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A modern Greek tragedy

As South Koreans returned to work after a long Chuseok holiday yesterday, world markets were being rattled by renewed jitters that the Greek government may default on its sovereign debt. Signs of division among European Union leaders fanned fears that Greece may not get much-needed financial aid that was originally scheduled to arrive early next month, leaving it potentially teetering on the brink of bankruptcy. The EU and the International Monetary Fund organized a 110 billion euro ($150 billion) rescue package to bail out Greece, and so far 65 billion euros have been provided.

Athens, which desperately needed next month’s installment of 8 billion euros to stay afloat, is now at the mercy of EU members, who are questioning the Greek government’s competence after the country has missed a series of fiscal targets that were a conditional part of the bailout package.

The fear now is that a Greek default would have a ripple effect on vulnerable EU countries like Spain and Italy, as well as on stronger economies that hold Greek bonds. The euro zone, already laden with huge debt, could be devastated if this were to happen, while European banks could collapse under the weight of severe losses.

Now, the European market seems to be betting on the worst - the collapse of the Greek economy - as its one-year government bonds are offering yields in excess of 80 percent, or 50 percent for two-year bonds.

Greece seems to have only two ways out: increasing its budgetary revenue base or slashing expenditure. But neither of these are practicable. To boost revenue, the Greek economy must grow by 4 to 5 percent, which is beyond its current capability. To reduce spending, the government must remove any welfare expenditure that exceeds half of its total budget. That too is impossible given the current public sentiment.

Now, Greece is surviving by gobbling up the EU’s financial aid simply to pay off its debts before they mature by the end of next year. At this rate, bankruptcy looks unavoidable. Who would have thought a country with a per capita income of over $30,000 could face a default crisis like Latin economies in the 1980s?

Seoul authorities must reexamine local economic and market conditions to minimize the shock of this modern Greek tragedy. They should closely monitor foreign funds and encourage diversification of sources. The Greek lesson of the perils of profligate budgeting must not fall on deaf ears.