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GREECE DEBACLE-2010

Posted on: 27 May 2010
This forms part of our Economic Development articles

1. The world moved into a recession in 2008 with fears that it can turn into a depression if not counteracted. Consequently, the lessons learnt from the Great Depression were applied. This meant, inter alia, that due to low demand coupled with surplus production capacities, it was advisable to accept larger government deficits, as tax receipts declined and governments increased their own spending. Acting in tandem throughout the world, this meant that deficits on government accounts increased, as has also happened in South Africa, the USA and others.
2. Greece’s economy is not the strongest in the world. Yet, according to the results of a survey undertook and published by Institutional Investor in September 2009 regarding the credit ratings of countries, Greece was rated by some 100 international organisations as 74,9% credit worthy. This was 5,1 percentage points lower than a year before and the country declined from the 28^th to the 36^th position in six months. For reference purposes, this rating for Greece compared to the 62,0% and 52^nd position for the RSA. Greece was therefore regarded as more credit worthy than the RSA.
3. Against this background the question can now be asked why did S&P not gradually started to lower Greece’s sovereign rating earlier and why did it lowered it by three notches in one swoop knowing that in a few day’s time the EU and the IMF would announce a financial package to assist the Greece government?
4. The consequence of S&P’s actions was that other smaller countries in the EU and over the world were also put under pressure. Many of them, including Greece, are now forced to introduce measures to reduce their government deficits. This is exactly what is not called for in present circumstances where the worlds’ economies are operating below full capacity levels and demand remains fragile. This means that the world economic recovery can be harmed while countries that experience over valued currencies, such as the RSA, may be the mostly adversely affected.

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