Where Did The Greek Bailout Money Go?

May 10, 2016

Just as the Eurogroup starts the painful process of imposing yet another round of austerity on an already ruined Greece a timely recent study by the European School of Management and Technology (ESMT) has analysed in detail how the entire EU/IMF/ECB Greek rescue program was in fact designed to save not the Greek people, but its banks and private creditors.

For the first time, the Berlin-based ESMT has compiled a detailed and complete calculation entitled ‘Where Did The Greek Bailout Money Go?” that looks at every individual loan instalment and examined where the money from the first two aid packages, amounting to €215.9 billion, actually went. Researchers found that only €9.7 billion, or less than 5 percent of the total, ended up in the Greek state budget, where it could benefit citizens directly. The rest was used to service old debts and interest payments. The report’s conclusions are quite clear:

“This paper provides a descriptive analysis of where the Greek bailout money went since 2010 and finds that, contrary to widely held beliefs, less than €10 billion or a fraction of less than 5% of the overall programme went to the Greek fiscal budget. In contrast, the vast majority of the money went to existing creditors in the form of debt repayments and interest payments. The resulting risk transfer from the private to the public sector and the subsequent risk transfer within the public sector from international organizations such as the ECB and the IMF to European rescue mechanisms such as the ESM still constitute the most important challenge for the goal to achieve a sustainable fiscal situation in Greece.”

Jörg Rocholl, President, European School of Management and Technology said that his institute’s research shows that the biggest problem lies with the way the bailout packages were designed in the first place. “The aid packages served primarily to rescue European banks,” he said. For example, €86.9 billion were used to pay off old debts, €52.3 billion went on interest payments and €37.3 billion were used to recapitalise Greek banks.

Of course, the servicing of debts and interest payments is a major source of expenditure in any state budget – so the Greek state did benefit from it indirectly, as it had also spent the loan money beforehand. But the new calculations do throw doubts on whether the aid programs were sensibly constructed. The loans were used to service debt, but Greece has been de facto bankrupt since 2010 and the last thing a bankrupt needs is more loans and more debt, what is required is debt forgiveness. Many economists now consider this the fundamental failure of the whole Greek bailout project.

“Greece would be in a better position now, if there had been debt relief right at the beginning of the crisis in 2010, and much damage could have been avoided for Greece and Europe as a whole,” said Marcel Fratzscher, head of the German Institute for Economic Research. He said such a move “would have protected small taxpayers in Greece and the whole of Europe.”

Jörg Rocholl accepts that if the Greek bail out funds had not be passed to the banks then the German government would have had to support German banks with a massive direct national bail out program. “But at least it would have become clearer where the money was going,” he said. It would also have avoided a great deal of hostility between Athens and Berlin. And it would probably have been cheaper for the German taxpayer. If the banks (who made losses as a result of reckless lending) had been allowed to fail and then been bailed the politics of the situation would have been entirely different because it would have been clear that the massive costs to the public sector was the fault of the banks.

Above all, the rescue of Greek banks has turned out to be a catastrophic deal for taxpayers. According to ESMT calculations, a total of €37.3 billion from both bailout packages went to Greek banks. But these aid packages to the banks have been almost completely wiped out. Since their recapitalisation in 2013 the banks have lost around 98 percent of their stock exchange value, in two primarily politically driven episodes. At the beginning of 2015, the bank index fell by 44 percent, just in the first three trading days following the election victory of Syriza. Market capitalisation fell by €11.4 billion. This was followed by the politically motivated bank crisis in the summer of 2015, when the ECB cut off liquidity support in order to put pressure on the Syriza government to submit to a new Troika program. Greek banks could only be rescued from collapse by closing them for three weeks and introducing capital controls, and this led to dramatic losses. This meant that when it came the third bailout program had to allocate another €25 billion in capital injections for Greek banks.

But despite the figures, the German government continues to defend the rescue policy. A government official conceded that the money from bailout programs went primarily to European banks. But, he said, anything else shortly after the collapse of Lehman Brothers would have led to major distortions. The risk of contagion came from the financial system and not from the Greek economy. That is why Athens was given billions, so it could service and reassure its investors. Not until the year 2012 did European governments finally bring themselves to agree on small debt relief with private creditors.

“The objective of European aid programs is to assure frameworks are stabilised,” said Ralph Brinkhaus, deputy chairman of the German Christian Democrats parliamentary group, in defence of the policy. “It is not the purpose of aid programs to hide structural problems in the Greek state budget.” He added that Greece needed structural reforms, above all else, “and debt relief would not facilitate that.”

That has been the constant argument of Merkel and her finance minister, Wolfgang Schäuble. Early debt relief in the year 2010 would have taken all the pressure off the government in Athens to reform, they believed. So the decision to use the bail out funds to save the banks (mostly German and French banks) and to impose massive new debts on Greece was made explicitly in order to save the banks and to force political and structural change in Greece. Merkel and Schäuble still opposes Greek debt relief, but Germany is looking increasingly isolated in this position. The head of the International Monetary Fund (IMF) Christine Lagarde has urged eurozone finance ministers to immediately start negotiations on granting debt relief for cash-strapped Greece. According to the Financial Times which obtained a copy of the IMF chief’s letter to all 19 ministers, Lagarde wrote that talks with Athens to find €3 billion in “contingency” budget cuts had failed and debt relief must be considered immediately. Otherwise, said Lagarde, there’s risk of losing IMF participation in the program.

“We believe that specific measures, debt restructuring, and financing must now be discussed contemporaneously,” said Lagarde ahead of an emergency meeting on Monday.

“For us to support Greece with a new IMF arrangement, it is essential the financing and debt relief from Greece’s European partners are based on fiscal targets that are realistic because they are supported by credible measures to reach them,” she added

The consensus inside Germany on Greek debt relief is also breaking up. Carsten Schneider, deputy chairman of the Social Democratic parliamentary group, said he is willing to back the idea of debt restructuring if the Greek government sets up a functioning administration, especially with regard to tax enforcement. “If these obligations are fulfilled, there will be a restructuring of debt, as agreed with the federal chancellor,” he said.

Previous post:

Next post: