Reflections on Greece

Was Greece Set Up To Fail?

Raúl Ilargi Meijer

The Automatic Earth,

18 July, 2015

I started writing this on my last night in Athens for now, Wednesday, and had no time to finish it then:

On the eve of my temp absence from this great city, a few things. I could simply extend my stay, which might be slightly cheaper, but A) flights to Athens cost less all the time, and B) I have to go see my mom in Holland, who’s not doing well at all. On top of that, Nicole arrived in Holland last week, and we might as well just fly out back here together in a few weeks.

My ‘job’ here is by no means done, anyway. Because of the general strike today, another Solidarity Clinic that I wanted to donate some of your AE for Athens Fund money to, is closed (update on the Fund tomorrow). Parliament is debating the latest Troika strangle plan as we speak, and who knows what tomorrow will bring? 

An entire economy is being deliberately suffocated, and all in all it’s just total madness. Quiet madness, though (update: and then the riots broke out..).

Two things I’ve been repeatedly asked to convey to you are that:

1) you can’t trust any Greek poll or media, because the media are so skewed to one side of the political spectrum, and that side is not SYRIZA (can you imagine any other country where almost all the media are against the government, tell outright lies, use any trick in and outside the book, and the government still gets massive public support?!),

and:

2) Athens is the safest city on the planet. I can fully attest to that. Not one single moment of even a hint of a threat, and that in a city that feels very much under siege (don’t underestimate that). And people should come here, and thereby support the country’s economy. Don’t go to Spain or France this year, go to Greece. Europe is trying to blow this country up; don’t allow them to.

Then: I was reminded of something a few days ago that has me thinking -all over- ever since. That is, to what extent has Greece simply been a set-up, and a lab rat, for years now? I’m not sure I can get to the bottom of this all in one go, but maybe I don’t have to either. Maybe the details will fill themselves in as we go along.

One Daniel Neun wrote on Twitter, in German, translation mine, that:

Greece’s 2009 deficit was retroactively manipulated upward through a collaboration of the EU, IMF, PASOK, Eurostat (EU statistics bureau) and Elstat (Greek statistics bureau). That is the only reason why interest rates on Greek sovereign bonds skyrocketed in the markets, which in turn made Greek debt levels skyrocket.

The political and media narrative has consistently been that Greece “unexpectedly” and “all of a sudden” in late 2009, when a new government came in, was “found out” to have much higher debt levels than “previously thought”. And then had to appeal for a massive bailout. Obviously, Neun’s version is quite different. His doesn’t look like just another wild assumption, since he names a few sources, among which this from Kathimerini dated January 22, 2013:

Greece’s Statistics Chief Faces Charges Over Claims Of Inflated 2009 Deficit Figure

The head of Greece’s statistics service, Andreas Georgiou, and two board members at the Hellenic Statistical Authority (ELSTAT) are to face felony charges regarding the alleged manipulation of the country’s deficit figure in 2009.

Financial prosecutors Spyros Mouzakitis and Grigoris Peponis have asked a special magistrate who deals with corruption issues to investigate whether claims that Georgiou, the head of the national accounts department Constantinos Morfetas and the head of statistical research, Aspasia Xenaki, were responsible for massaging the figures so that Greece’s deficit appeared larger than it actually was, triggering Athens’s appeal for a bailout.

The three face charges of dereliction of duty and making false statements. Ex-ELSTAT official Zoe Georganta caused a storm in 2011 when she accused Georgiou of pumping up Greece’s deficit to over 15% of GDP, which was more than three times higher than the government had forecast in 2009.

However, she told a panel of MPs last March that she knew of no organized plan behind this alleged manipulation of statistics, instead blaming the politicians that handled Greece’s passage to the EU-IMF bailout of “inexperience, inability or maybe some of them profited.” The former ELSTAT official claimed that the deficit for 2009 should have been 12.5% of GDP and could have easily been brought to below 10% with immediate measures.

As well as this from Greek Reporter dated June 18 2015:

The 2009 Deficit Was Artificially Inflated, Former ELSTAT Official Tells Greek Parliament

Greece’s deficit figures for 2009 and 2010 were deliberately and artificially inflated, and this was at least partly responsible for the imposition of bailouts and austerity programs on the country, a former vice president of the Hellenic Statistical Authority (ELSTAT), Nikos Logothetis, said.

Testifying before a Parliamentary Investigation Committee on examining and clarifying the conditions under which Greece entered its bailout programs and the accompanying Memorandums, Logothetis called ELSTAT president Andreas Georgiou a “Eurostat pawn” that had converted the statistics service into a “one-man show.” He also accused Georgiou of bending the rules and “using tricks” to bump up the deficit’s size.

“A lot of the criteria were violated in order to include public utilities in the deficits. The deficit was enlarged even more by the one-sided fiscal logic of ELSTAT president Andreas Georgiou. It should not have been above 10%. The ‘alchemy’ that was carried out demolished our credibility, drove spreads sky high and we were unable to borrow from the markets. The enlargement of the deficits legitimized the first Memorandum and justified the second for the implementation of odious measures,” Logothetis said.

Noting that this was the third time he was testifying, Logothetis pointed out that Georgiou’s practices had been questioned by himself and other ELSTAT board members (most prominently by Zoe Georganta) but Georgiou had chosen to silence them so that the deficit figure was released only with his own approval and that of Eurostat.

Logothetis claimed that Georgiou had avoided meeting with ELSTAT’s board, even after Logothetis resigned, because the board’s majority would have questioned his actions. He also insisted that “centers” outside of Greece had played a role and needed someone on the “inside,” while he suggested that “someone wanted to bring the IMF into Europe.”

The former ELSTAT official said he was led to this conclusion by “seeing spreads rise as a result of the statistical figures until we reached a real enlargement of the deficits, violating the until-then not violated Eurostat criteria.”

A view from the ground was provided earlier today by my friend Dimitri Galanis in Athens when I asked him about this:

Let me help you a bit: September 2008 Wall Street crashes. For a whole year the whole planet is furious against TBTF banks and filthy rich bank CEOs. A year later – 2009 – the Deus ex machina – Georges Papandreou, then the newly elected Greek PM, “discovers” all of a sudden that Greek debt was bigger than everybody “imagined”.

The EU is “surprised” – Oh nobody knew!!! [everybody knew] Et voila: The Wall Street crisis becomes the Greek and Eurozone crisis. IMF gets a footing in the eurozone. Wall Street, French and German banks get bailed out. Greece suffers – Eurozone on the brink of collapse.

Greece is the tree – the rest is the forest .

And then I saw a piece by former US Secretary of Labor Robert Reich yesterday:

How Goldman Sachs Profited From the Greek Debt Crisis

The Greek debt crisis offers another illustration of Wall Street’s powers of persuasion and predation, although the Street is missing from most accounts. The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO, Lloyd Blankfein. Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it.

And just as with the American subprime crisis, and the current plight of many American cities, Wall Street’s predatory lending played an important although little-recognized role. In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction.

Then Goldman Sachs came to the rescue, arranging a secret loan of €2.8 billion for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate. As a result, about 2% of Greece’s debt magically disappeared from its national accounts.

For its services, Goldman received a whopping €600 million, according to Spyros Papanicolaou, who took over from Sardelis in 2005. That came to about 12% of Goldman’s revenue from its giant trading and principal-investments unit in 2001—which posted record sales that year. The unit was run by Blankfein.

Then the deal turned sour. After the 9/11 attacks, bond yields plunged, resulting in a big loss for Greece because of the formula Goldman had used to compute the country’s debt repayments under the swap. By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from €2.8 billion to €5.1 billion.

In 2005, the deal was restructured and that €5.1 billion in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the ECB and a major player in the current Greek drama, was then managing director of Goldman’s international division. Greece wasn’t the only sinner. Until 2008, EU accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks.

In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities. But Greece was in the worst shape, and Goldman was the biggest enabler.

Undoubtedly, Greece suffers from years of corruption and tax avoidance by its wealthy. But Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt—along with much of the rest of the global economy. Other Wall Street banks did the same. When the bubble burst, all that leveraging pulled the world economy to its knees.

Even with the global economy reeling from Wall Street’s excesses, Goldman offered Greece another gimmick. In early November 2009, three months before the country’s debt crisis became global news, a Goldman team proposed a financial instrument that would push the debt from Greece’s healthcare system far into the future.

This time, though, Greece didn’t bite.

As we know, Wall Street got bailed out by American taxpayers. And in subsequent years, the banks became profitable again and repaid their bailout loans. Bank shares have gone through the roof. Goldman’s were trading at $53 a share in November 2008; they’re now worth over $200. Executives at Goldman and other Wall Street banks have enjoyed huge pay packages and promotions. Blankfein, now Goldman’s CEO, raked in $24 million last year alone.

Meanwhile, the people of Greece struggle to buy medicine and food.

Note: when Reich says that “..Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt..”, he describes a tried and true Wall Street model. This is how investment firms like for instance Mitt Romney’s Bain Capital operate: take over a company, load it up with (leveraged) debt, strip its assets and then throw the debt-laden remaining skeleton back unto the public sphere. In this sense, the Troika and its Wall Street connections function as a kind of venture/vulture fund with regards to Greece. Nothing new, other than it’s never been perpetrated on a European Union country before.

So what do you think: was Greece set up to fail from at least 6 years ago, has it all been a coincidence, or did they maybe just get what they deserve?

Here’s a short timeline. In October 2009, Papandreou becomes the new PM. Shortly thereafter, he “discovers” with the help of Elstat head Andreas Georgiou that the real Greek deficit is not the less than 5% the previous government had predicted, but more than 15%. Within months, salaries and pensions or cut or frozen and taxes are raised. That apparently doesn’t achieve the intended goals, so Papandreou asks for a bailout.

Within 10(!) days, ECB, EU and IMF (aka Troika) fork over €110 billion. The conditions the bailout comes with, cause the Greek economy to fall ever further. Moreover, everyone today can agree that no more than 10% of the €110 billion ever reaches Greece; the remainder goes to the banks that had lent it too much money to begin with.

The remaining investors -the big bailed out banks had fled by then- agree to a 50% haircut, with even more odious conditions for Greece. Papandreou wants a referendum over this and is unceremoniously removed. Technocrat Lucas Papademos is appointed his successor. As Athens literally burns in protest, a second bailout of €136 billion is pushed through. More and deeper austerity follows.

By now, a large segment of the population is unemployed, and pensions are a fraction of what they once were. In an economy that depends to a large extent on domestic consumption, there could hardly be a bigger disaster. Papademos must be replaced because he has no support left, and Samaras comes in.

He allegedly posts a budget surplus, but that is somewhat ironically only possible because the entire economy is no longer functioning. Greek debt-to-GDP rises fast. The Greek people this time revolt not by fighting in the streets, but by electing Syria.

And that brings us back to January 25 2015. And eventually to Thursday, July 16 2015.

What have the bailouts achieved? Well, the Greek economy is doing worse than ever, and the people are poorer than ever. Both have a lot more bad ‘news’ to come. So says the latest bailout imposed on Tsipras at gunpoint.

To go back to 2009, if the Elstat people who testified -multiple times- before the Greek Parliament were right, there would have been either no need for a bailout, or perhaps a much smaller one. Which, crucially, would not have required IMF involvement.

It therefore doesn’t look at all unlikely that Greece was saddled with an artificially raised deficit, and that the intention behind that, all along, was to get the Troika ‘inside’ for the long run. So the country could be stripped of all its assets.

The bailouts needed to be as big as they were to 1) successfully make the international banks ‘whole’ that had lent as much as they had into the Greek economy, 2) get the IMF involved, 3) and absolve the notorious -and cooperative- domestic oligarchy from any pain. And make all the usual suspects a lot more money in the process.

The added benefit was that it was obvious from the start that the Greeks would never be able to pay the Troika back, and would be their debt slaves for as long as the latter wanted, giving up all their treasured possessions in the process.

Or, alternatively, it could all have been a terribly unfortunate coincidence. It would be a curious coincidence, though.