It's just a balance issue. In previous versions teams full of grey players have been crap so that you had to have half a hundred active leagues in order to have a competitive game because loads of European teams had no players.
A team like Olympiakos should have players of a
fairly high standard, be they greys or not. Clearly grey players in some small nations are too good, but in FM07 they are appalling bad in most nations I have come across.
I haven't played FM08 long enough to know, but in FM07 nations for which you have selected to retain all players tend to develop infeasibly good players relative to the nations of your active leagues and very much compared to grey nations. I am managing Lebanon in FM07, our FIFA world ranking has been steady at ~10-20th for a few years now and we batter almost every team in Asia, we even beat Australia 8-0 in an Asian Nations Cup qualifier so there's clearly a lack of balance in the other direction there!