Greek Debt Crisis and its Lessons for Ukraine | VoxUkraine

Greek Debt Crisis and its Lessons for Ukraine

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24 June 2015

Two countries are making headlines in Europe these days: Ukraine and Greece. Both countries are on the brink of defaulting on their debt. Greece has been in crisis for nearly six years, already had a major restructuring of public debt and an unusually large loan from the International Monetary Fund (IMF). Ukraine has been in crisis for “only” 1.5 years. Ukraine should learn from the Greek experience to avoid some of the worst calamities Greeks had to suffer.

In October 2009, the newly elected government in Greece admitted a big hole in public finance. After correction, the budget deficit to GDP ratio doubled from 6% to 12%, an astonishing amount. By April 2010, Greece’s credit rating was downgraded to junk. At that point, Greece quickly approaches bankruptcy. To save the country, the IMF, the European Central Bank (ECB), and the European Commission (EC) provided Greece with €240 billions (!) of loans (this is approximately 80% of Greece’s GDP in 2007). The lenders required Greece to (1) pay down its debt to international organisations in full,  (2) cut government spending and/or increase taxes (austerity), (3) make changes in labor and other markets to improve the economy’s long-run growth (structural reforms). This program did not help Greece to either grow or pay its debt. By 2012, unemployment rate rose from 9% to 25%. GDP fell in every quarter until the third quarter of 2014 with the cumulative contraction of 25% (!) since the start of the crisis. The debt to GDP ratio rose from 112% in 2008 to 177% in 2014.

Lessons for Ukraine

  1. Austerity hurts a weak economy: Many people mistakenly think of sovereign debt problem as a debt problem for a person. If a person has to cut debt, he should spend less. But the “spend less” solution implicitly assumes that as people spend less their income does not change. This is true for people, but not true for countries. When a government cuts spending, the economy contracts. When the economy contracts, the tax revenues fall and thus the government has to cut spending again. As the cycle goes on, the economy ends up in a deep hole. This is exactly what happened in Greece. Despite multiple cuts in government spending, the decline of the economy almost doubled Greece’s debt burden relative to GDP. Similarly, deep cuts in government spending or large increases in taxes will  further hurt Ukrainian economy. The government should focus on spending its money better, not on cutting them.
  2. If a country cannot meet its debt obligations, the debt should be restructured quickly: A big burden of debt (debt overhang) can limit investment and growth. With an advantage of hindsight, one can say that the money Greece paid as interest to lenders should have been used to restructure banks, to cut taxes, or to invest. Instead, Greece used a big chunk of new loans to repay earlier debts, which was a part of the deal with the IMF, ECB, and EC.

Prime Minister Yatsenyuk said that Ukraine spends as much on servicing its debt as it spends on defense and security. This is a case where the country carries an unreasonable burden and it is not a matter of willingness of pay on debts. Being a victim of Russia’s aggression, Ukraine has a higher priority than to pay down debt – it has to fight the war to survive.

  1. Debt reduction should be large: Greece already had a major restructuring of its debt in 2012: private bondholders took a 53.5% haircut. The restructuring lowered the level of public debt by €106.5 billion. The amount may have seemed more than enough at the time but the problems in Greece kept accumulating and now another major restructuring of debt is eminent. With a hindsight, the first round restructuring should have been larger. That restructuring helped in the short-term, but did not solve the larger problem of Greece’s debt. Ukraine should not repeat Greece’s mistake, and, if it chooses to restructure, it should restructure aggressively once and for all.
  2. Countries should live within their means: Similar to Ukraine, Greece has a large government sector, early retirement age, and a corrupt tax system with huge tax evasion problems. With the help of accounting gimmicks and inflows of foreign capital, Greece could afford such a lavish lifestyle for some time but it’s now paying the price: 5 years of recession and 25% unemployment rate. Ukraine started to bring its finances in order by increasing gas price for households and businesses, eliminating special pensions, etc. More can and should be done in this area. This is not to say that Ukraine has to eliminate budget deficit overnight, but it should have a clear path to fiscal sustainability.
  3. A fixed exchange rate is a bad choice: Greece stayed in the eurozone (that is, Greece fixed the value of its currency against its trading partners in Europe) and the cost of that was dear. To regain competitiveness, Greece had to do an internal devaluation (lowering wages by about 16%) which turned out to be a very painful ordeal and it lasted a long time. If Ukraine tried to defend the value of the hryvnia at the pre-crisis level, the collapse of the Ukrainian economy would have been larger. By devaluing the hryvnia, Ukraine dodged the bullet that Greece could not avoid. Unemployment in Ukraine did not rise to 25%. People in Ukraine should stop dreaming about the 8 UAH/USD exchange rate or any other fixed exchange rate.
  4. Structural reforms will not happen if politicians resist them: Despite the fact that the international lenders insisted on structural reforms as a condition of lending, Greece’s corrupt political system successfully resisted many of the required reforms. After six years, Greece economy reminds the Ukrainian economy: few wealthy people control the economy shielded from competition; it is hard to invest or to start a business; corruption is widespread; legal system is slow; tax evasion is a major problem. Moreover, the Greeks recently elected the government that ran on a platform of resisting reforms. In Ukraine, both people and politicians are more open to reforms. However, in the first 100 days, the new Yatsenyuk government completed about 5% of what they promised. Similarly the coalition agreement is less than 10% completed.  Civic society and media should stay vigilant and keep pushing politicians to reform the economy.


A medical analogy might help to quickly see what was problematic with policies in Greece. Think of Greece as a very sick patient in an emergency room who lived an unhealthy life (shady accounting) and who bleeds heavily (lots of debt). A competent doctor will try to (1) stop the bleeding (reduce debt); (2) inject new blood (avoid austerity and devalue currency); (3) not ask the patient to immediately run around the block (structural reforms) even if running generally promotes health; (4) check on the patient often after recovery and make sure he takes the medicine as prescribed and exercises frequently (do the reforms eventually and live within means). Ukraine is not far from Greece in this analogy. But in contrast to Greece, Ukraine is not only bleeding badly, it is also continuing a nasty knife fight with a bully.


As we write this post, we do not know the outcome of the emergency summit of the EU leaders to discuss the Greek crisis. Greece submitted its proposal early Monday, too close to the end of the summit. The proposal was not made public, but based on anonymous reports and interviews of officials Greece proposed: 1) to find significant (1.4% of GDP) pension savings by increasing worker and employer contributions, 2) introduce a new tax on business, 3) introduce a new tax on wealthy, 4) increase value-added tax.  All of these amount to raising taxes. European officials seemed to be cautiously optimistic, so do markets with European stocks increasing 3%, Greek stocks 9%, and falling interest rates on Greek government bonds.

It looks like another Greek government is caving in to the creditors’ demands for austerity promising to raise taxes. There is a good and a bad news in that. A good news is that Greece is not leaving Euro which would be bad for both. A bad news is that EU officials continue on austerity course repeating past mistakes. Greeks suffered for six years and, apparently, they will have to take more pain. Without interest payments, Greece is already running a budget surplus but the surplus is still smaller than the size of interest payments and so the debt problem is not resolved. It is time to write off the debt and start from a new page. Without significant debt write-off, we might write similar article next year.

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