Greece: where has the money gone?

Greece has put itself in an awkward position. The situation has now gone critical, as the country owes 312 billion Euros debts to its international creditors, an amount that - most optimist comments say - it will greatly struggle to reimburse. On June 30, the country already defaulted to the International Monetary Fund after having been unable to repay a 1,6 billion Euros loan that had come to maturity.

All of what happens today, Greece seems to have deserved it. Typically, detractors accuse the Greeks guilty of the many sins that led themselves to today’s debacle. The country borrowed money extensively from private banks and institutions, since it joined the European Union in 1981. And it has spent this money much over what its financial means would have allowed. As a symbol, in 2004, this small country that only counts a 11-million population, organized the Summer Olympics, a privilege that, in the last 20 years, only world’s richest and among most sizable countries, such as the UK, China, Australia and the US could have. No investment was spared to achieve this pharaonic project, which eventually ended up in a huge waste of resources. It is reported that only 1 of the 22 venues built for this occasion are still used as of today. Greece also employed an army of public servants close to 800 thousands people, who not only benefited from advantageous salaries and conditions, but would retire with generous pensions as well. In 2010, as the retirement age had already been brought to 67 in Germany, in Greece it was still stuck to 61 though many people would actually retire in their 50’s due to then favorable conditions. It is also estimated 8 billion Euros pensions were claimed and paid fraudulently between 2001 and 2011, including payments made to already dead individuals. Unsurprisingly, in 2012, Greece was the EU country, spending the most in pensions, when brought in percentage of their GDP (17,5% vs 12% in Germany).

Meanwhile, the Greeks did not ensure they got the revenues to face these expenses. For years, Greek economy relied on consumption and borrowings. It has a structural negative trade balance, which ranged over the last 13 years between -1 and -4,5 billion Euros yearly. Most notoriously, the government failed to adapt the tax system to Western European standards, leaving a huge chunk of the population escaping taxes. In a 2011 documentary for French television, Dominique Strauss-Kahn, then IMF president notably described not paying taxes as « the national sport in Greece ». As a result, Greek state budget has a significant and chronic deficit. Since 1981, not a single year has Greece budget gap, let alone been positive, passed above the -3% threshold required by the EU stability criteria. 

Last but not least, the Greeks deliberately cheated. So as to integrate the Euro zone in 2002, Greece hired investment bank Goldman Sachs to perform temporary accounting tricks through derivatives, in order to show EU regulators a picture compliant with EU criteria to adopt Europe’s single currency.

Therefore, critics say, no matter how Greece is having difficulties to repay its debts, no mercy should be shown to them when it comes to debt restructuring. After all, they spent other countries’ money, while others were tightening their belt. It is therefore hard to understand why today the Greeks are lingering not to give that money back. On June 18, current IMF president Christine Lagarde did not have words harsh enough when she asked with anger « Greece to talk like adults ».

Money lost

Greece’s defenders will object that there is no money left to repay the debt. The country already endured painful measures to slash expenses. It has been constrained to sell a significant number of strategic public assets, including the privatization of part of Piraeus port to the Chinese in 2008 for 0,5 billion Euros. It dramatically cut public expenses, including all sorts of public aids and pensions. In 2011, all pensions above 1200 euros were reduced by more than 20%. They have been cut further down since. Public hospitals budget have been slashed by more than 50% since 2008. On the first 4 months of 2015, their budget have been squeezed by 94%. Logically, austerity measures have a  terrible effect on the population. Reported figures show that 40% of Greek children were living under the poverty line, and 26% of Greeks are unemployed. Yet, despite these major efforts, Greece still was unable to reimburse creditors. Today, Banks are closed for more than 3 weeks and cash withdrawals limited to as little as 60 Euros a day, in a desperate effort to stop citizens from a bank run, that would prove fatal to the economy. Indeed, Greek Banks have already been placed under Emergency Liquidity Assistance (ELA), a programme of the European Central Bank to provide them with limited amounts of cash needed to let them ensure a minimum level of operations.

So if cash does not sit in Greek banks, one would probably wonder where the money has gone. That is probably what most media reports fail to tell us. Firstly, it is important to remember that much of that money that Greece is struggling to repay today has been lent to Greece by private banks. In 2009, a Barclay Research report shows that French banks were exposed 79 billion US dollars to Greece, while German banks accounted for 45 billion US dollars of Greek debt. When the Financial crisis struck, most of these debts were taken on by Governments, in order to save their banks from bankruptcy. Today, the exposure of French private banks to Greece only amounts to 2 billion Euros. Meanwhile, Greece owes Germany 55 billion Euros and France 42 billion Euros, through the cumulation of European Financial Stability Facility fund and bilateral loans. That is together almost a third of total Greek debt.

Though some of the money lent from private banks to the government eventually landed in the pockets of local pensioners it would be not true to say it profited to everyone in the country. Besides pensions, welfare aids such as unemployment benefits remained miserly in the country, a 2010 analysis from the Economist admitted.


Borrow, Buy and get Broke:  money's vicious circle

Instead, these huge amounts of cash inconsiderately flushed into Greek economy seem to have been in big part reinvested back in the benefit of European industries. Besides banks, some major companies made juicy deals with Greek state during years in various fields that include military, construction or pharmaceuticals.

Until the crisis, the Pharmaceuticals industry enjoyed golden years in Greece. From 2000 to 2009, state Pharma expenditures almost quadrupled to reach a yearly record of 7 billion Euros. Not only was Greece the European country seeing the fastest acceleration in Pharma expenditures but it was in 2008, the country with the highest yearly state Pharma expenditures per capita (450 Euros per head) much above France (380 Euros) or Italy (250 Euros). Moreover, in Greece, state pharmaceuticals expenditure represented a record percentage when compared to the GDP (2.4%), much above the EU average (1,7%). While healthcare expenditures grew annually by around 4.4%, in line with EU average, between 1998 and 2008, Pharmaceuticals expenditures in Greece skyrocketed growing uncontrolled at an annual pace of 11,3%, again EU’s far record on that period. And all these uncontrolled spending eventually profited European industries. According to 2010 IMS, a Pharmaceuticals market analysis firm, report, almost half of the Pharmaceuticals market was in the hand of 5 companies, out of which 4 were from Western Europe: Sanofi-Aventis (born from the merger of a French and German company), Novartis (Switzerland), AstraZeneca and GlaxoSmithKline (UK). None of the top 10 was Greek.

Constructions sector can give another idea of how, mainly French and German companies profited from Greece's borrowed state money. The modern Athens metro was for instance built in the 90’s by a consortium of German, French and Greek companies, including Siemens, whose name has been frequently associated to a scandal of bribery to obtain lucrative public contracts in Greece. In 2007, a consortium of French company VINCI, and German construction leader Hochtief, got, among many other existing deals, a 3 billion euros contract in Greece for the construction of two new highways. Such foraminous investment proved quickly oversized: traffic on toll highways in Greece have fallen by more than 45% since. Also for the record, Greece government is claiming back 600 million Euros in unpaid VAT from Hochtief, that is running the Athens Eleftherios Venizelos airport. So far, the company failed to reimburse the demanded amount.

But the most striking example surely comes from military industry. Greece is located in a geopolitically sensitive area at the edge of the EU: it notably shares a border with Turkey, with whom it has old unsolved territorial disputes, and regular tensions. Greece arms budget still represents around 4% of GDP, much above the EU average of 1.7%. Surprisingly, these budgets were not cut with the crisis. An explanation provided by an article from the Guardian in 2012 is that, while general context and efforts from neighboring Turkey to mutually reduce military expenses would not justify such spendings, « France and Germany's arms industries have greatly profited from this profligate military spending, leading their governments to put pressure on Greece not to cancel lucrative arms deals ». The article notes that from 2005 to 2010, Greece bought 15% of Germany arms exports, more than any other country in the world. 58% of Greece total military expenditures went in fact to Germany. It was also Europe’s top buying country of French arms during the same period. In 2010, Greece still spent yearly 7,1 billion Euros on military. To put things into perspectives, the same year, while social spending was cut by 1,8 billion Euros, 1,4 billion euros was spent in weapons purchase from France and Germany alone.

These examples are not isolated as Greece remarkably failed to develop major industries beyond tourism, and shipping, leaving most public markets under EU richest countries companies'  domination. Germany is Greece's biggest import source: it was accounting in 2004 for 12.5% of total Greek imports. This way, money borrowed from French and German private banks and spent to finance this out of control state spending frenzy would be directly recycled in the bank accounts of firms based in Paris or Frankfurt, after a temporary transit through Greece. Circle complete.

A whole pervert system has been set-up this way, where every actor would benefit. European banks, mostly French, German or Dutch, would make tremendous profits from lending billions Euros of easy money to Greece profiting from the higher interest rates paid there. Not knowing what to do with this miraculous money that, it believed, would never stop flowing, Greece state would reinvest the money to purchase products and investments it did not need and/or at much higher prices than the market from Western European firms. And most these firms would enjoy pricey contracts and comfortable margins from the Greek state.

A dangerous game, where everyone seemed to be winning, until it ultimately ground to a halt. In this case, the halt came with the 2008 worldwide Financial crisis, where big countries, afraid of seeing their banks collapse, decided to save them, take on their risky loans and close the money tap to Greece. Whilst it allowed to guarantee the bank accounts holders’ savings in the West, it broke the market’s most basic rule that bad loans that can not be reimbursed because they were granted without proper consideration of risk or check of use could be well written-off. These loans not being written-off were transferred instead to countries’ balance-sheet, therefore turning the whole affair into the current political issue between governments.

Reimburse debt? (or die tryin')

The only answer provided by the Eurogroup, that gathers Euro-zone Finance ministers, is further austerity to be imposed to Greek people. As money has been lent unwisely to Greece, it is useful to remember that this money has mostly not been spent to the benefit of the Greek population, but rather invested inconsiderately in unnecessary investments, with the money eventually being recycled to the profit of the same economies, e.g. France and Germany, that are imposing harsh measures on Greece today. There is an urgent need to reform in today’s Greece. Yet, the stubborn approach of refusing to restructure debt as the market logic would have otherwise imposed and claiming this money back on people that carry no responsibility in it seems mostly unfair. If remaining unchanged, Europe should be afraid that it could result in more social and political disasters to come.