A lot has been written and more has been said recently on whether Greece has deservedly joined the eurozone or if the Greek membership was the result of cunning and deceit that fooled the western European partners in approving Greece’s second attempt to join the euro.
But what was said at the time? Were the eurozone’s own rules applied? And were the European partners blissfully ignorant of the problems with the Greek economy and the Greek statistics at the time?
To what extend was Greece’s admission a purely political decision that at the time suited Franco German interests?
Now that Greece finds itself in the middle of the storm it is worth looking back to the early days of the euro to decide if Greece alone is really to blame for the breakdown of trust with the eurozone institutions.
Greece had hoped to join the euro with the first wave of member countries in January 1999, but failed to meet the economic tests of low inflation and government debt and deficits – the Maastricht criteria.
In June 2000 Greece has won endorsement from European finance ministers to become the 12th full-fledged member of the single currency.
“Greece will become a member for sure. It meets all the requirements for membership,” Austrian Finance Minister Karl-Heinz Grasser told the BBC at the time, adding that he hoped the move would put pressure on the remaining EU members who have opted out of the single currency – Denmark, Sweden, and the UK – to reconsider their stance.
Investors said at the time that they are worried the decision to allow Greece to join the euro will send out the wrong signal to financial markets – suggesting that in future other, weaker economies may be allowed in without complying fully with membership conditions.
Greece had one of the highest inflation rates in Europe. Public sector borrowing was also much higher than would be permitted normally under the EU rules governing entry to the project.
“Greece has made a huge improvement,” said French Finance Minister Laurent Fabius who was trying to talk up a week euro. But in fact Greece as everyone knew had not made much of an improvement and the euro countries had to take a political decision to admit Greece. Wim Duisenberg, European Central Bank president warned that Greece still had a lot of work to do to improve its economy and bring inflation under control.
As the BBC reported the other eurozone members thought that for the eurozone as a whole, Greek membership would not make a huge difference. The Greek GDP was only 2% of the eurozone total; even if the Greek deficit was over the permitted 3%, -it turned out to be 3.7% – the amount would be negligible and would be offset by the political benefits.
“Politically, it sends an important signal to the 12 countries queuing to join the EU. They have seen the tough decisions they have to make in order to qualify for EU and euro membership. At the same time, it shows that the EU decision makers can be somewhat lenient towards aspiring euro countries.” the BBC concluded.
EU doubts about Greek figures date back to the early days of the euro
The 2000 real Greek deficit turned out to be 3,7% of GDP, which later led to a controversy about the Greek admission and Greek statistics. However, the creative accounting role of Goldman Sachs in hiding the true extend of Greek deficit was well known at the time and was widely reported in the financial press. Which makes the surprise and shock with which the news of GS’s involvement was greeted in 2012, when the story resurfaced, rather odd.
In November 2001, the Greek finance minister’s Yiannos Papantoniou debt division made a public statement about its debt management strategy. It acknowledged that its debt was a ‘critical macroeconomic parameter’, and pledged to reduce debt servicing costs by means that included ‘the extensive use of derivatives’.
In February 2002, the European Commission pointed out future deficit forecasts by Greece relied ‘primarily’ on achieving reductions in interest costs. It called for Greece to reduce its ‘very high’ debt ratio, and to provide ‘more detailed information on financial operations’.
Following that, in March 2002, Eurostat refused to validate data transmitted by the Greek government. In response, the National Statistics Service of Greece revised the debt level by several percentage points. In September 2002, Eurostat again refused to validate Greek data. The debt was revised upwards once again, and the budget balance, which the Greek government had presented as a surplus, became a deficit.
Given that the Eurozone institutions appear to have been aware of the state of the Greek economy in the last 15 years and did very little about it, their latest decisions that forced the near collapse of the economy, the introduction of capital controls and the placing of all the responsibility for the state of the economy squarely on the shoulders of the new government, can only be interpreted as yet another political decision by Europe.
The following extracts from Risk Magazine, 01 Jul 2003:
“Ever since the deficit and debt rules for eurozone member states were drawn up in the early 1990s, there have been persistent rumours and allegations that governments have used derivatives to get around them. For some time, economists have argued that the combination of strict external targets with considerable local autonomy in sovereign debt management almost inevitably leads high-deficit countries towards derivatives…..
…. With the help of Goldman Sachs, Greece has been using giant swaps deals to ensure its national debt ratios met EU targets. “
“Although the overall deal is believed to have consisted of three or four individual transactions or tranches, according to sources, the total cross-currency swap notional was approximately $10 billion, with tenors ranging from 15 to 20 years. While the size of upfront payment to Greece’s public debt division is not clear, it seems the total credit risk incurred by Goldman Sachs was roughly $1 billion. Effectively, Goldman Sachs was extending a long-dated illiquid loan to its client.”
“Goldman Sachs is known for its conservative approach to credit risk, and chose to hedge its exposure to Greece by immediately placing the risk with a well-known investor in sovereign credit: Frankfurt-based Deutsche Pfandbriefe Bank (Depfa). According to sources, Depfa entered into a credit default swap with Goldman Sachs, selling $1 billion of protection on Greece for up to 20 years. ”
“There is no doubt that Goldman Sachs’ deal with Greece was a completely legitimate transaction under Eurostat rules” continues Risk. “ Moreover, both Goldman Sachs and Greece’s public debt division are following a path well trodden by other European sovereigns and derivatives dealers. However, like many accounting-driven derivatives transactions, such deals are bound to create discomfort among those who like accounts to reflect economic reality. For example, the Greece-Goldman deal may be of interest to credit rating agency Standard & Poor’s, which upgraded Greece’s long-term debt from A to A+ in June 2003.”
Furthermore, financial institutions hoped at the time that the use of derivatives in deficit and debt management by eurozone sovereigns would flourish. The planned expansion of the eurozone to include 15 east European countries was seen as a golden opportunity for especially rich pickings for dealers, something that continued until the crisis of 2008.
See also A Greek Tragedy Time magazine Apr. 10, 2000. Another interesting account of the state of the Greek economy just before Greece joined the euro.