How Greece Mortgaged Its Financial Future

While the world awaits the outcome of Greek parliamentary elections on June 17 — which will determine whether the country remains in the eurozone — it is important to understand how a country of 11 million people could accumulate such a colossal debt in the first place. Greece found itself at the bottom of a deep fiscal hole due to political-party overpromises of public spending and a deal signed between the Greek Finance Ministry and Goldman Sachs in 2001 allowing the country to legally fudge its debt percentages to enter the eurozone.

Since the fall of the Greek military dictatorship in 1974, political parties have used the public sector to maintain power. Pasok and New Democracy are the political parties that are held accountable since one of the two political parties has been in power since the 1974 rise of the Third Hellenic Republic. Pasok and New Democracy leaders have repeatedly promised public-sector employees lifetime jobs (equivalent tenure of Supreme Court justices in the United States) with generous pension plans which inevitably led to a steady rise in the number of public-sector employees. In Greece, the public sector is a much more desirable workplace than the private sector. Efforts to increase efficiency and competition in the private sector have been undermined so that the government can leverage public-sector employment for maximum power.

Greece agreed to abide by debt and budget ratio rules in the Maastricht Treaty that created the European Union when it joined the eurozone on June 19, 2000. According to those rules, member countries’ debt cannot exceed 60 percent of its gross domestic product (GDP) and budget deficits cannot exceed three percent of GDP. On October 6, 2009, Bank of Greece Governor George Pavropoulous reported a shocking budget deficit of 10 percent of GDP – known as the “proton pseudos,” the original lie that eroded trust and solidarity in the EU. Greece’s deficit is the highest reported by any member country in two decades since the beginning of the euro project. A few days after the original report, Finance Minister George Papaconstantinou disclosed that the projected deficit would increase further to about 15.8 percent of GDP in 2010 and blamed his estimate on the global recession, fiscal problems (overestimated tax revenues, excessive public spending), and “hidden” financial mis-steps committed by the previous government.

At the time, Pasok Prime Minister George Papandreou and Finance Minister Papaconstantinou claimed they were unaware of the deficit problem. This is unlikely to be true because former Prime Minister Karamanlis (in power before Papandreou) allowed the public debt to increase by 50 percent between the years of 2005 and 2009 from 200 billion euros (100 percent of GDP) to 300 billion euros. How could former Prime Minister Papandreou run a campaign based on the slogan “There is money available” when he was not even sure this was true? The answer is easy: his focus was on winning the election instead of being honest about the country’s impending financial disaster with Greek citizens. Ironically, his tenure demonstrated the exact opposite of his campaign theme: there was no money available and the country owed more than it could reasonably hope to pay back. His resignation was an admission of how dire the situation had become.

Unfortunately, the behavior of former Prime Ministers Karamanlis and Papandreou is the norm in Greek politics, and this custom is what has torn the country into economic shreds. While Karamanlis and Papandreou are well-known for their over-spending promises, former Prime Minister Kostas Simitis carried fiscal irresponsibility to an even higher level when he signed a backroom deal with Wall Street investment bank Goldman Sachs — a deal considered by some as one of the greatest secrets in European history.

Deficit restrictions motivated countries with the desire to enter the eurozone to decrease public deficits. Just like other countries, Greece decreased its public deficits, but used a special arrangement to do so. In 2000 the Greek Finance Ministry signed a cross-currency swap deal with Goldman Sachs that transferred some of the country’s public debt into other currencies, dollars and yen, which hid its true deficit amount. Currency swaps are a common tool used by governments to protect against changes in currency value, and European accounting rules do not require a country to reflect this information on their balance sheets. However, Greece and Goldman Sachs’ deal was unique in the sense that it allowed the agreement to function as a loan from Goldman Sachs to Greece due to an “historical implied foreign exchange rate.” In other words, the exchange rate that was used when the deal was signed was not the value at that time; the value was based on a weaker euro rate that allowed Greece to exchange its yen and dollars for a substantial amount of euros. Greece borrowed approximately one billion dollars from this deal and Goldman Sachs instantly made over 200 million dollars plus future accumulated interest. Both the bank and the Greek Finance Ministry have declined to issue a statement on this deal. In essence, the Greek government and Finance Ministry mortgaged the nation’s future.

So it is easy to understand why a 2010 report from Transparency International, a global anti-corruption organization, rated Greece at the bottom in terms of government honesty and competence, and why Greek citizens are protesting in the streets with fury and passion. Leaders in Athens cared more about their power and lining their own pockets than the torture the nation must now endure to pay for public overspending. Greece needs a reformed political culture and a fresh government that represents the people rather than the interests of a corrupt elite.