Greece’s request for a bail-out – an historic first for any nation using the euro – was ultimately triggered by disclosure of unexpectedly bad new audit figures about Greece’s finances. Amid intense market pressure on Greek government borrowing, the revelations left a bail-out as the only alternative to a Greek default on its sovereign debt. The episode highlights the recent history of shoddy national accounting about government deficits by Greece (and some other EU member states). Certainly in the Greek case it strongly undermined the government’s financial credibility.
This issue -- flawed accounting and centralized reporting by EU member states – was highlighted in comments by EU Economy Commissioner Olli Rehn at a European Institute meeting just hours before Athens sent Brussels a formal request to trigger the aid package. The bail-out, forecast to run over 40 billion euro, was already drafted by the EU Commission and member states, the European Central Bank (ECB) and the International Monetary Fund (EMF).
Apparently aware that a bail-out was becoming inevitable even as he spoke, Rehn made a special point of the auditing question: at one point, he spoke to EU diplomats in the room, appealing to them to urge their governments to authorize better EU audits of their national fiscal situation and their deficit figures. The Commission has been pushing member states and the European Parliament to give greater auditing powers to the EU’s auditing arm and statistics agency, Eurostat.
The meeting, also attended by officials from the U.S. government and international institutions as well as bankers and journalists, was held in Washington, where Rehn had arrived for G-20 talks that will now be dominated by fixing the specific Greek structural reforms and other details of the bail-out package.
Rehn indicated that discussions had advanced far enough for terms to be announced within a few days of a request – presumably over the weekend. The move was forced by the need to spare Greece from defaulting on its sovereign debt. (The last country forced to “restructure” was Russia in 1988; since then, Moscow had not issued a government bond until, by coincidence, it did so on Thursday: buoyed by rising oil prices, the Russian offering was over-subscribed by eager buyers.)
The final blow to Greece’s reeling financial outlook came Thursday with the release of new EU figures showing that Greece’s deficit had reached 13.6 per cent of GDP this year – another unexpected upward revision of the figures from Athens, which had recently forecast a level of 12.7 per cent. The new number immediately drove up Greece’s borrowing costs and triggered a new downgrade in the nation’s credit-rating by Moody’s.
It took less than a day for Athens to formally request, early Friday, an immediate activation of the joint rescue package promised by the euro zone and the IMF – now expected to amount, initially, to 45 billion euro in loans.
The “trigger” figures came in the report on 2009 budget deficits from Eurostat, which is based in Luxembourg but functions as one of the directorates of the European Commission. In releasing the new data, Eurostat said that Greece’s deficit figure for 2009 might still increase by 0.3-0.3 per cent due to “uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps.”
These conclusions (which come after a string of disclosures in which successive Greek governments apparently sought to mask the country’s degree of indebtedness) explained the forcefulness of Rehn’s call at the European Institute for EU states to permit Brussels to get earlier, fuller information about member states’ budgets.
The goal, he said, was not to seek to dictate changes in these governments’ national budget priorities, but to obtain early warning in time to take “corrective” action when countries were jeopardizing the “growth and stability pact” that underpin the euro. This EU pact sets a ceiling on the debt-to-GDP ratio of three percent – a level surpassed by most EU member states in recent years. For example, this latest Eurostat report said that the average ratio of deficit-to-GDP of all 27 EU Members has now risen to 6.8 per cent – an almost threefold growth since the onset of the economic crisis.
The list of offenders was led by Ireland (with a deficit of 14.3 per cent), then Greece, followed by Britain (11.5 per cent), Spain 11.2 percent and Portugal (9.4 per cent). The IMF has warned that contagion from the Greek crisis could put other EU states under pressure. On Friday, as the price of insuring Greek debt rose again (to $550,000 per year for insuring $10 million of Athens’ bonds), the price of similar insurance for Portugal also rose. It reached $248,000 – an all-time high but still only two-thirds the rate for Greece.
Already, the crisis has sparked new readiness to consider changes in EU rules to enforce greater fiscal discipline among member states in some form of “economic governance.” Germany has been pressing for promises of such eventual changes by other EU governments as Berlin proceeds now to provide the biggest part of the EU bail-out – a move that is very unpopular among German voters. Rehn said that he was confident that Chancellor Angela Merkel would deliver on her pledge of German funding for the Greek bailout that has to be delivered now.
The Greek government has blamed its predicament on excesses incurred by the previous government that lost power last summer. Since then, Prime Minister George Papandreou has put in place drastic spending cuts. His Socialist government has already had to confront repeated demonstrations against proposed austerity measures.
Greece’s problems, while hardly unique in the EU, do have special dimensions arising from the country’s particular circumstances. One is the repayment schedule of its debts: for example, Athens has a payment coming due in May, which analysts said Athens would probably be unable to make unaided. Another special Greek difficulty is its lack of credibility in capital markets, a problem acutely demonstrated by the record over recent months in which Greece has never accepted a reliable independent audit of its finances, including the so-called “masked assets” that the previous Greek government bought, partly through Goldman Sachs and other brokers.
“This was legal,” Rehn told the EI meeting, adding that it might not be “legitimate” in his or other people’s eyes. One of the key conclusions to draw, he indicated, was the need for stronger auditing that kept tabs on systemic risk in EU countries.