The Greek crisis is the result of the negative business cycle over the last years, of the sluggish economic environment and poor productivity, but most of all it is the product of mismanagement of public funding and unsatisfactory reporting practices. The subprime crisis pushed for credit rationing, due to small market confidence. The interbank market dried up because of difficulties in evaluating assets and liabilities.The panic that followed after Lehman Brothers’ bankruptcy in the USA and the Northern Rock rescue in the UK in late 2008 pushed for public intervention by Governments. G20 countries (April 2009) decided to put in place massive public spending programs to save the productive system, and smooth the inevitable hard landing of economies. Their programs were uncoordinated, and each country decided its own goals and plans. The USA saved the financial system, regulated and not, but decided to save only some players in the automotive industry. As a result, General Motors - GM filed for Chapter 11 creditor protection in March 2009, leaving millions unemployed and bond holders with empty hands. European countries intervened domestically by increasing social expenditure (towards the unemployed and families), through firm rescue plans and restructuring programs. In 2010, the excessive public spending produced the first public debt crisis after the subprime credit crisis: Greece. Greece is characterized by a weak economic environment (i.e. sluggish productivity) and excessive public debt and deficit. In 2009, Greece reported an unprecedented 15.4% deficit/GDP ratio, and public debt skyrocketed to 126.8%. The European Commission had revised the official Greek data on debt, expenditure and deficit many times since 2000. The most severe revisions took place in 2004 and 2009. In the years 2000-02, Greece subscribed currency and interest rate swap contracts with Goldman Sachs in order to hedge risks and to reduce the cost of debt. At the time, these operations were consistent with European accounting rules (which were substantially absent, we must say). In February 2010, Goldman Sachs reported that these operations produced a debt reduction of €2,367 billion, but after the year 2004 the bank has not sell any other contract to the Hellenic state, in accordance with Eurostat rules. The cost reduction was produced by the effective currency hedge (of the drachma with the US$ and the Japanese Yen), and by interest rate hedging. After 2002, Greece closed its swaps, but misreported the remaining streams of interests; in 2005 and 2008, revisions were introduced and data revised backward. According to the EU, this was a case of deliberate misreporting. According to the EU report and the press1, Greece had been underwriting swaps contracts after 2005, yet not directly, but by exploiting incomplete accounting reporting practices, as described in details in the EU report. The Greek government financed the deficit by means of the National Bank of Greece (which is not the central bank), thus violating the Maastricht Treaty rules. This trick became evident when the National Bank of Greece accessed the European Central Bank re-financing scheme in 2008, giving as collateral the notes issued by Titlos Plc. Titlos Plc is a SPV created by the National Bank of Greece itself and Goldman Sachs, that sold €5.1 billion notes expiring in February 2039 to the National Bank of Greece. The Greek Treasury controlled 100% of this bank, and this was a way of externally financing outstanding debt, circumventing controls and bans. The result of this operation is that the deficit of the Greek Treasury was securitized through the National Bank of Greece , which obtained liquidity from the ECB basing on the notes issued by Titlos. The final cost of the Greek debt was that of the Refi rate. These operations were a fraud against European accounting rules. The EU report (2010) used very hard words to describe the behaviour of the Greek authorities: voluntary misreporting, methodological weaknesses and unsatisfactory technical procedures in the Greek statistical institute, inappropriate governance, poor cooperation and lack of clear responsibilities. The EU, moreover, stated that "revisions are an illustration of the lack of quality of Greece fiscal statistics, and show that the progress in the compilation of fiscal statistics in the country, and the intense scrutiny by Eurostat since 2004, have not sufficed to bring the quality of Greek fiscal data to the level reached by other EU Member States (…)” and "Eurostat is at present not in a position to validate figures which are of acceptable statistical quality". The walking out of a country from the EMU would produce certain negative effects on the credibility of the monetary union itself, but on the other side it would strengthen the constraints for those who remain. The balance between pros and cons is not merely economic, and the final decision was taken by ECONFIN, which is in charge of saving Greece. In March 2010, Greece asked the help of the EU and IMF, and, after prolonged discussion, obtained a 3-year rescue plan worth of €110 billion. German and French presidents will politically pay for their benevolence towards this country. The Greek government voted an austerity plan to reduce corruption, tax evasion and the waist of public resources. The Greek population is paying the highest price of the crisis; salaries and wages of public employees have been reduced, unemployment has overcome 20% and public spending is frozen. The pension reform will reduce the wealth of the population; other domestic manoeuvres will act on productivity, but that will take a long time to show up in statistics. In 2011, the IMF will visit Greece to verify the soundness of reforms in order to confirm the loan.

1Wall Street Journal of February 23rd, 2010.

European Central Bank Withdrawal and expulsion from the EU and EMU, Legal Working paper n.10, December 2009 ( )
EU report on Greek government debt and deficit statistics, 8 January 2010 ( )
International Monetary Fund (2010) Statement by the EC, ECB, and IMF on the Interim Review Mission to Greece, Press Release No. 10/246, June 17.
Oldani C., Savona P. (2010) The souvlaki connection: some reflection on Greek public debt crisis, Review of Economic Conditions in Italy, n2.

Editors: Chiara OLDANI & Paolo SAVONA