnosis of 'double deficit-double crisis' affecting the borrowing cost. In this context, in section 3, we present through historical data, the evolution of interest expenditures during the period before the country's membership in the euro zone, as well as during the period as a euro zone country until the fiscal crisis. Interest expenditures reflect the role of two factors, the country's borrowing cost and debt level, and also show their importance as a determining factor of fiscal deficit and the related necessary primary surpluses for its reduction. During the country's effort to enter the euro zone, the improvement of macroeconomic fundamentals and significant fiscal consolidation associated with structural reforms, led to repeated upgrades by all rating agencies. Also, the good prospects from entering the euro zone, achieving the A levels of credit rating that is the most important factor for borrowing cost, resulted in significant reduction and convergence of interest rates as for all European countries. Determinant factors for spread differentiation, revealed their importance during the economic crisis and caused wide deviations that are described in section 4. In the case of Greece, these factors in combination with inappropriate fiscal management, led to current borrowing crisis as it is shown in the related figures. In section 5, the effects of the borrowing crisis are discussed in the wider economy, by crowding out effects and also the basic preconditions and policy mixed guidelines for exiting the debt and borrowing crisis, according to the existing debt theory. The relevance of the importance that borrowing cost plays in today's fiscal and economic conditions, can be a helpful instrument for planning the appropriate policies to tackle the worst crisis in the country after World War history. In our conclusions, we point out the urgency of a comprehensive plan for reform and development, based on new philosophy, culture and parameters, implemented by credible practices, surprising the markets positively by its measurable fiscal and economic results. 2. On the Determinants of the Current Greek Debt and Borrowing Costs Exploring the factors lying behind today's high indebtness of the Greek economy, we have to go back to the expansionist policies of the eighties. During the 1980's, public spending soared from 29% to 48% of GDP and deficits averaged 10% of GDP. Public debt, as a percentage of GDP, tripled from 28% in 1980 to 89% in 1990 (Dimitriou K. et al 2011). This fast increase of debt/GDP rate approximating 100% in 1993 decelerated during the rest of the period and remained on average at this level for almost 15 years until 2005. This was due to the relatively weak implementation of fiscal adjustment policies and mainly due to sufficient rates of growth. …