Former head of ELSTAT, the Greek statistical authority, Andreas Georgiou has been acquitted in the case where he was charged with misdemeanour. Three foreign statisticians came to Athens to bear witness in the case, testifying to Georgiou’s positive work on rectifying the problems of earlier false statistics.
The irony is that the Greek government is silently accepting that civil servants who fixed the problem of a decade or fraudulent statistics are being prosecuted, not those who committed the fraud for years.
But as lister earlier on Icelog this is only one of four cases Georgiou is fighting in Greece. The other cases against Georgiou are still lingering in Greek courts. In the largest case against himm where he is charged with treason for in fact correctly reporting correct statistics, the examining judge has now proposed that the case be dismissed. Stunningly, this is the fourth time a judge proposes to have the case dropped but so far it’s always risen again in a new guise.
Here is Kathimerini report on the latest trial and its outcome.
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There is no end in sight of the ELSTAT saga of political vendetta against the ex ELSTAT director Andreas Georgiou who oversaw the correction of Greek statistics 2010 to 2015. Yes, the Prosecutor of the Appeals Court has recommended to throw the case of Georgiou and his colleagues out, not once but three times, only to resurface again. In addition, the case has transformed into several case all migrating through the Greek judicial system. I’ve earlier claimed that the ELSTAT case is a test of Greek political willingness to own up to the past and move on. The steadfast will to prosecute civil servants for doing their job exposes the damaging corrupt political forces still at large in Greece, a very worrying signal for the European Union and the International Monetary Fund – but most of all worrying for Greece.
If anyone thought that the long-running saga of prosecutions against ex head of ELSTAT Andreas Georgiou was over, just because so little is now heard of it, then pay attention: the case is still ongoing, there is an upcoming decision in the Appeals Court that could potentially send Georgiou to trial with the possibility of a life sentence for him. In addition, there are side stories here, other ongoing investigations and prosecutions.
The ELSTAT saga started after Georgiou had only been in office for just over year. It really is a saga (here my earlier reports and detailed account of it) of upside down criminal justice but it’s so much taken for granted in Greece that little or no attention is paid to the fundamental issue:
How is it possible that the man who as Head of ELSTAT from August 2010 until August 2015, putting in place procedures for correct reporting of statistics following the exposure of fraudulent statistics for around a decade, is being prosecuted and not the people who for years provided false and fraudulent statistics to Greece, European authorities and the world?
This case of a Hydra with many heads is rearing one of these heads next on 6 December when Georgiou is to face charges of violation of duty in producing the correct 2009 government deficit statistics. On important aspect is this: the charges imply that the Greek government isn’t accepting the correct figures on which the current bailout program and debt relief is based on.
European and international organisations have supported Georgiou’s point of view, the last being a letter from the International Association for Research in Income and Wealth (IARIW), to prime minister Alexis Tsipras now in November. However, the support from abroad does not seem to have had any effect on the prosecutions against Georgiou in Greece. As can be seen from the overview below of how the cases have sprawled in various directions there really is no end in sight. A worrying trend in a European democracy, the country that calls itself the cradle of Western democracy.
To Icelog, Georgiou says: “The numerous prosecutions and investigations against me and others that have been going on for years – as well as the persistence of political attacks and the absence of support by consecutive governments – have created disincentives for official statisticians in Greece to produce credible statistics. As a result, we cannot rule out the prospect that the problem with Greece’s European statistics will re-emerge. The damage already caused concerns not only official statistics in Greece, but more widely in the EU and around the world, and will take time and effort to reverse.”
Charges three times thrown out resurface in wider charges
The original criminal case concerned criminally inflating the 2009 deficit causing damages to Greece in the order of €171bn or €210bn (depending on how it was calculated on different occasions by his detractors). For three consecutive years – in 2013, 2014 and 2015 – investigating judges and prosecutors proposed to drop the case only to see the charges resurfacing again each and every time. In 2016, the Prosecutor of the Appeals Court assigned to the case yet again proposed that the case be dropped. A decision is pending at the Council of the Appeals Court.
The same issue of the 2009 deficit did indeed resurface in the form a separate, brand new case on 1 September this year, now not only alleging criminal actions by Georgiou and ELSTAT staff but by the EU Commission and the IMF. A separate criminal investigation has begun and is running parallel to the over five year old case above. On the losing end here are not only the individuals hit by these charges but also public statistics, Greece, EU and international partners.
A worrying disincentive to service truthful information
Now, on 6 December, Georgiou is facing a trial for violation of duty, exactly the violations that various prosecutors and investigating judges had, in 2013, 2014 and 2015, proposed to drop. However, the Appeals Court decided in 2015 to refer the case to an open trial. In Greece, this trial is being presented as doing justice for Greece, implying that earlier cases may have been dropped due to European pressure.
Again, this clearly shows that there are political forces in Greece refusing to shoulder any responsibility for fraudulent statistics and a huge cover up of the dismal governance in Greece up to the surfacing crisis in 2009.
If convicted for violation of duty, Georgiou faces a possible conviction of two years in prison. Greek statistics face an uncertain future: a trial against the people who fixed the problem of Greek statistics is hardly a great incentive to Greek civil servants to service truthful information instead of untruthful politicians.
Twelve months for “criminal slander”: told the truth but should have kept quiet
In June, Georgiou was tried for criminal slander for defending the 2009 deficit statistics, the very numbers ELSTAT produced as required by the European Statistics Code of Practice. The Court Prosecutor recommended to the Court that the case be dropped and that Georgiou be acquitted. But the Court ruled in the end that although it believed Georgiou to have told the truth he should still not have said the things he said and sentenced him to twelve months in prison.
The appeal of this conviction was due to be heard in October in the Appeals Court. However, the plaintiff – actually the former director of national accounts at the National Statistics Office (later ELSTAT) in 2006 to 2010, i.e. during the fraudulent reporting – succeeded in having the appeal trial postponed. It’s now due in 16 January 2017, possibly a tactical move to influence two other ongoing cases involving Georgiou, the above-mentioned criminal case and a civil case.
The civil case is related to the criminal slander case. Decision is due in the coming weeks and could land Georgiou with a crippling fine of tens of thousands of euro.
Protecting the perpetrator of a crime, not the victim
As reported last summer in my detailed article of the ELSTAT saga, ELSTAT’s former vice president Nikos Logothetis was found by the police to have repeatedly hacked into Georgiou’s ELSTAT email account. This started already on Georgiou’s first day as president of ELSTAT, in August 2010, before he had even started to look at the thorny issue of the 2009 deficit, and continued until the hacking was exposed late October 2010.
Police investigations showed who was responsible for the criminal action of hacking Georgiou’s account – Logothetis was actually logged into the account as the police came unannounced to his home.
Georgiou was informed that Logothetis would be prosecuted for this and that following the criminal case he could then bring a civil case against Logothetis. However, in early July this year Logothetis was acquitted of violating Georgiou’s email account in a felony case. The Court also decided Logothetis could not be retried for the felony charge due to the time passed since the hacking.
According to the ruling it was not disputed that Logothetis had indeed accessed Georgiou’s account. However, the action was deemed not to have been carried out because of monetary gains or to hurt Georgiou but only because Logothetis “wanted to understand Georgiou’s illegal actions and to legally defend the legitimate interests of ELSTAT and consequently of the Greek state.”
Quite remarkably, the felony case was allowed to wait for five years before it was considered by the Appeals Court, thus triggering the statute of limitations. In addition, somehow Georgiou received no notice of the decision of the Appeals Court on the Logothetis felony case acquittal and thus had no chance to take legal action to potentially reverse the ruling within the allowed one month period.
Furthermore, the Court hadn’t taken any note of the fact that Logothetis actually hacked the account before Georgiou even looked at the 2009 deficit numbers nor did it figure in the case that Logothetis had continuously slandered and attacked Georgiou during his five years in office, even calling for the hanging of Georgiou in a published interview.
Another case against Logothetis, also for the hacking but as a misdemeanor and not a felony, was due to go to trial now in November but has been postponed in accordance with Logothetis’ wishes. It’s now been set for February 2017.
The ELSTAT case in the European Parliament:
On 22 November the ongoing political pressure on Greek statistics and Georgiou and his colleagues was taken up in a hearing at the Committee on Economic and Financial Affairs of the European Parliament. Both Georgiou and Walter Rademacher president of Eurostat participated, presented their views and were questioned by MEPs.
Rademacher gave an overview of the problems with Greek statistics and emphasised the need to close with the past, stop going after ELSTAT staff and to recognise what had been wrong (see video; Rademacher at 2:20-12:15). Rademacher paid tribute to Georgiou and the ELSTAT staff in modernising the organisations, bringing the governance to the proper standard and thus re-establishing trust in Greek statistics, a much needed contribution.
Rademacher pointed out that the serious misreporting didn’t cause the crisis in 2009 but was a “blatant symptom of very serious flaws” within the Greek statistics administration “at that time.” He also underlined the immense effort taken by various organisations to aid and support ELSTAT in improving its work, inter alia hundred Eurostat missions since 2010 to the present day, around one a month, to ELSTAT as well as to Eurostat in-house assistance, to the cost of around €1m in addition to technical assistance from the IMF and other EU National Statistical Institutes – no other country has needed anything like this.
In his presentation, Georgiou (12:26-20:12) emphasised the enormous disincentive for official statistics in Greece his case has been.
“These and other cases and investigations send a strong signal to today’s guardians of honest, transparent statistics in Greece: you do so at your own risk. The point cannot be lost on them that compiling reliable statistics according to EU law and statistical principles can endanger their personal well-being.”
The ELSTAT case: a scary disincentive for Greek civil servants
Georgiou had only been in office for around thirteen months when political forces in Greece openly started questioning in parliament his professional integrity. That was also the time when allegation emerged of him committing treason in reporting the correct figures.
Now, more than five years later, the case is still going on in various ways. Quite remarkably, Georgiou has not had any support from the Tsipras government. Given how the ELSTAT case has progressed, there are clearly forces both in the government and in the main opposition party who have a personal and political interest in hiding the truth on how the fraudulent reporting was kept going for around a decade, until 2009 and who find a convenient scapegoat in Georgiou and his staff.
Given the strong Greek political forces at large here the only way to stop the scapegoating seems to be that the donor countries and institutions show Greece that it can’t be helped until it helps itself. Until it helps itself by putting an end to prosecuting civil servants who fixed a serious problem that severely undermined the trust in the Greek government. As it stands, there is no incentive for Greek civil servants to withstand political pressure for corrupt action.
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Anyone who has followed the Greek crisis will be familiar with stories of insane corruption and absurd clientilismo. As the criminal prosecution of the former head of ELSTAT, Andreas Georgiou, shows the Tsipras government prefers scapegoats rather than facing painful truths about the past. Now, also foreigners working for the IMF and Eurostat are being implicated in a new criminal case against Georgiou and his colleagues.
Before the January 2015 elections, which brought Alex Tsipras and his Syriza party to power, Tsipras had been adamant on the need to tackle corruption. Once in power this discourse ebbed out. Now Tsipras and his government is watching a so-called independent judiciary persecuting the former head of ELSTAT, the Greek statistical bureau, Andreas Georgiou, who demonstrably turned ELSTAT and statistics around after a decade of falsified statistics.
The latest and most remarkable turn in the ELSTAT saga is a new criminal investigation, not only focusing on Georgiou and two of his colleagues, whose cases have all been dismissed more than once (see my detailed ELSTAT saga, written after I visited Athens in June 2015) but also on the IMF and Eurostat staff.
As I have earlier pointed out the ELSTAT prosecutions are a test of the new Greece trying to be born after the crisis: as long as ELSTAT staff and now foreigners striving to bring clarity to statistics, one of the absolute pillars of any modern country, are being prosecuted Greece is failing to free itself of political corruption. The fact that the Greek state is yet again trying to prosecute civil servants who did their jobs admirably is a sign of something seriously wrong in this country.
To Icelog Georgiou says: “The prosecutions within the borders of the European Union of official statisticians, whose work has been thoroughly checked and fully validated by the competent European Union institutions for six years in a row, should be a cause of great concern given their important precedential significance at a European Union level and an international level as well.”
A new criminal investigation of ELSTAT directors – as well as IMF and Eurostat staff
The latest move was brought on by the chief prosecutor of the Greek Supreme Court, Xeni Demetriou. As a deputy prosecutor of the Supreme Court until June 2016, Demetriou had been responsible for proposing in September 2015 to annul the last acquittal decision regarding Andreas Georgiou and his two colleagues. In the event, the Supreme Court published a decision in August 2016 accepting that annulment proposal and referring the case back to the lower court so that the latter reconsider its decision.
Amazingly, in this latest move, Demetriou as chief prosecutor, initiates an additional, brand new criminal investigation. The case was brought following a publication of two articles in the Greek newspaper Dimokratia at the end of August; the articles were introduced with photos of Andreas Georgiou, as well as of Eurostat and IMF officials.
Apparently based on emails and other sources, Dimokratia focuses on the 2009 deficit calculation. The newspaper’s coverage doesn’t seem to add anything but clamours statements such as “The Mafia of the Deficit,” to what was earlier investigated and then dismissed in previous attempts to bring Georgiou and his colleagues to court. The magazine reported inter alia of burglaries to allegedly make the case against the ELSTAT directors go away, postulating that they incriminate Georgiou and his colleagues.
This new prosecution does not only involve ELSTAT directors but goes further, involving IMF and Eurostat staff. Dimokratia claims that Eurostat’s Director General Walter Radermacher forced Greece to use statistical methods not used in any other country, directly causing the high deficit. The grand scheme was to force Greece to pay foreign banks, or as stated by the magazine: “the dirty plan of the destruction of Greece was planned and executed with distorted data so that the foreign banks can be repaid completely.”
One of the Dimokratia sources is Nikos Stroblos, a former director of the national accounts division of Greece’s statistics office during the years of fraudulent reporting. As so often pointed out on Icelog: quite extraordinarily, Georgiou and ELSTAT directors who brought the reporting of statistics to international standards, are being hounded in Greece but nothing has been done to investigate what went on during the years of false reporting.
International support for Georgiou and his ELSTAT colleagues
Eurostat and the European commission have earlier voiced concern over the turn of events in Greece. On August 24 Commissioner for Employment, Social Affairs, Skills and Labour Mobility, as well as European statistics, Marianne Thyssen was adamant that the independence of ELSTAT and the quality of its statistics were essential, adding that from the point of view of the Commission and Eurostat “it is absolutely clear that data on Greek Government debt during 2010-2015 have been fully reliable and accurately reported to Eurostat.” The Commission called “upon the Greek authorities to actively and publicly challenge the false impression that data were manipulated during 2010-2015 and to protect ELSTAT and its staff from such unfounded claims.”
The International Statistical Institute, ISI, has earlier voiced great concern for the course of events in Greece and has recently, yet again, called upon “the Greek authorities to actively and publicly challenge the false impression that data were manipulated during 2010-2015 and to protect ELSTAT and its staff from such unfounded claims.”
Further, ISI, “is extremely concerned about the persecution/prosecutions of Mr. Andreas Georgiou, Ms. Athanasia Xenaki and Mr. Kostas Melfetas for doing their work with the highest professionalism, integrity and adherence to international standards and the UN Principles, regardless of political pressure. It is inconceivable that such work, independently verified and approved in line with international standards, could lead to prosecution, and even successful prosecution of those responsible. Instead, such work should be praised!”
Persecution due to correct statistics shows the Tsipras government’s ties to the past
So far, none of this has had the slightest effect on the Tsipras government.
As pointed out recently on Icelog, the case against Georgiou and his colleagues, and now also involving IMF and Eurostat staff, is a test of the Greek government’s commitment to change and to acknowledge fraudulent behaviour in the past.
As pointed out by Tony Barber in the Financial Times on September 12, Tsipras is “yet again testing his EU partners’ patience. He is not only dragging his heels on economic reform, but is letting a criminal prosecution go ahead in a blatantly politicised case against Andreas Georgiou, a former head of the national statistics agency.”
In his review of “Game Over,” ex minister of finance George Papaconstantinou’s book on his six years in politics, Peter Spiegel notes the significance of the ELSTAT case and the Greek tendency to find scapegoats: “… it is Greece’s abiding myth that somehow the day of reckoning was avoidable. Papaconstantinou’s highly readable book makes that falsehood clear. No doubt Mr Georgiou’s trial will do the same.”
As long as Alexis Tsipras and his government continue to persecute the ELSTAT directors it is clear that the old bad ways and corrupt powers are untouched and still ruling.
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The re-awoken charges against ex-ELSTAT head Andreas Georgiou and two of his colleagues are attracting attention in the international media. Last, the Financial Times takes the case up on its front page today. According to recent report on EurActiv it also seems that powers in Brussel are rightly getting increasingly worried about the procedures in Greece against Georgiou.
After a trip to Athens last year I wrote about the case in detail on Icelog. When the case resurfaced now in summer I pointed out that Greek authorities were punishing the messenger instead of those who really falsified Greek statistics for roughly a decade.
The reason I find the ELSTAT case so interesting and important is that in my view it’s a test case for the willingness of the Greek political class to face the misdeeds of the past, the corruption and all the things that hinder prosperity in Greece. In addition, a country without reliable statistics can’t really claim to be a modern and accountable country.
As it is now, Greece is heading towards a political trial where those who fixed the fraud are being hounded and punished, not the perpetrators. As long as the charges against Georgiou and his colleagues are upheld it is clear that the forces who want to keep Greece as it was – weakened by corruption and unhealthy politics – are still ruling. That isn’t only worrying for Greece but for Europe as a whole.
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The Greek ELSTAT saga has taken yet another turn, which should be a cause for grave concern in any European country: a unanimous acquittal by three judges of the Greek Appeals Court in the case of former head of ELSTAT Andreas Georgiou has been annulled. This was announced Sunday December 18 – the case was up in court December 6 – but no documents have been published so far, another worrying aspect.
The acquittal was the fourth attempt to acquit Gergiou – and this is now the fourth attempt to thwart the course of Greek justice and revive the unfounded charges against him. The intriguing thing to note here is that the acquittal was annulled by a prosecutor at the First Instance Court, who in September brought a whole new case regarding the debt and deficit statistics from 2010 and ELSTAT staff role here, this time not only accusing ELSTAT staff of wrongdoing but also staff from Eurostat and the IMF; a case still versing in the Greek justice system.
All of this rotates around the fact that ELSTAT, and now Eurostat and IMF staff, is being prosecuted for producing correct statistics after more than a decade of fraudulent reporting by Greek authorities.
It beggars belief that the justice system in Greece seems to be wholly under the power of political forces who try as best they can to avoid owning up to earlier misdeeds. In spite of acquittals, those who corrected the fraudulent statistics are being prosecuted relentlessly while nothing is done to explain what went on during the time of the fraudulent reporting. It should also be noted that in order to stop the ELSTAT prosecutions completely, four other cases related to this one, need to be stopped.
The ELSTAT staff is here reliving the horrors of the Lernaen Hydra in Greek mythology. Georgiou and his colleagues have had international support but that doesn’t deter Greek authorities from something that certainly looks like a total abuse of justice. How is it possible to time and again take up a case where those charged have already been acquitted?
Icelog has followed the ELSTAT saga, see here for earlier blogs, explaining the facts of this sad saga.
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In Greece, authorities go after those who tried to sort out the mess of the Greek economy, not those who created it. That’s one conclusion to be drawn for charges, yet again, brought against Andreas Georgiou former head of ELSTAT, the Greek statistics bureau. It should be scary for Greeks and European institutions to see the relentless persecutions of a civil servant who did his job.
Since he was appointed head of ELSTAT in summer of 2010, well after it was clear that the Greek statistics were unreliable, Andreas Georgiou has had to fight forces in Greece who simply refuse to let go of him and his colleagues, a story carefully recounted on Icelog a year ago, with the precise data of statistics and the development of the ELSTAT saga. Time and again, the case against Georgiou has been dropped but always brought up again.
New criminal charges now against Georgiou do not only threaten him with a prison sentence but also threaten to awaken earlier dropped charges against him and two of his colleagues.
And those who for years falsified statistics? No, not one hair on their head has been ruffled, no investigations set up as to how it was possible that wrong and falsified statistics were reported to Greeks themselves and to international bodies such as Eurostat, the European statistical bureau, more or less from 2000 until 2009.
In Game Over, the Inside Story of the Greek Crisis, George Papaconstantinou minister of finance during the fateful time from the October 2009 election until June 2011 recounts thoroughly how the falsified statistics came up as soon as the PASOK government came to power.
Already during his first days in Office, Papaconstantinou heard from various institutions that inter alia the much watched budget deficit was well beyond what the Greek authorities had reported to Eurostat two days before the October 2009 election. “In short, they had lied,” Papaconstantinou concludes in his book. What ensued was a discovery of fraudulent statistics going back years.
No one could precisely show Papaconstantinou how the reported figure was found. One of his first acts in office was to call the head of the national statistics, professor Emmanouil Kontopyrakis to his office. The professor had no idea how the deficit figure was computed but to him it did seem like a “reasonable projection” – the minister asked him to resign.
As Papaconstantinou carefully recounts much of the mistrust of his European colleagues directed at Greece was based on the fact that there wasn’t even precise statistics and figures to work with to begin with.
When Andreas Georgiou took over as head of ELSTAT in August the much-debated deficit figures, both forecasted and the real figures, had been corrected, of course greatly increasing the deficit, under the auspice of Eurostat.
As carefully detailed in my ELSTAT saga last year, the numbers kept going upwards. The 2009 deficit first forecasted 3.7% in early October was by April 2010 estimated by Eurostat to be an actual deficit of 13.6% but Eurostat was still not sure it couldn’t rise; by late 2010 Georgiou and his team found it to be 15.4%.
In his book, Papaconstantinou writes that Georgiou proved to be the right man for the job, “helping to make Greek statistics credible. I was less lucky with of the other people appointed to the ELSTAT board.” In a police investigation one board member was later discovered to have hacked Georgiou’s email account. Another member accused Georgiou of inflating the deficit figure, causing the bailout, a “totally absurd” accusation according to Papaconstantinou.
The memorandum on the Greek rescue packet was finalised May 2 2010. Yet, Georgiou, who only took over in August 2010, is continuously persecuted for having influenced the bailout.
Considering how poisonous the unreliable data proved to be in the discussions up to the May 2010 memorandum it would have been greater reason to thank Georgiou and his team for delivering sound statistical data.
But that is not what happened and things didn’t stop there. The opposition lapped up the accusations. “Soon the justice system was involved. Prosecutors brought criminal charges against Georgiou for actions having caused billions of damage to Greece. We were suddenly in a parallel universe; rather than bringing to task those who had lied about the true size of the deficit, we were accused for having told the truth!”
No matter though Georgiou’s case has been thrown out several times the dark forces in Greek politics always find a way of bringing it back. And that has now happened again, the case is being brought back in a new guise (see here and here). It seems that Europe risks having a political prisoner within its boundaries, imprisoned for doing his job.
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Icelandic authorities ignored warnings before October 2008 on the expanded banking system threatening financial stability but the shock of 90% of the financial system collapsing focused minds. Disciplined by an International Monetary Fund program, Iceland applied classic crisis measures such as write-down of debt and capital controls. But in times of shock economic measures are not enough: Special Prosecutor and a Special Investigative Committee helped to counteract widespread distrust. Perhaps most importantly, Iceland enjoys sound public institutions and entered the crisis with stellar public finances. Pure luck, i.e. low oil prices and a flow of spending-happy tourists, helped. Iceland is a small economy and all in all lessons for bigger countries may be limited except that even in a small economy recovery does not depend on a one-trick wonder.
“The medium-term prospects for the Icelandic economy remain enviable,” the International Monetary Fund, IMF, wrote in its 2007 Article IV Consultation
Concluding Statement, though pointing out there were however things to worry about: the banking system with its foreign operations looked ominous, having grown from one gross domestic product, GDP, in 2003 to ten fold the GDP by 2008. In early October 2008 the enviable medium-term prospect were clouded by an unenviable banking collapse.
All through 2008, as thunderclouds gathered on the horizon, the Central Bank of Iceland, CBI, and the coalition government of social democrats led by the Independence party (conservative) staunchly and with arrogance ignored foreign advice and warnings. Yet, when finally forced to act on October 6 2008, Icelandic authorities did so sensibly by passing an Emergency Act (Act no. 125/2008; see here an overview of legislation related to the restructuring of the banks and here more broadly on economic measures).
Iceland entered an IMF program in November 2008, aimed at restoring confidence and stabilising the economy, in addition to a loan of $2.1bn. In total, assistance from the IMF and several countries amounted to ca. $10bn, roughly the GDP of Iceland that year.
In spite of mostly sensible measures political turmoil and demonstrations forced the “collapse government” from power: it was replaced on February 1 2009 by a left coalition of the Left Green party, led by the social democrats, which won the elections in spring that year. In spite of relentless criticism at the time, both governments progressed in dragging Iceland out of the banking mess.
After the GDP contracted by 4% in the first three years the Icelandic economy was already back to growth summer 2011 and is now in its fifth year of economic growth. In 2015, Iceland became the first European country, hit by crisis in 2008-2010, to surpass its pre-crisis peak of economic output.
Iceland is now doing well in economic terms and yet the soul is lagging behind. Trust in the established political parties has collapsed: instead, the Pirate party, which has never been in government, enjoys over 30% following in opinion polls.
Compared to Ireland and Greece, Iceland’s recovery has been speedy, giving rise to questions as to why so quick and could this apparent Icelandic success story be applied elsewhere. Interestingly, much of the focus of that debate is very narrow and in reality not aimed at clarifying the Icelandic recovery but at proving or disproving aspects of austerity, the euro or both.
Unfortunately, much of this debate is misleading because it is based on three persistent myths of the Icelandic recovery: that Iceland avoided austerity, did not save its banks and that the country defaulted. All three statements are wrong: Iceland has not avoided austerity, it did save some banks though not the three largest ones and did not default.
Indeed, the high cost of the Icelandic collapse is often ignored, amounting to 20-25% of GDP. Yet, not as high as feared to begin with: the IMF estimated it could be as much as 40%. The net fiscal cost of supporting and restructuring the banks is, according to the IMF 19.2% of GDP.
Costliest banking crisis since 1970; Luc Laeven and Fabián Valencia.
As to lessons to avoid the kind of shock Iceland suffered nothing can be learnt without a thorough investigation as to what happened, which is why I believe the report, a lesson in itself, by the Special Investigative Commission, SIC, in 2010 was fundamental. Tackling eventual crime, as by setting up the Office of the Special Prosecutor, is important to restore trust. Recovering from a collapse of this magnitude is not only about economic measures and there certainly is no one-trick fix.
On specific issues of the economy it is doubtful that Iceland, a micro economy, can be a lesson to other countries but in general, the lessons are simple: sound public finances and sound public institutions are always essential but especially so in times of crisis.
In general: small economies fall and bounce fast(er than big ones)
The path of the Icelandic economy over the past fifty years has been a path up mountains and down deep valleys. Admittedly, the banking collapse was a major shock, entirely man-made in a country used to swings according to whims of fishing stocks, the last one being in the last years of the 1990s.
Sound public finances, sound institutions
What matters most in a crisis country? Cleary a myriad of things but in hindsight, if a country is heading for a major crisis make sure the public finances are in a sound state and public authorities and institutions staffed with competent people, working for the general good of society and not special interests – admittedly not a trivial thing.
Since 1980 Icelandic sovereign debt to GDP was on average 48.67%, topped at almost 60% around the crisis in late 1990s and had been going down after that. Compare with Greece.
Same with the public budget: there was a surplus of 5-6% in the years up to 2008, against an average of -1.15% of GDP from 1998 to 2014. With a shocking deficit of 13.5% in 2009 it has since steadily improved, pointing to a balanced budget this year and a tiny surplus forecasted for next year. Again, compare with Greece.
As to institutions, the CBI has been crucial in prodding the necessary recovery policies; much more so after change of board of governors in early 2009. Sound institutions and low corruption is the opposite of Greece, where national statistics were faulty for more than a decade (see my Elstat saga here).
Events in 2008
In early 2007, with sound state finances and fiscal strength the situation in Iceland seemed good. The banks felt invincible after narrowly surviving the mini crisis on 2006 following scrutiny from banks and rating agencies (the most famous paper at the time was by Danske Bank’s Lars Christensen).
Icelanders were keen on convincing the world that everything was fine. The Icelandic Chamber of Commerce hired Frederic Mishkin, then professor at Columbia, and Icelandic economist Tryggvi Þór Herbertsson to write a report, Financial Stability in Iceland, published in May 2006. Although not oblivious to certain risks, such as a weak financial regulator, they were beating the drum for the soundness of the Icelandic economy.
But like in fairy tales there was one major weakness in the economy: a banking system with assets, which by 2008 amounted to ten times the country’s GDP. Among economists it is common knowledge that rapidly growing financial sector leads to deterioration in lending. In Iceland, this was blissfully ignored (and in hindsight, not only in Iceland: Royal Bank of Scotland is an example).
Instead, the banking system was perceived to be the glory of Icelandic policies in a country that had only ever known wealth from the sea. Finance was the new oceans in which to cast nets and there seemed to be plenty to catch.
In early 2008 things had however taken a worrying turn: the value of the króna was declining rapidly, posing problems for highly indebted households – 15% of their loans were in foreign currency, i.a. practically all car loans. The country as a whole is dependent on imports and with prices going up, inflation rose, which hit borrowers; consumer-price indexed, CPI, loans (due to chronic inflation for decades) are the most common loans.
Iceland had been flush with foreign currency, mainly from three sources: the Icelandic banks sought funding on international markets; they offered high interest rates accounts abroad – most of these funds came to Iceland or flowed through the banks there (often en route to Luxembourg) – and then there was a hefty carry trade as high interest rates in Iceland attracted short- and long-term investors.
“How safe are your savings?” Channel 4 (very informative to watch) asked when its economic editor Faisal Islam visited Iceland in early March 2008. CBI governor Davíð Oddsson informed him the banks were sound and the state debtless. Helping the banks would not be “too much for the state to swallow (and here Oddsson hesitated) if it wanted to swallow it.” – Yet, timidly the UK Financial Services Authority, FSA, warned savers to pay attention not only to the interest rates but where the deposits were insured the point being that Landsbanki’s Icesave accounts, a UK branch of the Icelandic bank, were insured under the Icelandic insurance scheme.
The 2010 SIC report recounts in detail how Icelandic authorities ignored or refused advise all through 2008, refused to admit the threat of a teetering banking system, blamed it all on hedge funds and soldiered on with no plan.
The first crisis measure: Emergency Act Oct. 6 2008
Facing a collapsing banking system did focus the minds of politicians and key public servants who over the weekend of October 4 to 5 finally realised that the banks were beyond salvation. The Emergency Act, passed on October 6 2008 laid the foundation for splitting up the banks. Not into classic good and bad bank but into domestic and foreign operations, well adapted to alleviating the risk for Iceland due to the foreign operations of the over-extended banks.
The three old banks – Kaupthing, Glitnir and Landsbanki – kept their old names as estates whereas the new banks eventually got new names, first with the adjective “Nýi,” “new,” later respectively called Arion bank, Íslandsbanki and Landsbankinn. Following the split, creditors of the three banks own 87% of Arion and 95% of Íslandsbanki, with the state owning the remaining share. Due to Icesave Landsbanki was a different case, where the state first owned 81.33%, now 97.9%.
In addition to laying the foundation for the new banks, one paragraph of the Emergency Act showed a fundamental foresight:
In dividing the estate of a bankrupt financial undertaking, claims for deposits, pursuant to the Act on on (sic) Deposit Guarantees and an Investor Compensation Scheme, shall have priority as provided for in Article 112, Paragraph 1 of the Act on Bankruptcy etc.
By making deposits a priority claim in the collapsed banks interests of depositors were better secured than had been previously (and normally is elsewhere).
When 90% of a financial system is swept away keeping payment systems functioning is a major challenge. As one participant in these operations later told me the systems were down for no more than ca. five or ten minutes during these fateful days. All main institutions, except of course the three banks, withstood the severe test of unprecedented turmoil, no mean feat.
The coming months and years saw the continuation of these first crisis measures.
It is frequently stated that Iceland, the sovereign, was bankrupted by the collapse or defaulted on its debt. That is not correct though sovereign debt jumped from ca. 30% of GDP in 2008 until it peaked at 101% in 2012.
IMF and international assistance of $10bn
That fateful first weekend of October 2008 it so happened that there were people from the IMF visiting Iceland and they followed the course of events. Already then seeking IMF assistance was discussed but strong political forces, mainly around CBI governor Davíð Oddsson, former prime minister and leader of the Independence party, were vehemently against.
One of the more surreal events of these days was when governor Oddsson announced early morning on October 7 that Russia would lend Iceland €4bn, with maturity of three to four years, the terms 30 to 50 basis points over Libor. According to the CBI statement “Prime Minister Putin has confirmed this decision.” – It has never been clarified who offered the loan or if Oddsson had turned to the Russians but as the Cypriot and Greek government were to find out later this loan was never granted. If Oddsson had hoped that a Russian loan would help Iceland avoid an IMF program that wish did not come true.
On November 17, 2008 the Prime Minister’s Office published an outline of an Icelandic IMF program: Iceland was “facing a banking crisis of extraordinary proportions. The economy is heading for a deep recession, a sharp rise in the fiscal deficit, and a dramatic surge in public sector debt – by about 80%.”
The program’s three main objectives were: 1) restoring confidence in the króna, i.a. by using capital controls; 2) “putting public finances on a sustainable path”; 3) “rebuilding the banking system… and implementing private debt restructuring, while limiting the absorption of banking crisis costs by the public sector.”
An alarming government deficit of 13.5% was now forecasted for 2009 with public debt projected to rise from 29% to 109% of GDP. “The intention is to reduce the structural primary deficit by 2–3 percent annually over the medium-term, with the aim of achieving a small structural primary surplus by 2011 and a structural primary surplus of 3½-4 percent of GDP by 2012.” – This was never going to be austerity-free.
By November 20 2008 IMF funds had been secured, in total $2.1bn with $827m immediately available and the remaining sum paid in instalments of $155m, subject to reviews. The program was scheduled for two years and the loan would be repaid 2012 to 2015.
Earlier in November Iceland had secured loans of $3bn from the other Nordic countries together with Russia and Poland (acknowledging the large Polish community in Iceland). Even the tiny Faroe Islands chipped in with $50m. In addition, governments in the UK, the Netherlands and Germany reimbursed depositors in Icelandic banks, in all ca. $5bn. Thus, Iceland got financial assistance of around $10bn, at the time equivalent of one GDP, to see it through the worst.
In spite of a lingering suspicion against the IMF, both on the political left and right, there was never the defiance à la greque. Both the “collapse coalition” and then the left government swallowed the bitter pill of an IMF program and tried to make the best of it. Many officials have mentioned to me that the discipline of being in a program helped to prioritise and structure the necessary measures.
Recently, an Icelandic civil servant who worked closely with the IMF staff, told me that this relationship had been beneficial on many levels, i.a. had the approach of the IMF staff to problem solving been an inspiration. Here was a country willing to learn.
Part of the answer to why Iceland did so well is that the two governments more or less followed the course set out in he IMF program. This turned into a success saga for Iceland and the IMF. One major reason for success was Iceland’s ownership of the program: politicians and leading civil servants made great effort to reach the goals set in the program. – An aside to the IMF: if you want a successful program find a country like Iceland to carry it out.
Capital controls: a classic but much maligned measure
For those at work on crisis measures at the CBI and the various ministries there was little breathing space these autumn weeks in 2008. No sooner was the Emergency Act in place and the job of establishing the new banks over (in reality it took over a year to finalise) when a new challenge appeared: the rapidly increasing outflow of foreign funds threatened to sink the króna below sea level and empty the foreign currency reserves of the CBI.
On November 28 the CBI announced that following the approval of the IMF, capital flows were now restricted but would be lifted “as soon as circumstances allow.” De facto, Iceland was now exempt from the principle of freedom of capital movement as this applies in the European Economic Area, EEA. The controls were on capital only, not on goods and services, affected businesses but not households.
At the time they were set, the capital controls kept in place foreign-owned ISK650bn, or 44% of Icelandic GDP, mostly harvest from carry trades. Following auctions and other measures these funds had dwindled down to ISK291bn by the end of February 2015, just short of 15% of GDP. However, other funds have grown, i.e. foreign-owned ISK assets in the estates of the failed banks, now ca. ISK500bn or 25% of GDP.
In addition, there is no doubt certain pressure from Icelandic entities, i.e. pension funds, to invest abroad. The Icelandic Pension Funds Association estimates the funds need to invest annually ISK10bn abroad. Greater financial and political stability in Iceland will help to ease the pressure. (Further to the numbers behind the capital controls and plan to ease them, see my blog here).
With capital controls to alleviate pressure politicians in general have the tendency to postpone solving the problems kept at bay by the controls; this has also been the case in Iceland. The left government made various changes to the Foreign Exchange Act but in the end lacked the political stamina to take the first steps towards lifting them. With up-coming elections in spring 2013 it was clear by late 2012 that the government did not have the mandate to embark on such a politically sensitive plan so close to elections.
In spring 2015, after much toing and froing, the coalition of Independence party led by the Progressive party presented a plan to lift the controls. The most drastic steps will be taken this winter, first to bind what remains from the carry trades and second to deal with the estates, where ca. 80% of their foreign-owned ISK assets will be paid as a “stability contribution” to the state. (I have written extensively on the capital controls, see here). The IMF estimates it might take up to eight years to fully lift the controls.
It is notoriously difficult to measure the effects of capital controls. It is however a well-known fact that with time capital controls have a detrimental effect on the economy, as the CBI has incessantly pointed out in its Financial Stability reports.
In its 2012 overview over the Icelandic program the IMF summed up the benefits of controls:
“… as capital controls restricted investment opportunity abroad, both foreign and local holders of offshore króna found it profitable to invest in government bonds, which facilitated the financing of budget deficit and helped avoid a sovereign financing crisis.” – Considering the direct influence of inflation, due to CPI-indexation of household debt, the benefits also count for households.
Again, measuring is difficult but the stability brought by the controls seems to have helped though the plan to lift them came none too soon. Some economists claim the controls were unnecessary and have only done harm. None of their arguments convince me.
Measures for household and companies
Icelandic households have for decades happily lived beyond their means, i.e. household debt has been high in Iceland. The debt peaked in 2009 but has been going down rapidly since then.
Already in early 2008, the króna started to depreciate versus other currencies. From October 2007 to October 2008 the changes were dramatic: €1 stood at ISK85 at the beginning of this period but at ISK150 in the end; by October 2009 the €1 stood at ISK185.
Even before the collapse it was clear that households would be badly hit in various ways by the depreciating króna, i.a. due to the CPI-indexation of loans as mentioned above. In addition, banks loaded with foreign currency from the carry trades had for some years been offering foreign currency loans, in reality loans indexed against foreign currencies. With the króna diving instalments shot up for those borrowing in foreign currency; as pointed out earlier, 15% of household debt was in foreign currency.
The left government’s main stated mission was to shield poorer households and defend the welfare system during unavoidable times of austerity following the collapse. In addition, there was also the point that in a contracting economy private spending needed to be strengthened.
The first measure aimed directly at households was in November 2008 when the government announced that people could use private pension funds to pay down debt.
Soon after the banking collapse borrowers with loans in foreign currency turned to the courts to test the validity of these loans. As the courts supported their claims the government stepped in to push the banks to recalculate these loans.
In total, at the end of January 2012 write-downs for households amounted to ISK202bn. For non-financial companies the write-downs totalled ISK1108bn by the end of 2011 (based on numbers from Icelandic Financial Services Association). In general, Icelandic households have been deleveraging rapidly since the crisis.
Governments in other crisis countries have been reluctant to burden banks with the cost of write-downs and non-performing loans. In Iceland, there was a much greater political willingness to orchestrate write-downs. The fact that foreign creditors owned two of the three banks may also have made it less painful to Icelandic politicians to subject the banks to the unavoidable losses stemming from these measures.
Changes in bankruptcy law
In 2010 the Icelandic Bankruptcy Act was changed. Most importantly, the time of bankruptcy was shortened to two years. The period to take legal action was shortened to six months.
There are exemptions from this in case of big companies and bankruptcy procedures for financial companies are different. However, the changes profited individuals and small companies. In crisis countries such as Greece, Ireland and Spain bankruptcy laws has been a big hurdle in restructuring household finances, only belatedly attended to.
… and then, 21 months later, Iceland was back to growth
It was indicative of the political climate in Iceland that when the minister of finance, trade and economy Steingrímur Sigfússon, leader of the Left Green party, announced in summer 2011 that the economy was now growing again his tone was that of an undertaker. After all, the growth was “only” forecasted to be around 2%, much less than what Iceland had enjoyed earlier. Yet, this was a growth figure most of his European colleagues would have shouted from the rooftops.
Abroad, Sigfússon was applauded for turning the economy around but he enjoyed no such appreciation in Iceland.
As inequality diminished during the first years of the crisis the government could to a certain degree have claimed success (see on austerity below). However, the left government did poorly in managing expectations. Torn by infighting, its political opponents, both in opposition and within the coalition parties never tired of emphasising that no measures were ever enough. That was also the popular mood.
The króna: help or hindrance?
Much of what has been written on the Icelandic recovery has understandably been focused on the króna – if beneficial and/or essential to the recovery or curse – often linked to arguments for or against the EU and the euro.
A Delphic verdict on the króna came from Benedikt Gíslason, member of the capital controls taskforce and adviser to minister of finance Bjarni Benediktsson. In an interview to the Icelandic Viðskiptablaðið in June 2015 Gíslason claimed the króna had had a positive effect on the situation Iceland found itself in. “Even though it (the króna) was the root of the problem it is also a big part of the solution.”
Those who believe in the benefits of own independent currency often claim that Iceland did devalue, as if that had been part of a premeditated strategy. That however was not the case: the króna has been kept floating, depreciating sharply when funds flowed out in 2008. The capital controls slammed the break on, stabilising and slowly strengthening the króna.
Lately, with foreign currency inflows, i.a. from tourism, the króna has further appreciated but not as much as the inflows might indicate: the CBI buys up foreign currency, both to bolster its reserve and to hinder too strong a króna. Thus, it is appropriate to say that the króna float is steered but devaluation, as a practiced in Iceland earlier (up to the 1990s) and elsewhere, has not been a proper crisis tool.
Had Iceland joined the EU in 1995 together with Finland and Sweden, would it have taken up the euro like Finland or stayed outside as Sweden did? There is no answer to this question but had Iceland been in the euro capital controls would have been unnecessary (my take on Icelandic v Greek controls, see here). Would the euro group and the European Central Bank, ECB, have forced Iceland, as Ireland, to save its banks if Iceland had been in the euro zone? Again, another question impossible to answer. After all, tiny Cyprus did a bail-in (see my Cyprus saga here).
On average, fisheries have contributed around 10% to the Icelandic GDP, 11% in 2013 and the industry provided 15-20% of jobs. Fish is a limited resource with many restrictions, meaning that no matter markets or currency fishing more is not an option.
Tourism has now surpassed the fishing industry as a share of GDP. Again, depreciating króna could in theory help here but Iceland is not catering to cheap mass tourism but to a more exclusive kind of tourism where price matters less. Attracting over a million tourists a year is a big chunk for a population of 330.000 but my hunch is that the value of the króna only has a marginal effect, much like on the fishing industry: the country’s capacity to receive tourists is limited.
Currency is a barometer of financial soundness. One of the problems with the króna is simply the underlying economy and the soundness of the governments’ economic policies or lack of it, at any given time. Sound policies have often been lacking in Iceland, the soundness normally not lasting but swinging. Older Icelanders remember full well when the interests of the fishing industry in reality steered the króna, much like the soya bean industry in Argentina.
The króna is no better or worse than the underlying fundamentals of the economy. In addition, in an interconnected world, the ability of a government to steer its currency is greatly limited, interestingly even for a major currency like the British pound. What counts for a micro economy like Iceland is not necessarily applicable for a reserve currency.
Needless to say, the króna did of course have an effect on how Iceland fared after the collapse but judging exactly what that effect has been is not easy and much of what has been written is plainly wrong. (I have earlier written about the right to be wrong about Iceland; more recent example here). In addition, much of what has been written on Iceland and the króna is part of polemics on the EU and the euro and does little to throw light on what happened in Iceland.
Iceland: no bailouts, no austerity?
There have been two remarkably persisting stories told about the Icelandic crisis: 1) it didn’t save its banks and consequently no funds were used on the banks 2) Iceland did not undergo any austerity. – Both these stories are only myths, which have figured widely in the international debate on austerity-or-not, i.a. by Paul Krugman (see also the above examples on the right to be wrong about Iceland) who has widely touted the Icelandic success as an example to follow. Others, like Tyler Cowen, have been more sceptical.
True, Iceland did not save its three largest banks. Not for lack of trying though but simply because that task was too gigantic: the CBI could not possibly be the lender of last resort for a banking system ten times the GDP, spread over many countries.
When Glitnir, the first bank to admit it had run out of funds, turned to the CBI for help on September 29 2008, the CBI offered to take over 75% of the bank and refinance it. It only took a few days to prove that this was an insane plan. The CBI lent €500m to Kaupthing on the day the Alþingi passed the Emergency Act, October 6 2008, half of which was later lost due to inappropriate collaterals. This loan is the only major unexplained collapse story.
The left government later tried to save two smaller banks – a futile exercise, which only caused losses to the state – and did save some building societies. The worrying aspect of these endeavours was the lack of clear policy; it smacked of political manoeuvring and clientilismo and only added to the high cost of the collapse, in international context.
As to austerity, every Icelander has stories to tell about various spending cuts following the shock in October 2008. Public institutions cut salaries by 15-20%, there were cuts in spending on health and education. (Further on cuts see IMF overview 2012).
With the left government focused on the poorer households it wowed to defend benefit spending and interest rebates on mortgages. These contributions are means-tested at a relatively low income-level but helped no doubt fending off widening inequality. Indeed, the Gini coefficients have been falling in Iceland, from 43 in 2007 to 24 in 2012, then against EU average of 30.5. (See here for an overview of the social aspects of the collapse from October 2011, by Stefán Ólafsson).
In addition, it is however worth observing that although inequality in general has not increased, there are indications that inter-generational inequality has increased, as pointed out in the CBI Financial Stability Report nr. 1, 2015: at end of 2013 real estate accounted for 82% of total assets for the 30 to 40 years age group, compared to 65% among the 65 to 70 years old. The younger ones, being more indebted than the older ones are much more vulnerable to external shocks, such as changes in property prices and interest rates. Renters and low-income families with children, again more likely to be young than older people, are still vulnerable groups.
In the years following the crisis the unemployment jumped from 2.4% in 2008 to peak of 7.6% in 2011, now at 4.4%. Even 7.6% is an enviable number in European perspective – the EU-28 unemployment was 9.5% in July 2015 and 10.9.% for the euro zone – but alarming for Iceland that has enjoyed more or less full employment and high labour market participation.
Many Icelanders felt pushed to seek work abroad, mostly in Norway, either only one spouse or the whole family. Poles, who had sought work in Iceland, moved back home. Both these trends helped mitigate cost of unemployment benefits.
Austerity was not the only crisis tool in Iceland but the country did not escape it. And as elsewhere, some have lamented that the crisis was not used better to implement structural changes, i.a. to increase competition.
The pure luck: low oil prices, tourism and mackerel
Iceland is entirely dependent on oil for transport and the fishing fleet is a large consumer of oil. Iceland is also dependent on imports, much of which reflect the price of oil, as does the cost of transport to and from the country. It is pure luck that oil prices have been low the years following the collapse, manna from heaven for Iceland.
The increase in tourism has been crucial after the crisis. Tourism certainly is a blessing but the jobs created are notoriously low-paying jobs. As anyone who has travelled around in Iceland can attest to, much of these jobs are filled not by Icelanders but by foreigners.
Until 2008, mackerel had never been caught in any substantial amount in Icelandic fishing waters: the catch was 4.200 ton in 2006, 152.000 ton in 2012. Iceland risked a new fishing war by unilaterally setting its mackerel quota. Fishing stocks are notoriously difficult to predict and the fact that the mackerel migrated north during these difficult years certainly was a stroke of luck.
The non-measureables: Special Prosecutor and the SIC report
As Icelanders caught their breath after the events around October 6 2008 the country was rife with speculations as to what had indeed happened and who was to blame. There were those who blamed it all squarely on foreigners, especially the British. But the collapse also changed the perception of Icelanders of corruption and this perception has lingered in spite of action taken against individuals. This seems to be changing, yet slowly.
When Vilhjálmur Bjarnason, then lecturer at the University of Iceland, now MP for the Independence party, said following the collape that around thirty men (yes, all males) had caused the collapse, many nodded.
Everyone roughly knew who they were: senior bankers, the main shareholders of the banks and the largest holding companies, all prominent during the boom years until the bitter end in October 2008. Many of these thirty have now been charged, some are already in prison and other fighting their case in courtrooms.
Alþingi responded swiftly to these speculations, by passing two Acts in December: setting up an Office of a Special Prosecutor, OSP and a Special Investigative Committee, SIC to clarify the collapse of the financial sector. These two Acts proved important steps for clearing the air and setting the records straight.
After a bumpy start – no one applied for the position of a Special Prosecutor – Ólafur Hauksson a sheriff from Reykjavík’s neighbouring town Akranes was appointed in January 2009. Out of 147 cases in the process of being investigated at the beginning of 2015, 43 are related to the collapse (the OSP now deals with all serious cases of financial fraud).
The Supreme Court has ruled in seven cases related to the collapse and sentenced in all but one case; Kaupthing’s second largest shareholder and three of the bank’s senior managers are now in prison after a ruling in the so-called al Thani case. – Gallup Iceland regularly measures trust in institutions. Since the OSP was included, in 2010, it has regularly come out on top as the institution enjoying the highest trust.
As to the SIC its report, published on 12 April 2010, counts a 2600 page print version, which sold out the day it was published, with additional material online; an exemplary work in its thoroughness and clarity.
The trio who oversaw the work – its chairman then Supreme Court judge Páll Hreinsson (now judge at the EFTA Court), Alþingi’s Ombudsman Tryggvi Gunnarsson and Sigríður Benediktsdóttir then lecturer in economics at Yale (now head of Financial Stability at the CBI) – presented a convincing saga: politicians had not understood the implication of the fast growing banking sector and its expansion abroad, regulators were too weak and incompetent, the CBI not alert enough and the banks egged on by over-ambitious managers and large shareholders who in some cases committed criminality.
How have these two undertakings – the OSP and the SIC – contributed to the Icelandic recovery? I fully accept that the effect, as I interpret it, is subjective but as said earlier: recovery after such a major shock is not only about direct economic measures.
Setting up the OSP has strengthened the sense that the law is blind to position and circumstances; no alleged crime is too complicated to investigate, be it a bank-robbery with a crowbar or excel documents from within a bank. The OSP calmed the minds of a nation highly suspicious of bankers, banks and their owners.
The benefit of the SIC report is i.a. that neither politicians nor special interests can hi-jack the collapse saga and shape it according to their interests. The report most importantly eradicated the myth that foreigners were only to blame – that Iceland had been under siege or attack from abroad – but squarely placed the reasons for the collapse inside the country.
The SIC had a wide access to documents, also from the banks. The report lists loans to the largest shareholders and other major borrowers. This clarified who and how these people profited from the banks, listed companies they owned together with thousands of Icelandic shareholders.
The SIC’s thorough and well-documented saga may have focused the political energy on sensible action rather than wasting it on the blame game. Interestingly, this effect is no less relevant as time goes by. To my mind, the atmosphere both in Ireland and Greece, two countries with no documented overview of what happened and why, testifies to this.
In addition, the report diligently focuses on specific lessons to be learnt by the various institutions affected. Time will show how well the lessons were learnt but at least heads of some of these institutions took the time and effort, with their staff, to study the outcome.
A country rife with distrust and suspicion is not a good place to be and not a good place for business. Both these undertakings cleared the air in Iceland – immensely important for a recovery after such a shock, which though in its essence an economic shock is in reality a profound social shock as well.
I mentioned sound institutions above. Their effect is not easily measureable but certainly well functioning key institutions such as ministries, National Statistics and the CBI have all been important for the recovery.
In its April 2012 Ex Post Evaluation of Exceptional Access Under the 2008 Stand-by Arrangement the IMF came up with four key lessons from Iceland’s recovery:
(i) strong ownership of the program … (ii) the social impact can be eased in the face of fiscal consolidation following a severe crisis by cutting expenditures without compromising welfare benefits, while introducing a more progressive tax system and improving efficiency; (iii) bank restructuring approach allowing creditors to take upside gains but also bear part of the initial costs helped limit the absorption of private sector losses by public sector; and (iv) after all other policy options are exhausted, capital controls could be used on a temporary basis in crisis cases such as Iceland, where capital controls have helped prevent disorderly deleveraging and stabilize the economy.
The above understandably refers to the economic recovery but recovering from a shock like the Icelandic one – or as in Ireland, Greece and Cyprus – is not only about finding the best economic measures, though obviously important. It is also about understanding and coming to terms with what happened.
As mentioned above, I firmly believe that apart from classic measures regarding insolvent banks and debt, both sovereign and private, the need to clarify what happened, as was done by the SIC and to investigate alleged criminality, as done by the OSP, is of crucial importance – something that Ireland (with a late and rambling parliamentary investigation), Greece, Cyprus and Spain could ponder on. All of this in addition to sound institutions and sound public finances before a crisis.
The soul lagging behind
In the olden days it was said that by traveling as fast as one did in a horse-drawn carriage the soul, unable to travel as fast, lagged behind (and became prone to melancholia). Same with a nation’s mood following an economic depression: the soul lags behind. After growth returns and employment increases it takes time until the national mood moves into the good times shown by statistics.
Iceland is a case in point. Although the country returned to growth, with falling unemployment, in 2011 the debate was much focused on various measures to ease the pain of households and nothing seemed ever enough.
The Gallup Expectations monitor turned upwards in late 2009, after a steep fall from its peak in late 2007, and has been rising slowly since. Yet it is now only at the 2004 level; the Icelandic inclination to spending has been sig-sawing upwards. – Here two graphs, which indicate the mood:
With plan in place to lift capital controls, the last obvious sign of the 2008 collapse will be out of the way. Implementation will take some years; a steady and secure execution this coming winter will hopefully lift spirits in the business community.
Living intimately with forces of nature, volcanoes and migrating fish stocks, and now tourists, as fickle as the fish in the ocean, Icelanders have a certain sangue-froid in times of uncertainty. Actions by the three governments since the collapse have at times been rambling but on the whole they have sustained recovery.
A sign of the lagging soul is that growth has not brought back trust in politics. Politicians score low: the most popular party now enjoying ca. 35% in opinion polls, almost seven years after the collapse and four years since turning to growth, is the Pirate party, which has never been in government.
Recovery (probably) secured – but not the future
As pointed out in a recent OECD report on Iceland the prospect is good and progress made on many fronts, the latest being the plan to lift capital controls: “inflation has come down, external imbalances have narrowed, public debt is falling, full employment has been restored and fewer families are facing financial distress. “
However, the worrying aspect is that in addition to fisheries partly based on cheap foreign labour the new big sector, tourism, is the same. Notoriously low productivity – a chronic Icelandic ill – will not be improved by low-paid foreign labour. Well-educated and skilled Icelanders are moving abroad whereas foreigners moving to the country have fewer skills. Worryingly, there is little political focus on this.
As the OECD points out “unemployment amongst university graduates is rising, suggesting mismatch. As such, and despite the economic recovery, Iceland remains in transition away from a largely resource-dependent development model, but a new growth model that also draws on the strong human capital stock in Iceland has yet to emerge.”
Iceland does not have time to rest on its recovery laurels. Moving out of the shadow of the crisis the country is now faced with the old but familiar problems of navigating a tiny economy in the rough Atlantic Ocean.
This post is cross-posted with A Fistful of Euros.
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Why the Troika and the EU member states find it so difficult to trust Greece
The word “trust” has been mentioned time and again in reports on the tortuous negotiations on Greece. One reason is the persistent deceit in reporting on debt and deficit statistics, including lying about an off market swap with Goldman Sachs: not a one-off deceit but a political interference through concerted action among several public institutions for more then ten years.
As late as in the July 12 Euro Summit statement “safeguarding of the full legal independence of ELSTAT” was stated as a required measure. Worryingly, Andreas Georgiou president of ELSTAT from 2010, the man who set the statistics straight, and some of his staff, have been hounded by political forces, also Syriza. Further, a Greek parliamentary investigation aims at showing that foreigners are to blame for the odious debt, which should not be paid while there is no effort to clarify a decade of falsifying statistics.
In Iceland there were also voices blaming its collapse on foreigners but the report of the Special Investigation Committee silenced these voices. – As long as powerful parts of the Greek political class are unwilling to admit to past failures it might prove difficult to solve its results: the excessive debt and deficit.
“This is all the fault of foreigners!” In Iceland, this was a common first reaction among some politicians and political forces following the collapse of the three largest Icelandic banks in October 2008. Allegedly, foreign powers were jealous or even scared of the success of the Icelandic banks abroad or aimed at taking over Icelandic energy sources. In April 2010 the publication of a report by the Special Investigation Committee, SIC, effectively silenced these voices. It documented that the causes were domestic: failed policies, lax financial supervision, fawning faith in the fast-growing banking system and thoroughly reckless, and at times criminal, banking.
As the crisis struck, Iceland’s public debt was about 30% of GDP and budget surplus. Though reluctant to seek assistance from the International Monetary Fund, IMF, the Icelandic government did so in the weeks following the collapse. An IMF crisis loan of $2.1bn eased the adjustment from boom to bust. Already by the summer of 2011 Iceland was back to growth and by August 2011 it completed the IMF programme, executed by a left government in power from early 2009 until spring 2013. Good implementation and Iceland’s ownership of the programme explains the success. For Ireland it was the same: it entered the crisis with strong public finances and ended a harsh Troika programme late 2013; its growth in 2014 was 4.8%.
For Greece it was a different story: high budget deficit and high public debt were chronic. From 1995 to 2014 it had an average budget deficit of -7%. Already in 1996, government debt was above 100% of GDP, hovering there until the debt started climbing worryingly in the period 2008 to 2009 – far from the prescribed Maastricht euro criteria of budget deficit not exceeding 3% and public debt no higher than 60% of GDP. Both Greek figures had however one striking exception: they dived miraculously low, below their less glorious averages in time for joining the euro. Yet, only the deficit number ever went below the required Maastricht criteria, which enabled Greece to join the euro in 2001.
Greece had an extra problem not found in Iceland, Ireland or any other crisis-hit EEA countries: in addition to dismal public finances for decades there is the even more horrifying saga of deliberate hiding and falsifying economic realities by misreporting Excessive Deficit Procedure, EDP and hide debt and deficit with off market swaps.*
This is not a saga of just fiddling the figures once to get into the euro but a deceit stretching over more than ten years involving not only the Greek statistical authorities but the Greek Ministry of Finance, MoF, the Greek Accounting Office, GAO and other important institutions involved in the compilation of EDP deficit and debt statistics – in short, the whole political power base of Greece’s public economy.
Already in 2002 Eurostat discovered that the debt and deficit dip around the euro entry was no miracle but manipulation: Greek authorities simply reported wrong numbers. In 2004, Eurostat’s Report on the revision of the Greek government deficit and debt figures showed that this had been on-going between 1997 to 2003. Consequently, the Greek statistical authorities, the then National Statistical Service of Greece, NSSG (from which ELSTAT was created in mid-2010) were forced to revise its data for the years 2000 to 2003 upward, above the criteria set for Greece’s entry in the Eurozone. These issues were unique to Greece: “Revisions in statistics, and in particular in government deficit data, are not unusual… However, the recent revision of the Greek budgetary data is exceptional.”
The Eurostat 2004 report was followed by intense and unprecedented scrutiny with Eurostat using all its power to control and make sure the Greek stats were correct. Yet, NSSG did not learn its lessons, or rather, the political interference was relentless.
In autumn 2009 the ECOFIN Council requested a new report, this time from the EU Commission, EC, due to “renewed problems in the Greek fiscal statistics” after the “reliability of Greek government deficit and debt statistics (has) been the subject of continuous and unique attention for several years.”
The EC report on Greek Government Deficit and Debt Statistics, published in January 2010 showed that Greek numbers on debt and deficit were still wrong: deficit forecasts changed drastically from the March to the September reporting more than once and once the real statistics were available the numbers were still higher. Again, such a revision was rare in EU member states “but have taken place for Greece on several occasions.”
As earlier, the reason for the faulty data was methodological shortcomings, not only at the NSSG but also at the GAO and the MoF responsible for providing data to NSSG and, even more grave, political interference and “deliberate misreporting,” where the NSSG, GAO, MoF and other institutions involved in the reporting, all played their part.
The Goldman Sachs, GS, off market swap story was one chapter in the faulty data saga. In 2008, when Eurostat made enquiries in all member states on off market swaps, Greek authorities informed Eurostat promptly that the Greek state had engaged in nothing of the sort. This 2008 statement turned out to be a blatant lie when Eurostat investigated the matter, as shown in a Eurostat report in November 2010. The swap story is a parallel to the Greek data deceit in the sense that it was not a single event but a deceit running for years, involving several Greek authorities.
Needless to say, fiddling the numbers did not eradicate the debt and deficit problem. The EC report was published as Greece was losing access to markets. Negotiations on a bailout were complicated by unreliable information on Greek public finances. On May 2, 2010, as the first Greek Memorandum of Understanding was signed, with a €110bn loan – €80bn from European institutions and €30bn from the IMF – it was clear that the crucial figures of debt and deficit might still go up.
Following these major failures at the NSSG its head had resigned in 2009. At the GAO and the MoF ministers, vice ministers and general secretaries changed with the new Papandreou government but the ranks below remained unchanged, as did the mentality. With changes in the statistics law in summer 2010 ELSTAT replaced NSSG. A new board was put in place and also a new head: Andreas Georgiou, earlier at the IMF, returned home to take over at ELSTAT. This ended the battle to produce correct statistics: since August 2010, neither Eurostat nor other European authorities have questioned Greek national statistics.
It was however the beginning of an on-going horror story for Georgiou and some of his staff who have been hounded since ELSTAT began reporting correct statistics in accordance with European standards: three times, competent judiciary officials have recommended to have the criminal case launched against them put to file, i.e. to drop the case. Only recently, a council of appeals court judges have let go of charges against the three for having caused the state a loss of €171bn, which would have meant a prison sentence for life. However, charges against Georgiou for violation of duty are still being upheld; should he be found guilty he will not be able to hold a public post again.
There are now two committees, set up by the Greek parliament, investigating the past. One is the Parliamentary Truth about the Debt Committee. Set up in April 2015, with members chosen by the Syriza president of the Greek parliament Zoe Konstantopoulou, it concluded in its preliminary report, presented June 17, that Greece neither can nor should pay its debt to the Troika because that debt is “is illegal, illegitimate, and odious.” The other, a Parliamentary Investigative Committee made up of members of parliament and normally referred to as the Investigative Committee about the Memoranda, is scrutinising how Greece got into the two Memoranda of Understanding with international partners, in 2010 and 2012, in the context of adjustment programs. – Both committees have repeated the claims against Georgiou and the two ELSTAT managers.
In spite of over a decade long saga of false statistics and political interference there has been no attempt so far to set up an independent committee to tell the whole Greek debt saga, from the 1990s to the present day, manipulated statistics, deceitful swaps, political interference, warts and all.
2004: the first Greek crisis … of unreliable statistics
The first Greek crisis did not attract much attention although it was indirectly a crisis of deficit and debt – it was a crisis caused by faulty statistics, unearthed by Eurostat already in 2002. After going through the deficit and debt figures reported by Greece the 2004 Eurostat’s Report on the revision of the Greek government deficit and debt figures rejected figures put forward by the NSSG in March 2004. After revision the numbers for the previous years looked drastically different – the budget deficit, which should have been within 3%, moved shockingly:
|DEFICIT||% GDP||% GDP||% GDP||% of GDP|
Report on the revision of the Greek government deficit and debt figures
The institutions responsible for reporting on the debt and deficit figures were NSSG, the MoF through the GAO as well as MoF’s Single Payment Authority and Bank of Greece. Specifically, NSSG and the MoF were responsible for the deficit reporting; the MoF was fully responsible for the debt figures.
The Eurostat drew various lessons from the first Greek crisis. Legislative changes were made to eradicate the earlier problems – not an entirely successful exercise as could be seen when the same problems re-surfaced. But the most important result of the 2004 crisis was a set of statistical principles known as the European Statistics Code of Practice, adopted in February 2005, revised in September 2011, following the next Greek crisis of statistical data. Unfortunately, NSSG drew no such lessons.
2009: the second Greek crisis … of unreliable statistics
Following the 2004 report Eurostat had NSSG in what can best be described as a wholly exceptional and intensive occupational therapy: from the ten EDP notifications 2005 to 2009 Eurostat had reservations to five of them, far more than any other country received. No country but Greece got “methodological visits” from Eurostat. The Greek notifications, which passed, did so only because Eurostat had corrected them during the notification period, always increasing the deficit from the numbers reported by Greek authorities.
But in spite of Eurostat’s efforts the pupil was unwilling to learn and in 2009 there was a second crisis of statistics: things had not improved as was bluntly stated in a 30-page report on Greek Government Deficit and Debt Statistics from the EC in January 2010. In addition: what had been going on at Greek authorities had no parallel in any other EU country.
This second crisis of Greek statistics in 2009 was in the first instance not set off by a real figure but by the dramatic revisions of the deficit forecast for 2009. As in 2004, this new crisis led to major revisions of earlier forecast: the April forecast was revised twice in October. What happened between spring and October was that George Papandreou and the PASOK ousted New Democracy and prime minister Kostas Karamanlis from power; the new government was now beating drums over much worse state of affairs than earlier data and forecast showed.
After first reporting on October 2 2009 there came another set of numbers from NSSG on October 21, revising earlier reported deficit for 2008 from 5% of GDP to 7.7% – and the forecasted deficit ratio for 2009 of 3.7% was revised to 12.5% (as explained in footnote, numbers for current year are a forecast, whereas numbers for earlier years should be actual data).
And this was not all: in early 2010, Eurostat was still not convinced about the actual EDP data from the years 2005 to 2008. The earlier 2009 deficit forecast of 12.5% had risen to an actual deficit of 13.6% by April 2010 to finally land on 15.4% in late 2010.
The EC report detected common features with events in 2004 and 2009: a change of government – in March 2004, Kostas Karamanlis and New Democracy came to power, ending eleven years of PASOK rule and as mentioned above George Papandreou and PASOK won back power in October 2009.
In both cases “substantial revisions took place revealing a practice of widespread misreporting, in an environment in which checks and balances appear absent, information opaque and distorted, and institutions weak and poorly coordinated. The frequent missions conducted by Eurostat in the interval between these episodes, the high number of methodological visits, the numerous reservations to the notifications of the Greek authorities, on top of the non-compliance with Eurostat recommendations despite assurances to the contrary, provide additional evidence that the problems are only partly of a methodological nature and would largely lie beyond the statistical sphere.
In other words, the problem was not statistics but politics. As politics is well outside its remit, Eurostat could not get to the core of the problem: “Though eventually an overall level of completion was achieved, given that Eurostat is restricted to statistical matters in its work the measures foreseen in the action plan were mainly of a methodological nature, and did not address the issues of institutional settings, accountability, responsibility and political interference.”
The political interference could i.a. be seen from the fact that reservations expressed by Eurostat between 2005 and 2008 on specific budgetary issues, which had then been clarified and corrected, resurfaced in 2009, i.e. earlier corrections were reverted and were now once more wrong.
Good faith versus fraud
The EC 2010 report identified two different but in some cases linked sets of problems. The first was due to methodological weaknesses and unsatisfactory technical procedures, both at the NSSG and the authorities that provided data to the in the NSSG, in particular the GAO and the MoF.
The second set of problems stemmed “from inappropriate governance, with poor cooperation and lack of clear responsibilities between several Greek institutions and services responsible for the EDP notifications, diffuse personal responsibilities, ambiguous empowerment of officials, absence of written instruction and documentation, which leave the quality of fiscal statistics subject to political pressures and electoral cycles. “
Eurostat’s extra scrutiny and unprecedented effort had clearly not been enough: “even this activity was unable to detect the level of (hidden) interference in the Greek EDP data. In particular, after the closure of the infringement procedure at the end of 2007, Eurostat issued a reservation on the quality of the Greek data in the April 2008 notification and validated the notifications of October 2008 and April 2009 only after it intervened before and during the notification period to correct mistakes or inappropriate recording, with the result of increasing the notified deficit in both instances. As an example, Eurostat’s methodological missions in 2008 resulted in an increase of the 2007 deficit figure notified by the Greek authorities, from 2.8% to 3.5% of GDP.”
The EC 2010 report further pointed out that “on top of the serious problems observed in the functioning of other areas involved in the management of Greek public revenues and expenditures, that are not the object of this report, the current set-up does not guarantee the independence, integrity and accountability of the national statistical authorities. In particular the professional independence of the NSSG from the Ministry of Finance is not assured, which has allowed the reporting of EDP data to be influenced by factors other than the regulatory and legally binding principles for the production of high quality European statistics.”
The EC report concluded that there was nothing wrong with the quality assurance system in place at Eurostat; the shortcomings were particular for Greece: “The partners in the ESS (European Statistical System) are supposed to cooperate in good faith. Deliberate misreporting or fraud is not foreseen in the regulation.”
Again, the rarity of the magnitude of such revisions was underlined: “Revisions of this magnitude in the estimated past government deficit ratios have been extremely rare in other EU Member States, but have taken place for Greece on several occasions.”
The EC 2010 report spells out interplay between authorities, dictated by political needs. Against these concerted actions by Greek authorities, the efforts of European institutions were bound to be inadequate – “the situation can only be corrected by decisive action of the Greek government.”
The Goldman Sachs 2001 swaps – part of the Greek statistics deceit saga
In early 2010, international media was reporting that Greece had entered a certain type of swaps – off market swaps – with Goldman Sachs in 2001 in order to bring its debt to a certain level so as to be eligble for euro membership.
Already in Council Regulation (EC) No 2223/96 swaps were classified as “financial derivatives,” with a 2001 amendment making it clear that no “payment resulting from any kind of swap arrangement is to be considered as interest and recorded under property.” However at that time off market swaps were not much noted. By the mid-2000s it became evident that the use of off market swaps could have the effect of reducing the measured debt according to the existing rules. Eurostat took this into account and issued guidelines to record off market swaps differently from regular swaps. – Further, Eurostat rules specify that when in doubt national statistical authorities should ask Eurostat.
In 2008, Eurostat asked members states to declare off market swaps if any. The prompt Greek answer was: “The State does not engage in options, forwards, futures or FOREX swaps, nor in off market swaps (swaps with non-zero market value at inception).”
In its Report on the EDP Methodologial Visits to Greece in 2010, Eurostat scrutinised the 2001 “currency off-market swap agreements with Goldman Sachs, using an exchange rate different from the spot prevailing one” that the Greek Public Debt Agency, PDMA, had made with the bank. It turned out that the 2008 answer was just the opposite of what had happened: the Greek state had indeed engaged in swaps but kept it carefully hidden from the outer world, i.a. Eurostat.
After having been found out to be lying about the swaps Greek authorities were decidedly unwilling to inform Eurostat on the details. Not until after the fourth Eurostat visit, at the end of September 2010, nota bene after Georgiou took over at ELSTAT, did Eurostat feel properly informed on the Goldman Sachs swap.
The GS off market swaps were in total thirteen contracts with maturity from 2002 to 2016, later extended to 2037. As Eurostat remarked these transactions had several unusual aspects compared to normal practices. The original contracts have been revised, amended and restructured over the years, some of which have resulted in what Eurostat defines as new transactions.
The GS swaps hid a debt of $2.8bn in 2001; after later restructuring the understatement of the debt was $5.4bn. The swap transaction, never before reported as part of the public accounts, was part of the revisions in the first ELSTAT reporting after Georgiou took over. This did actually increase the deficit by a small amount for every year since 2001, as well as increasing the debt figure.
The swap story is a parallel to the Greek data deceit in the sense that it was not a single event but a deceit running for years, involving several Greek authorities. Taken together, both the swap deceit and the faulty reporting of forecasts and statistics by Greek authorities show a determined and concerted political effort to hide facts and figures, which in reality did not change when new governments came to power.
A thriller of statistical data and mysteriously acquired emails
For Greece, the economy deteriorated drastically following the financial crisis in 2008. Public debt was at 129% of GDP end of 2009. The country effectively lost market access in March 2010. With an agreement signed May 2 2010 Greece became the first Eurozone country to be bailed out. The messy statistics made the negotiations tortuous.
After the appalling failures, misrepresentations and direct manipulation of figures for political purposes, both at NSSG and other institutions involved in the collection and presentation of statistical data, things turned for the better after Andreas Georgiou took over as president of the newly established ELSTAT in August 2010. However, not everyone in the Greek political system celebrated the fact that ELSTAT was now operating strictly to ESS standards.
It is worth noting that by the time Georgiou took over most of the corrections of earlier figures had already been done under the auspice of Eurostat. There was however the last set of corrections of deficit and debt figures. As pointed out earlier, the GS off market swaps were included for the first time, changing figures for earlier years and the actual deficit figure for 2009 was yet again revised upward in the first set of data, delivered by the new President. As the EC report in January 2010 had foreseen the deficit figure was yet to rise: the April figure of 13.6% was now 15.4%.
Following the adoption of the new statistics law in March 2010, ELSTAT was now independent of the MoF although its board was politically appointed in addition to a representative from the employees’ union. This might not have been a problem if the board had understood the European Statistics Code of Practice in the same way as Georgiou.
At ELSTAT Georgiou emphasised its independence and accountability where the board should be involved only with the broader issues, not the statistical production process. Instead, the board felt, among other things, that it should vote on and approve the statistics and saw Georgiou as being manipulative, wanting to rule over the statistics. Three of the members of the new board, set up in August 2010 – ELSTAT’s vice president Nikos Logothetis, Zoe Georganda and Andreas Philippou – had applied for the position of president, which possibly did not make things easier.
The break-down of trust happened at a meeting with the presidium of the employees’ union on 21 October 2010, after Georgiou had been in office less than three months. At this meeting, the presidium showed Georgiou a document – a legal opinion from Georgiou’s lawyer with whom Georgiou had been in touch via his private email account, on issues related to the law on ELSTAT that was in the process of being changed. Georgiou realised that someone had an unauthorised access to his account. He later became aware that another member of the board, Zoe Georganda, possessed an email Georgiou had exchanged with Poul Thomsen, head of the Greek IMF mission.
Georgiou brought the case to the police who discovered that Nikos Logothetis had been entering Georgiou’s account from the first day Georgiou took up his position at ELSTAT. When the police did a house search, Logothetis was actually at his computer, logged into Georgiou’s account. After less than six months in office Logothetis resigned from the ELSTAT board in February 2011 as criminal charges, based on his hacking into Georgiou’s account, were brought against him.
Logothetis has denied accessing the account and claims instead that various leading European statisticians framed him. His case is pending in court. In spite of being charged with unauthorised access to Georgiou’s account, Logothetis has repeatedly been called in as an expert witness in parliament in the cases against Georgiou and his two colleagues. His most recent appearance was in June with the Investigative Committee about how Greece got into the adjustment programs.
When revising wrong statistics equals ignoring national interest
In September 2011, Antonis Samaras the newly elected leader of New Democracy and minister for culture, gave a much noted speech at the Thessaloniki International Expo, where he attacked George Papandreou, accusing him of manipulating the statistics when Papandreou came to power in autumn 2009. Samaras claimed that Papandreou had done this only to discredit Kostas Karamanlis, who Samaras succeeded as a party leader and who had lost the election that brought Papandreou to power. – This speech proved fateful, not for Papandreou but for ELSTAT’s president Andreas Georgiou.
A few days after Samaras’ speech, Georgiou was called to the parliament to explain why he had ignored national interests and revised the figures upwards. Georgiou referred to the ESS Code of Practice but gained little understanding. Instead he was accused of inflating the 2009 figures under instruction of Eurostat to push Greece into the Adjustment Programme. This ignored the fact that the main corrections had been done before Georgiou took over at ELSTAT.
It is important to keep in mind the context for the 2009 deficit: there was the forecasted deficit of 3.9%, put forth by the MoF and reported by NSSG in April 2009 and then the estimate of the actual 2009 deficit of 13.6%, as reported by NSSG in April 2010. All of this had happened before Georgiou took over at ELSTAT in August 2010, after which the final adjustment from 13.6% to 15.4% was made.
The accusations against Georgiou also ignored the fact that Greece had entered the Adjustment Programme three months before he took over at ELSTAT and also that the Greek statistical data had been found to be wrong already before 2000 in addition to the swaps, reporting faulty data up to 2004 and then again up to end of 2009. Political figures both on left and right of the political spectrum united against the ELSTAT president as if the only reason for the country’s debt and deficit were statistics. The Greek Association of Lawyers accused Georgiou of high treason.
Around the time of the hearing in parliament in September 2011, a prosecutor took up the case against Georgiou and two ELSTAT managers and eventually pressed criminal charges in January 2013. In accordance with due process, an investigating judge began a more thorough investigation but at its conclusion, almost two years later, in August 2013 recommended that the case be dropped as nothing was found to merit taking the case further. Following interventions by politicians the case was kept open by the judicial system.
Twice again—in 2014 and 2015—prosecutors proposed that the case be dropped, always followed by interventions from nearly all sides of the political spectrum, which insisted on charges of false statements on the 2009 deficit and debt, and breach of faith against the state/causing the state damages be sustained and that the case be taken to trial. As the punishment should be relative to the damages, calculated to amount to €171bn, this would effectively have amounted to a prison sentence for life.
The charges against Georgiou and the two ELSTAT managers for allegedly making false statements on the 2009 statistics and breach of faith have recently been dropped. However, charges against Georgiou for alleged violation of duty i.a. for not bringing the 2009 figures to vote on the former board are being upheld. Some members of that former board still insist that the actual deficit figure of 2009 turned out to be identical to the planned deficit figure for 2009 of 3.9%, put forward in April 2009.
Truth commissions and ELSTAT
One of the measures agreed on by the Eurogroup and Greece after the fateful Euro Summit July 12, “(g)iven the need to rebuild trust with Greece,” was “safeguarding of the full legal independence of ELSTAT.” – This reflects the fact that ELSTAT’s independence is still not secured and ELSTAT’s president still under attack.
The two parliamentary committees – the Truth about the Debt Committee and the Investigative Committee about the Memoranda – both seem to be in denial regarding the swaps and the faulty statistics and both uphold blaming and shaming Georgiou and the two ELSTAT mangers.
In the Truth about the Debt Commission’s preliminary findings the earlier claims against Papandreou’s government are again taken up: “George Papandreou’s government helped to present the elements of a banking crisis as a sovereign debt crisis in 2009 by emphasizing and boosting the public deficit and debt.”
Further, it concluded “that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.”
As recently as June 18, Nikos Logothetis testified before the Committee about the Memoranda, claiming that the deficit figures for 2009 and 2010 had been deliberately and artificially inflated. He called Georgiou a “Eurostat pawn” who had used tricks to increase the deficit figure.
However and quite remarkably, the Greek parliament has never questioned anyone on the tricks and manipulations going on at ELSTAT and other public institutions involved in reporting wrong data from before 2000 until 2010.
International support for ELSTAT managers
Contrary to the sustained attacks at home, Georgiou and the two managers have enjoyed the support of Eurostat, European and international associations of statisticians, reflecting the fact that under Georgiou ELSTAT’s reporting has fully complied with Eurostat standards.
In late May, European Statistical System, ESS, published a statement expressing concern regarding the situation in Greece, “where the statistical institute, ELSTAT, as well as some of its staff members, including the current President of ELSTAT, continue to be questioned in their professional capacity. There are ongoing political debates and investigatory and judicial proceedings related to actions taken by ELSTAT and to statistics which have repeatedly passed the quality checks applied by Eurostat to ensure full compliance with Union legislation.”
On June 12 2015 The International Statistical Institute, ISI published its fourth statement regarding the situation in Greece, welcoming the proposal from the Greek Appeals prosecutor Antonis Liogas “that judicial authorities drop the investigation into claims that the current head of ELSTAT, Andreas Georgiou, inflated the country’s public deficit figure for 2009.” ISI pointed out that according to the prosecutor the probe into Georgiou and the two managers had not delivered any evidence suggesting that the three had manipulated the figures.
ISI repeated its statement from 2013 that “the charges against Mr. Georgiou and two of his Managers of exaggerating the estimates of Greek government deficit and debt for the year 2009 are fanciful and not consistent with the facts’… The ISI expresses the hope that justice will prevail in this case and that the threat of prosecution will finally be lifted from Mr Georgiou and his Managers.”
As well as the statement on ELSTAT in the Euro Summit’s July 12 statement, these recent statements on ELSTAT show that political pressure on ELSTAT is still palpable.
The lethal blend of “unhealthy politeness” and “excessive deference”
The lack of scrutiny, as demonstrated in the saga of the faulty Greek statistics, can partly be blamed on the European powers. True, both Eurostat and then the European Commission did exhume the ELSTAT failures and misreporting; but that it could happen in the first place is also due to failures at the European level.
When the European Union created a single currency the Euro countries in effect embarked on a journey all on the same ship. By now, it is evident that neither did the crew, European authorities, have the necessary safety measures to keep discipline among the passengers nor have the passengers kept an eye on each other. In the summer of 2011, Mario Monti, already tried by his experience as EU Commissary, formulated what had gone wrong:
“At the roots of the eurozone crisis lies of course the past indiscipline of specific member states, Greece in the first place. But such indiscipline could simply not have occurred without two widespread failings by governments as they sit at the table of the European Council: an unhealthy politeness towards each other, and excessive deference to large member states.”
A successful monetary union demands more than the countries being just fair-weather friends. The crisis countries, most notably Greece, can only learn from the past if they understand what happened. In Greece these failures were i.a. this basic function in a modern state of truthfully reporting statistics.
Truth or politically suitable truth
In December 2008, while Iceland was still in shock after the banking collapse, its parliament set up a Special Investigation Committee, SIC, which operated wholly independent of parliament. The three SIC members were its chairman Supreme Court Justice Páll Hreinsson, parliament’s Ombudsman Tryggvi Gunnarsson and lecturer in economics at Yale University Sigríður Benediktsdóttir who together supervised the work of ca. forty experts. Their report of 2600 pages was published April 10 2010.
The report buried the politically motivated explanations of the collapse being caused by foreigners and established instead a recount of what had happened, based both on documents and hearings (in private, not in public hearings). One benefit of the SIC report is that no political party or anyone else can now tell the collapse saga as suits their interest: the documented saga exists and this effectively ended the political blame game. Importantly, the report points out lessons to learn.
Sadly, nothing similar has been done in other crisis-hit European countries. The Irish parliament embarked on such a process in summer 2014 but so far, the efforts have not been wholly convincing. The two committees, set up by the Greek parliament, do not seem entirely credible, i.a. because the allegations of ELSTAT misconduct and manipulation under Georgiou are being recycled. Further, their scope seems myopic, i.a. as no effort is made to explain what went on at the institutions that from before 2000 until 2010 were reporting faulty statistics and forecasts and lying about the GS swaps.
All of this taken together shows a political class, also within Syriza, not only unwilling to face the past but actively fighting any attempt to clarify things in a battle where even national statistics are a dangerous weapon. The fact that leading Greek political powers are still fighting the wrong fight on statistics is unfortunately symptomatic for political undercurrents in Greece – and that partly explains the profound lack of trust among its creditors.
*A note on EU statistics: twice a year, before end of March and August, statistical authorities in the EU countries report forecasts of debt and deficit numbers for the current year, i.e. what the planned deficit and debt is and then statistical data for earlier years, i.e. the real debt and deficit, according to strict Eurostat methodology in order to produce comparable statistics. This reporting, called Excessive Deficit Procedure, EDP, is published by Eurostat in April and October every year.
Update: Andreas Georgiou’s time in office has not come to an end: he was hired for five years and is not reapplying. – It should be noted that it was George Papakonstantinou who was Minister of Finance when Georgiou was hired as president of ELSTAT. In addition, it was under Papakonstantinou that new laws to assure ELSTAT’s independence were passed in the summer of 2010.
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– Forget economics, politics is key to understanding the Eurozone
The cries of the Grexit criers lately have mostly been a repetition of an earlier discourse: in February 2012 Citi’s economists Willem Buiters and Ebrahim Rahbari coined the term “Grexit,” by July 2012 estimating its likelihood to 90%. Cheered on by the media, economists have taken over the debate of the Eurozone which is why much of it has been such a futile exercise: it is not economics, which ties the Eurozone together but the political determination of its leaders to make the euro work. With political will likelihood of any exit is 0. Ergo, Grexit is as unlikely now as it has always been in spite of the EU brinkmanship. One route Greece seems to be exploring is a tried and tested one: the “bisque clause” from 1946.
In December 2009 the European Central Bank, ECB, published a working paper, Withdrawal and expulsion from the EU and EMU; some reflections (recommended read, clear and intelligent), by Phoebus Athanassiou. As Athanassiou pointed out, talk of ‘secession’ from the European Union, EU and European Monetary Union, EMU would earlier “have been next to absurd, considering the EU’s contribution to lasting peace and stability in Europe,” not forgetting successful enlargement. Athanassiou concluded that “negotiated withdrawal from the EU would not be legally impossible… a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that … a Member State’s expulsion from the EU or EMU, would be legally next to impossible.” – But legal aspects are one thing, economics another and politics yet a separate aspect.
The eurocrisis has hit EU’s economy; economists and the financial media have led the crisis discourse. But the euro is a political construction, built on political will and at the root of the crisis there are politics: there has been a political unwillingness in the EU to be more than fair-weather friends. Fearing loss of sovereignty ministers have been unwilling to yield power to the various EU institutions (Athanassiou has some intriguing observations on sovereignty). – This is in essence what Mario Monti wrote in the summer of 2011 in a timely Financial Times article where he partly blamed the eurocrisis on the EU being too deferential and too polite to its member states.
With the crisis and hesitant action it has been ever more difficult to portray the EU as a success in spite of earlier glory. Much of the political demagogy on the left and right ends of the political spectrum in Europe is nourished by politicians from the established parties who have been far too willing to blame the EU for their own failures.*
Now Greece has voted in a new government who though critical of how the Troika, i.e. EU Commission, European Central Bank, ECB and the International Monetary Fund, IMF, has dealt with Greece makes no mention of Grexit and claims it wants to repay its debt. In a BBC interview minister of finance Yanis Varoufakis stressed that Greece was not going to toy with “loose or fast talk of Grexit” and fragmentation, which would only unleash destructive forces.
“Grexit is not on the cards,” Varoufakis said. At the same time, the government is hell-bent on finding a way to tackle what Varoufakis has called a “humanitarian crisis” in Greece, in addition to scutinising earlier privatisation and renegotiating, perhaps with an eye on the so-called “bisque-clause” from 1946.
Renegotiating, or whatever term will be found, is no mean feat also because all solutions are bound to be relevant for other problem countries. The Irish found a clever way though with their Promissory Notes, did it unilaterally with the ECB governor Mario Draghi commenting dryly that the ECB “took note” of it. – EU has always been brilliant at finding compromises though arguably its comprises have not always been brilliant.
The changing euro sentiment
On August 14 2007 ECB governor Jean-Claude Trichet stated that the bank was paying great attention to developments in the market, i.e. nervousness, increased volatility and ‘significant re-appreciation of risks’ which could be ‘interpreted as a normalisation of the pricing of risk.’ The bank had provided liquidity ‘needed to permit an orderly functioning of the money market… We are now seeing money market conditions that have gone progressively back to normal,” was Trichet’s reassuring conclusion.
Two years and some months later, in December 2009, it was clear that Trichet’s hopeful words were just that: hopeful. Ireland was under crisis clouds after the Irish government had been forced to fulfil its blanket guarantee of the banking sector. The situation in Portugal and Spain looked ominous not to mention Greece. All of this made Athanassiou’s paper a timely one.
Fast forward from Trichet’s 2007 statement to the ECB’s recent statement of a monthly asset purchase amounting to €60bn, at least until September 2016. ECB governor Mario Draghi has repeatedly stressed that the bank alone will not pull the EZ out of stagnation and slow growth. The political appetite for growth stimulus and the structural reforms needed has been negligible and attempts to challenge growth-quenching corruption, where needed, even less. It might even be argued that with the asset purchase, aka “quantitative easing,” into austerity-ruled EU the Union is like a boat rowing in opposite directions.
“The boom, not the slump, is the right time for austerity at the Treasury”
Jean-Claude Juncker’s €315bn fund is too little too late; a nod in the stimulus-direction rather than a real u-turn. After over six years of austerity the EU seems slow in revising on the 1930s lesson that the state has to step in when the private sector is sluggish. Greece now seems to want a realistic solution. Although only 2% of the EZ GDP it might inject new ideas into the Troika solutions, i.e. forcing reality instead of unsustainable solutions – effectively, earlier measures for Greece did not solve the problem and everyone involved knew it.
Simon Wren-Lewis’ summary of the obvious lessons from the Great Recession is: “Give any student who has just done a year of economics some national accounts data for the US, UK and Eurozone, and ask them why the recovery from the Great Recession has been so slow, and they will almost certainly tell you it is because of fiscal austerity.” Further, Wren-Lewis has recently summed up the necessary lessons from earlier attempts to debt restructuring, with a timely focus on Greece, saying the “Troika should welcome the opportunity to put right earlier mistakes.”
Yet and yet, austerity was the first and still is the strongest reaction to the eurocrisis. The IMF, for its part, has to a certain degree acknowledged its part in the mistaken routes chosen. For Greece there was a certain woeful blindness as to what the measures in 2012 would achieve in terms of growth, inflation, fiscal effort and social cohesion; this should not happen again as Reza Moghadam former head of the IMF European department wrote recently in the Financial Times, admitting to his share of the responsibility since he was part of Troika discussions 2010 to 2014 and pleading for halving Greek debt.
The new Greek government has plenty of research to bolster its case. In a 2013 paper, Òscar Jordà and Alan M. Taylor have shown “that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom.” And as John Maynard Keynes wrote in 1937, quoted by Jordà and Taylor: “The boom, not the slump, is the right time for austerity at the Treasury.”
To a certain degree the faith in austerity has been steered by predictable party politics as Simon Wren-Lewis covers here. Not surprisingly Wolfgang Schäuble claims that “austerity is the only cure for the eurozone.” With policies earlier belonging to the political right having to a great degree permeated the left, New Labour being the arch-example, there has been remarkably little left opposition to austerity. The political antagonism within the crisis countries has tended to be between parties in power, enforcing austerity and the opposition, opposing austerity so as to gain from the unpopular austerity measures.
Austerity is the easy route – structural reforms the really difficult one
But the last few years of austerity in Europe have also shown that although austerity is a tough path to follow, structural reforms are even harder. The Troika prescriptions for program-countries have all come with a list of structural reforms, which have been far tougher to fulfill. Though the structural reforms advised have often been sensible domestic politics and interest groups block them. The latest IMF review on Greece, from June 2014, lists the tough reforms still lacking, i.a. tax administration and public sector reforms.
The fact that there has often been little ownership of measures in the program countries has been part of the problem. One reason why Iceland sailed relatively smoothly through its IMF program was Iceland’s strong ownership of the program. Execution will be easier if the Greek government can renegotiate a sustainable plan it believes in contrary to earlier measures, which all involved knew was to a certain extent little but wishful thinking.
Consequently, scrutinising Troika programs it seems that although a tough path to follow austerity has been the easy route compared to structural changes where strong interest groups and politics clash.
Corruption – the dirty porn of EU politics
It is intriguing to note that the worst hit EZ countries are also countries where sentiment of corruption is high, as can be seen in the Eurobarometer. Yet, corruption has not been high on EU political agenda.
Only in 2011 did the EU Commission establish an Anti-Corruption report to monitor and assess efforts of individual EU countries to address corruption. The first report was published in 2014; reports will now be published every two years.
Given the fact that the cost of corruption is assumed to be 5% of GDP on a world scale, and clearly higher in corrupt countries, it has taken the EU scarily long to turn its attention to this problem. Again, that is no doubt partly due to the politeness Mario Monti had in mind – corruption is an embarrassing and dirty word in the EU, truly the dirty porn of EU politics.
Foreign media mostly focused on Syriza’s presumed anti-EU sentiments even though majority of Greeks want to stay in the EU and the euro. But Greeks noticed that Syriza broke with the norm of silence on corruption and campaigned on fighting it. Any step in that direction will be a great political achievement – and an example to follow for other countries. The fact that Syriza campaigned on the issue of corruption is already inspiring other countries, most notably the Spanish Podemos party.
It has caused some concern abroad that Syriza is going to stop or review the on-going privatisation. There is however indication that assets have been sold not on best price but best connection; something the Troika should not be too politie about, not least in a country with the sorry reputation of corruption. Privatisation will not be popular in Greece if people see state assets sold in a corrupt way.
Demagogues and the German problem
In 2009 it was easy for Athanassiou to refer to the success of the EU and the euro. Now the story in many EU countries, even in stoic and earlier so staunchly pro-EU Finland, is the rise and rise of anti-EU demagogical parties. So far, these are fringe parties, very often indirectly nurtured by politicians blaming the EU of their own failings.
But it is equally worrying that German Chancellor Angela Merkel is increasingly irritating other EU leaders with her moralising on other countries. After almost a decade as the leader of EU’s most powerful country, Merkel seems to be falling pray to the inherent law of power: the longer time in power the more myopic a leader is, ever more occupied with his or her legacy. This has not proved positive for her European engagement.
Given her long time in power Merkel has followed the course of the crisis countries from well before the crisis. She has had ample opportunities to speak out or warn her colleagues. Greece had for example been running a budget deficit more or less uninterrupted since the early 1980s enabled by German banks financing much of this deficit.
German banks, though prudent at home (or rather, Germans are prudent borrowers) were large lenders not only in Greece but also in other crisis countries, also in Iceland. German banks have behaved like the kind of teenagers who are faultlessly polite at home but run wild when partying at friend’s place cutting up the furniture and peeing in the corners.
Merkel did not seem worried until the problems in Greece and elsewhere threatened German financial stability. With the Troika involvement the German risk migrated to public sector lenders and the German banks avoided facing their risky behaviour.
It’s not the economy stupid, it’s the politics
Merkel herself is aware of the political dimension of the euro, or rather the lack of its political anchor. Her predecessor Helmut Kohl and his contemporary European leaders constructed a monetary union without a proper political dimension. More could not be achieved at the time; the wishful thinking was that the missing political part would come later. According to a German official Merkel thinks the euro, with the political part missing, is “a machine from hell” that she is still trying to repair. – As things stand now the machine will hardly be repaired any time soon– the one legacy likely to elude Merkel.
All through the eurocrisis the politics have lagged behind. As shown convincingly by Philippe Martin and Thomas Philippon concerted action such as the Outright Monetary Transactions, OMT already in 2008 and not as late as 2012 would have made the world of difference, not least for Greece.
Those running the “machine from hell” were slow in figuring out how to deal with the crisis. Domestic politics in the EZ were pointing in all and sundry direction. Merkel’s way of tackling any problem is to move slowly, very slowly. Her sluggishness has cost the Greeks dearly. But since the destiny of Germany and Greece are tied together in the euro the German sluggishness certainly has come at a cost to the Germans themselves.
Apart from the lack of political union to back up the euro – or at least some mechanism to deal with crisis – the EU made bad uses of what little mechanisms in place. This is what Mario Monti, wiser after his time as a European commissioner, pointed out in 2011, i.a. regarding Greece: “As for politeness, would Greece have been able to run for years public deficits vastly above its officially published figures – until the excess became known in late 2009 – had Eurostat had the power to conduct serious investigations to check the adequacy of nationally produced statistics? Of course not.”
Had the ECB been allowed to react already in 2008 with some form of OMT (yes, wishful thinking but let us assume these measures were conceivable already then though clearly not politically palatable) it would have run into the problem of ELSTAT where gathering statistics has turned into a political thriller still running: as late as January this year an ELSTAT supervising commission, one of whose members is from Eurostat, expressed concern and disappointment that some officials tried to influence ELSTAT’s reassessment of debt and deficit figures Brussels had called for. – Tackling the problem of ELSTAT would strengthen the trustworthiness of the new government.
The price of politeness is also evident in EU’s unwillingness to acknowledge the problem and cost of corruption (as I have pointed out earlier); unwillingness, which in itself a political vice among the EU countries. The EU countries are in it together but shrink from sifting through their neighbours’ dustbins to come up with compromising material.
Greece – with appetite for “bisque”?
Yanis Varoufakis and his team have had ample time to study the best approach but time is limited. Deposits are flowing out of Greek banks and the present Troika program ends on February 28, which jeopardises i.a. the ECB’s Emergency Liquidity Assistance, ELA.
Proselytising on Greek debt makes little sense – the debt is there not only because of Greek appetite for debt but for banks’ willingness to lend. The banks have sold off their Greek debt, IMF and ECB gobbled it up. It is too late to punish the original lenders, now it is only the Greek borrower left. There are many ideas floating around, here is Fistful of Euros’ Alex Harrowell summing up some of these ideas.
The problem with Greece is not just its debt, but the fact that the country is ever more crippled by earlier non-solutions as Syriza has stressed. Yet, the new Greek leaders have emphasised that they want to repay its debts to its lenders, ECB and the IMF as Alexis Tsipras said in a statement January 31. Greece is clearly trying to come up with a route that might suit everyone but is at the same time adamant that it must be allowed to run expansionary policies at home. Hiring Lazard as adviser shows the government pays attention to the markets as well as expecting tough talks.
The Troika loans amount to €226.7bn, ca. 125% of GDP, roughly two-thirds of total public debt of 175% of GDP. As Syriza has pointed out the unfortunate thing here is that the GDP has been shrinking making the debt ever less sustainable. This is i.a. part of the vicious circle that is dragging Greece down.
One way of going about the Greek problem might be to learn from history. The Stiglitz report, Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, from 2009 refers to the so-called “bisque-clause” from 1946:
There might also be alternative ways of ensuring flexible payment arrangements that would allow automatic adjustment for borrowers during bad times. For instance, one possibility is for coupon payments to remain fixed and for the amortization schedule to be adjusted instead. Countries would postpone part or all of their debt payments during economic downturns and would then make up by pre-paying during economic upswings. A historical precedent was set by the United Kingdom when it borrowed from the United States in the 1940s. The 1946 Anglo-American Financial Agreement included a “bisque clause” that provided a 2 percent interest payment waiver in any year in which the United Kingdom’s foreign exchange income was not sufficient to meet its pre-war level of imports, adjusted to current prices.
Sources have mentioned to me that the “bisque-clause” has inspired the approach being advocated by the new Greek government.
The “erroribus” of exit
“The world works thus that some help erroribus to circulate and others then try to erase it – and thus, both have something to do,” professor of antiquity at the University of Copenhagen Árni Magnússon (1663-1730) wrote.
Athanassiou’s conclusion was that “negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible. This paper concludes with a reminder that while, institutionally, a Member State’s membership of the euro area would not survive the discontinuation of its membership of the EU, the same need not be true of the former Member State’ s use of the euro.”
For those who have nailed their professional reputation to Grexit it might be hard to swallow that nope, Grexit is apparently not on the agenda – not for the new Greek government, not for the German government and, so far, no other EU government. German politicians may talk bravely about contained contagion from Grexit but dream on, who is willing to test the containment?
In order to understand the eurocrisis and find sustainable solutions forget the economics and focus instead on the politics. After all, the euro is a political construction, based on political will and as long as this will is there among Europe’s leaders there will be no Grexit or any other exit. Neither the ECB nor any EU institution will pull the rug from under Greece – this is not a question of some technical trick to force an end no government in Europe wishes for.
The euro is not just a currency, but the tangible sign of a union in which the earlier success of the internal market and enlargement was to be joined and entwined. For a few years it worked well, further cementing earlier progress. There are those who say it could never have worked and they are among the loudest in the Grexit choir as is, unsurprisingly, part of the UK media.
So far, the EZ countries have solved one problem after the other – yes, (too) often it has been too little too late, not always glorious. However, the political will to solve EZ troubles has been there and still is. Which is why it would be more fruitful to focus on the possible solutions – as the Greek government seems to be trying to do – rather than fable about Grexit.
* Earlier, Þórólfur Matthíasson professor at the University of Iceland and I have argued that the eurocrisis has to a large degree been symptom of underlying problems in the crisis-countries, ignored or not solved in time, to be solved at national level.
Cross-posted on Fistful of Euros
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