By: Dr. Mike Campbell

At the height of its sovereign debt crisis, Greece was being forced to pay unsustainably high interest rates on its debt vehicles in order to attract investors to service her debts. This happened because the major ratings agencies determined that there was a realistic chance that Greece could default on her obligations hence increasing the chances that investors may lose money by subscribing to a Greek bond.

In the event, Greece turned to her fellow Eurozone nations and the IMF for help and a facility of €110 billion was arranged that Greece could call upon in tranches to ensure that she could honour her obligations. The money was to be made available over a three year period. Naturally some strings were attached. The IMF and the Eurozone wanted to see Greece take steps to reduce public debt (which was running at 115% of GDP) and to return the public deficit from its current level of 13% to the permissible 3% of GDP foreseen in the Eurozone membership rules.

The IMF sent a delegation to Greece in July which reported that Greece was making good progress in getting its financial house in order. Greece has put together a raft of austerity measures which may have pleased the financial community, but they have been bitterly unpopular with Greek citizens, sparking strikes, protests and riots. The Greek people feel unconnected to the debts which have been run-up in their name by previous governments. The reduction in public spending has been attributed to the decline in Greek output of 1.5% seen in the last quarter.

The EU has confirmed that Greece has met (and exceeded) its targets and that the next tranche of funding will be released next month. Greek state spending has been cut by 16.9% over the levels seen in the first half of 2009 and the deficit has declined by some 46% - a faster rate than anticipated. Figures released by the Greek Finance Ministry suggest that the deficit stood at €12.1 billion at the end of July.