As finance minister in the new government of Prime Minister George Papandreou, he discovered that previous governments had hidden the true size of the country's debt. This is the edited transcript of an interview conducted on Feb. 3, 2012.
If you went back to New York, and you were explaining to ... your friends what's happened here in Greece, what's the simple summary that you'd give them? How do you make them understand?
I would say that this was a crisis that was overdue in a certain sense. It was coming. We failed to see it coming. And at the certain point, the economy stopped growing as it was, at which point the debt became unsustainable.
We, for a very long time, were running huge deficits. Unfortunately, in the last two years before we took office, so before 2009 and in 2009, the deficits skyrocketed. We were spending in 2009 36 billion [euros] more than we're earning. That number doesn't sound big for a large economy, but for an economy like Greece, it's a huge number.
So the markets woke up to the fact that they were not willing to finance this any longer. The markets thought that because Greece was a member of the euro zone, it was safe to lend to Greece at very low rates. But at some point they realized that this kind of dead dynamics were quickly becoming unsustainable. So they got scared, and they pulled off.
Once they did that, it became very clear that the cost of borrowing would be way too high for Greece to be able to sustain its debt, to be able to service its debt. So what we call the "spreads," the difference from the German rates, increased very quickly and very much.
Then the rest of the euro zone woke up to the fact that here was a euro zone member that would probably be shot out of the markets and scrambled to find a way to save it while maintaining incentives for it to reform and put its finances in order.
This created attention, because the rest of the euro zone had to help Greece but do it on terms that it would not create a precedent. And it would not go against one of the basic tenets of the euro zone, which is the famous "no bailout" clause for countries that are in difficulty.
So we passed -- and this was the beginning of 2010 -- a few months of trying to create out of thin air basically a mechanism that would help countries in trouble while putting them in a straitjacket, which is what we are in [in] the moment.
In doing so, the emphasis was more on the straitjacket to convince national parliaments in Germany and the Netherlands and France and others to vote to give money to Greece. That made for a program that if it were to be redesigned now, it would be different. And it has been redesigned in a different way -- longer time for repayments of the loans, etc.
And then slowly it also became apparent that Greece was not alone, that this was not just a Greek issue, that there were other countries that had similar problems. After Greece came Portugal, Ireland, and then we started talking about the center of euro, countries such as Italy.
So what was originally perceived as an isolated problem, it became apparent that it was a systemic problem for the rest of the euro zone, meaning that the euro zone was created on certain premises but that when we created it, we did not put in place all the right mechanisms of common economic governance to be able to deal with shocks such as this one. And that's what we are.
So it's really a twofold problem. You had the credit problem that then ran into the euro and the fact that the euro was not fully developed and formed.
You had an outside crisis, the world financial crisis, impacting a country which already had serious structural and fiscal problems, and a country that was moving on a knife's edge of debt sustainability, just being to able to serve its debt and go long, overlong.
Once the outside crisis threw it off balance, the debt became unsustainable. The structural problems, which were there, became apparent for all to see. And it became the lightning rod, if you will, of a broader chain of events that unfolded in the rest of the euro zone.
... When did it really dawn on you, the magnitude of the problem? Was there a particular day? Was there a particular moment? Was there a particular report you got?
... I remember we took office -- we won the elections on Oct. 4. We got a vote of confidence from Parliament on the 20th. The day after that, I had to go to the Eurogroup for my first session as finance minister, and I had to tell them that the deficit was twice as big as they thought, twice as big as the previous government had told them, and six times as big as was originally planned, because the deficit in the budget was planned to be 2 percent of GDP [gross domestic product], and I showed up to tell them it was 12.5.
Actually, once we were finished with looking at all the data, it landed at 16 percent. So it'd been 2 and [now] 16. You have a huge difference, ... and it was clear to me from the reaction that we were unleashing a certain chain of events.
There was no way or desire on our part to do anything but say what the numbers really were, and those numbers became apparent to us once we took office. Before that, we knew that the deficit was heading to double digits. We had been told so by the governor of the Bank of Greece. We had said so publicly that we thought the deficit was bigger than what the government was saying it was.
But [it was] not until we sat down in the General Accounting Office with all the people there that knew the national accounts and slowly stripped the layers of expenditures that were due but not really being recorded or declared, the projections of revenues that were completely unrealistic, and the numbers that were simply put aside and not officially recorded for a variety of reasons, not until that time did we realize that what we had was a very, very serious problem.
I would say that's the first realization of the problem. The second realization, which took a bit longer, was the realization of how swift the market reaction would be.
How could the numbers be so wrong?
The numbers were very wrong because the projections that were being made were deliberately trying to make a bad picture look much better, because the deficit in cash terms, even in the summer, was already bad. So there was no way that it would be possible for the deficit to land where the previous government was saying with heroic assumptions.
Between October and December, we were landed with requests from Social Security funds for additional subsidies to be able to pay pensions. We were landed with hospital bills that were recorded nowhere and that had to be paid. And we discovered that there was no way that the government was going to receive the kind of revenues that it was projecting.
So I would say there was a deliberate attempt if not to hide and not record data -- I think there was part of that -- but certainly to present a picture that was very different from the real picture. And that's because there were elections coming up.
Much of the world ... in the decade prior to this suffered from this credit boom, this cheap-money boom, right? Cheap money was available, and people went nuts all over the world. In America, we did on houses. Why in Greece was it expressed through government spending?
The Greek banking system was late in its development compared with the banking systems in other countries. The positive aspect of that is that it never caught up to the kind of credit excesses that you saw in other countries. We never had the kind of toxic bank balance sheets. However, banks were saddled with buying government debt, which had good returns, and they were buying Greek government bonds.
So the banking system participated, but in a different way than participated in the rest of Europe and in the U.S. Throughout the previous decade, Greece was growing at very healthy growth rates. We were catching up. ... GDP per capita had closed a big part of the gap with the rest of the European Union partners, but it was growing mostly on the basis of domestic consumption and also on public investment. It was not growing because of experts or because of healthy private investment. There was some of that, too, but it was not the main engine. ...
But [this] was an economy which was consuming more than it was producing. And [it] was clear this was a growth paradigm that was leading to the state, fueling it through additional expenditures, and where the state was not receiving enough in terms of revenues. Instead, the kind of incomes in the economy were being spent in buying consumption goods. That's how it became unsustainable.
When one hears of excessive -- some would say corrupt -- government spending, you know, people on the payrolls that really didn't do anything, real patronage jobs, ... how much of the problem is related to inappropriate government spending in nonproductive ways for political favors?
I think it's a combination of the two. I am not one of those that say it was all due to corruption. If you strip away corruption per se, you are still left with the vast majority of the debt.
It was a very simple mathematical exercise. Expenditure on wages, pensions, social expenditure was growing much faster than revenues were. The economy was growing, but we were not reducing our debt. Our debt was growing even though the economy was growing as well.
So there is a tendency today to say, "Well, that isn't really ours; it's because of the politicians being corrupt." I think it's much more complicated than that. I think as a society -- and that of course is expressed by its politicians, its political system -- we spent more than the economy was able to handle.
We spent more by creating a large public sector to an extent because of patronage, but not corruption per se, ... and because we didn't tackle some of the big problems in Greek society, namely tax evasion, we allowed tax evasion to become endemic, not just in the last few years but before that as well.
By doing so, we allowed tax revenues to be much, much lower as a percentage of GDP than in most other European countries. And then, if year after year you have this fundamental imbalance, then your debt piles up.
Why was tax evasion allowed to exist at the level it existed at?
Because it was never easy or convenient for political parties to have a head-on approach to it. I think we only started doing this in the last two years because people were kind of happy with the situation that was perpetuating itself, and not many people were willing to go against the grain, and because tax evasion -- let's face it -- was very widespread.
Greece is a country of professionals, of small businesses, and this is when a lot of tax evasion exists. You don't find tax evasions among pensioners or wage earners that have steady jobs as employees. You find most tax evasion in the free professions and the small businesses as well as in large businesses. So the fabric of the economy was evading, and if everybody's doing it, it's much harder to tackle it.
There were rules set up by the European community to try to limit the amount of deficit any country can have, a goal of 3 percent. One way [it's] been reported that that goal was reached was ... American banks came in with a version of these fancy financial instruments that had gotten us into trouble. And [they] actually worked, sold instruments to the Greek government that hid debt.
Two things. First of all, let's remember that the first country that actually breached the 3 percent rule was Germany. So once the large countries -- Germany, France -- breached the rule, smaller countries followed suit.
The kind of instruments that you're talking about to hide debt were used first and foremost by the large countries. Germany used them; France used them; Italy used them, because when they used them, they were deemed OK by the European statistical authority. So Greece used them as well.
But if you look at the numbers, those kind of fancy tricks do not account for a very large proportion of the debt or even of the increase in the debt. It is true that in critical moments, they managed to hide some percentage points of the debt, no question about it. And actually, after the European statistical agency had changed its rules in 2008, all countries bar Greece changed themselves and recorded on the debt the hidden figures.
At that point -- this was the previous, conservative government -- the government decided not to, at which point we had to do it, now to a cost of showing that the previous government was not being truthful with the figures.
So you had a period in the early '90s when most European governments were using those tools. Then the rules changed. Everybody became straight. Greece didn't until after we came to office and created an independent statistical agency which was audited by the European agency, came clean about all the figures. And finally everything has been recorded now in the official figures. ...
Why did you change the Greek statistical agency? That's something that you all accomplished, that's a significant legacy of your time there. ...
Part of the problem we had in 2009 is because nobody believed us anymore, there was a serious credibility problem. ... So it was absolutely imperative to convince our European partners, to convince the markets that what you see is what you get, meaning that the numbers that the country uses are the real thing.
The only way to do so is to take the statistical agency outside the Ministry of Finance, because it was a secretariat of the minister of finance, and as in other countries, make it into an independent agency with fully fledged powers and absolute autonomy from the government so as to remove any fear of political interference in the running of the agents and the numbers.
We recruited somebody who had the track record from the U.S., a professional who was put in the position with a vote by [an] enhanced majority of the Parliament and who reports to Parliament, not to the government. As a result of the work that was done, Eurostat has fully verified all the figures from Greece for 2009 and 2010.
But that civil servant is now a suspect in a criminal investigation. What does that tell us?
Indeed. It tells us that there are absurdities in the system. That investigation has even led to investigation of the then-prime minister and then-finance minister -- that's me -- for allegedly blowing up the figures with a logic that borders on the surreal, because the logic says they increased the deficit on purpose so as to bring the IMF [International Monetary Fund] in and impose more austerity on the people.
Well, I'm a politician. I don't particularly enjoy inflicting pain, and I can tell you that my popularity ratings certainly don't enjoy the results of that. So unfortunately, rather than statistics being an issue of technical expertise, they have become part of the political football. And the reason why this story is now center stage is because there are two different ways of looking at the situation.
The way that we look at the situation, and I think the way that any logical person looks at the situation, is that Greece was in trouble. [It] was in trouble because for a long time we were spending more than [it] was earning, and because it hadn't done the right things in terms of structure reforms.
This came to a head. Difficult decisions had to be taken, which brought a lot of pain and suffering to many people, but they were the only possible choice. And as a result, we were able to finance our debt through the official loans from the U.N. and the IMF. And this is where we are.
There is an alternative story, and the alternative story is this should never have happened because the problem wasn't there in the first place. We are in the IMF because these bad guys bloated the figures and brought the IMF in because they want to sell off the country to the foreigners.
If you believe in this alternative conspiracy theory, then you will also believe that the official statistical agency and Eurostat, which has verified the figures, the European statistical agency, are all lying and that somehow some disgruntled ex-member of the board that has an ax to grind is correct. Well, I think that logic will prevail.
... Some people listening to this could say: "OK, you know, in Greece they spent too much. People were paid too much in government. There were these artificial jobs out there. They need to cut back, just to get to normal." Is that what level the cutbacks are, bringing you to where you should have been?
... The problem is twofold. One is the physical aspect, and the other is the competitiveness problem, because it's not just that the state was running huge deficits. Also, the economy was losing competitiveness vis-a-vis its partners for years, and part of that competitiveness needs to be clawed back through structure reforms.
And when you do reforms, you are often against vested interests and people who, for example, don't want the profession to be opened and for anyone to exercise it, trade units that don't want their work practices to be touched, or people who participate in a pension system that came out in retirement at the age of 50, or even 45 sometimes, and think that this was normal where it clearly was not because it's not sustainable.
Whenever you're going through such a violent change, everybody's hurting, and there is no way that you can find a way to make it fair. You try. We increased taxes on the most wealthy. We increased taxes not just on high incomes but also on high wealth, property. We went after offshores. We went after tax evaders. For the first time, we put people in jail for tax evasion. In the U.S. that's normal; in Greece it was not. And we cut. Unfortunately, we cut horizontally. We cut public-sector wages horizontally. We cut pensions horizontally.
If we had time, we could have done it in a different way, but we were up against a clock. The clock was the bonds that had to be repaired and the willingness of the [EU] and the IMF to lend us, only if we agree to a certain package. So it's a very tough austerity package.
It's also got structural items in it that people tend to look more at the austerity and not on the other side. And it is fundamentally unfair because you cannot make it fair enough, because when you're living above your means and you have to somehow deflate this, everybody loses.
And unfortunately, not always [the] ones that should lose most are the ones that bear the brunt of this adjustment. We're trying to help the lesser paid, the lower paid, the ones on lower pensions. We have tried to cushion them more in all these cuts, but it's not easy. If somebody's in a low pension and you cut even a little, they hurt.
If somebody's low-paid, even if it's a public-sector employee, and you cut some, he's got mortgages; his kids need to go to college; he's paying health bills. He's in trouble, and as a result, the economy's in a recession. You cannot have a fiscal retrenchment without a recession. Recession puts people out of jobs, and that creates a multiplier effect.
And this is what we're paying politically, because the social price is very high. You find yourself in a difficult position as a politician, as a minister in the government, where you have two sets of constituencies. You have the people who vote for you, but you also have the bankers, and they're a more immediate vote of confidence than your constituents are.
... Did you feel as finance minister more beholden to them than to the people who elected your government?
No, I think that we know very well where our allegiance should be. But when you also know that if you do not react then you can go bankrupt, and reacting means imposing pain, then you have to do what it takes to avoid the bigger evil, because people today are looking at how they are and looking at how they were two years ago, and they say, "The situation's infinitely worse."
Correct, but they cannot easily perceive what they have managed to avoid, and that's bankruptcy. Bankruptcy is infinitely worse than the worst situation that they have today. But people often say, "You know, if you avoid the war you don't get much credit for it, because you've no clue what being in a war is like." And this is where we are now.
But it's interesting ... that you're up against what 30-year-old investment bankers and Wall Street or the City of London are telling you every single day, right?
Telling you every single day and every single moment. And while I think that an economy cannot for a long time live outside the trends that it should be, and it's clear that you cannot have a completely uncompetitive economy and be part of a euro zone, to what extent the market is sending you early enough and in the right way the kind of signals, of very late and a very abrupt way, is a problem.
The market was totally complacent and was happy to think that Greece should be borrowing at rates pretty much the same as Germany for many, many years. The underlying trends of the debt and deficit were there. The erosion of competitiveness was there, but the market, until 2009, was happy to continue lending at those rates.
Suddenly they woke up to reality and to the fact that this was a country with a very high debt-to-GDP ratio and with a deficit that was much bigger than what they thought, at which point they overreacted in exactly the same way that they had underreacted before.
And ultimately the trigger for that change was what?
Ultimately the trigger for that change was the new deficit figures.
Or even before that was the crash and Wall Street trigger, right?
There's two things. The Wall Street crash and the financial crisis turned the spotlight on the health of the official sector in Europe. Once the official sector started bailing out the banks, then it quickly moved to, "OK, what's the real health of the official sector here?" And then the spotlight came to the weaker countries.
So we came in the perfect unfortunate moment, which was that it was bare for all to see that the deficit was much higher than people thought, at which point the market quickly started turning, and we started running a race against the market, trying to convince the European partners to create a mechanism to help us before the markets closed fully.
And remember, Greece got its first tranche of the loan one day before a bond of 9 billion [euros] was due. If we had not gotten that money, we would not have been able to redeem the bond, at which point the country would have gone officially bankrupt.
What's it like to be at the center of that?
Interesting. I do not wish it on anyone. It was an experience that I certainly did not regret, because I think that we took the right decisions in the right moment. And Europe took the right decisions, with delay, but it did. I am paying personally a political cost for it. My party's paying a huge political cost for it.
But if that's the price to pay to be able to say that we did the right thing at the right time, we'll take it. The moment was difficult, but I always felt that collectively, obviously, this was not just a question for the finance minister; this was first and foremost an issue for the prime minister and for the whole government, even though the finance minister lives it on a daily basis much more than anybody else.
We all felt that even though we were forced to take decisions which were impossible and that we hadn't even dreamt of in our worst nightmares, we were doing the right thing. Mistakes we made -- there is no question about it. We may have delayed decisions. We may have taken some wrong decisions, but the basic direction and brunt of what we took was inescapable and necessary given the circumstances.
I think this was proven by the fact that other countries followed us, countries that had for many years undertaken austerity, for example, countries that thought they had a much healthier situation. Portugal, Ireland had to go through the same thing and go through the same mechanism. Even stronger countries such as Spain flirted and hopefully avoided the bailout mechanism. Italy had to go through savage cuts at the moment with a new government ... to avoid Greece's fate.
So we were not alone, and in that sense, discussing with your European partners makes an impossible situation much more bearable.
Rarely does one get a chance to talk to somebody who's at the epicenter of something like that. We talked about the economics of it, but just from a personal point of view, who's yelling at you loudest in the moment? ...
The first time that I went to the IMF, there were about 150 registered press, accredited press, and I had a press conference. The interest was such that there were about 145 of those 150 that were in my press conference. We thought that the whole world is looking, and the whole world was looking.
It was very strange, but Greece being 3 percent of European GDP was able to influence, by its actions or inaction, the rest of the world. Unfortunately, there was a disconnect between the necessity of your actions and how they impact also the rest of the world [and] sometimes the way that society follows this.
And in a country with a political system with a lot of populism, unfortunately with an opposition that while we're responsible for most of the mess was not willing to rise up and take responsibility, it became increasingly difficult to defend what we're doing as the austerity bit deeper and deeper, as unemployment kept going up, and as wages kept being cut and taxes going up. It became increasingly more difficult for people to realize that this tough road was the only one that could guarantee that this house would not go bankrupt.
And at some point they start saying: "Well, where's the end to this? Is there an end to this?" This is why we're hoping that the deal that is now being discussed and will hopefully be closed with a shaving of the national debt by 100 billion [euros], which is a very big number for Greece, ... and at the same time a new loan with a new program, we'll be able to count things down, and people will start seeing that at the end of this very difficult road, there is a better future where the economy starts picking up again. Jobs are being created, investment flows, and you have an economy which is much more viable and robust and much more competitive than what we had before. But the distraction in between is severe.
... Did you have [Secretary of the Treasury] Tim Geithner or anyone calling you, trying to influence what happened here?
I was on the phone very often with my counterparts in the EU. I saw many times and talked on the phone with Tim Geithner. And there was a time just before the decision on the first bailout by the EU -- I don't like the term, but that's the term that people use -- where I was getting practically nightly phone calls from the U.S. Treasury.
Saying: "We're very worried. We've seen this before. This has Lehman written all over it. It is important for the Europeans to move."
The U.S. had seen what uncontrolled events can happen depending on taking or not taking a decision, and it was for them very important for Europe to get over its fear of moral hazard and decide to help Greece, at the same time demanding Greece to do certain things.
And they were very keen for this to close, this deal to be done, and for Europe to show that it would stand behind a weak member state as long as this member state would do the right things, but not let it go down and thereby destroy the euro.
They were, I think, instrumental in helping form the final decisions in certain European countries. And I think we all know that there were discussions between President Obama and [German] Chancellor [Angela] Merkel at critical times to make it clear that the U.S. also thought that for the stability of the world financial system, it was important for the euro zone to come to a conclusion on this issue.
What tools did the U.S. have to influence those decisions?
... One was its influence through the IMF. The U.S. is the biggest shareholder in the IMF and has a say in its running and therefore in its positions.
The second is the power of persuasion. We all live in the same global market, and it is very important for Europe to be on the same page with the U.S., because contagion can happen both ways. In 2008 it went from the U.S. to Europe. The U.S. was fearing that now it would go the other way and therefore was trying to avoid that.
... How much of the motivation for these bankers to take this significant haircut comes from the fear that many banks have some sort of exposure through credit default swaps? How much is this sort of a hidden bomb driving this?
It's very hard to say for sure. I think with a deal that we're trying to close, everybody has something to gain. It is clear that if at the end of this the debt becomes sustainable, the bond prices will go up. It is very hard to say to what extent credit default swaps and the positions of the various partners of the various institutions with swaps play in their decisions. Certainly for hedge funds it makes a huge difference [as] to whether they will participate in this or not.
This is why there are number of critical issues. Will the CDSs [credit default swaps] be triggered or not in [an] event? That's something that we do not know yet. We would like to avoid it. But we will see whether that can be avoided in the end.
So that's part of the problem. The CDS market is very opaque. We don't really know who holds the positions, how much, and who is about to gain and who will lose. Some of it is washing out. Some are gaining; some are losing. But there is a clear suspicion that there is an important element that is also driving part of this discussion.
... As tough as this period was for you personally and as a government, and as much heat as you've taken and lost in popularity polls for the party and all of that, what is [it] that sustains you?
Well, this has been a tremendously difficult time. There's no question about it. If I had the suspicion that this was a, wrong, or b, in vain, it would be very hard to go on.
What kept me going, apart from the people around me and my family, was the fact that I was deeply convinced, and I continue to [be convinced] that we were doing the right thing, and that this was not going to be in vain, because at the end of the day, this would create a more robust economy that would deliver back to the people what they have lost and what they will lose in these years of adjustment.
And the institutional reforms to make the system work better.
And all the reforms, because I cannot accept that we should live in a country that doesn't have credibility in statistics or people don't know where the taxes are being spent; where we all suspect a neighbor isn't declaring what he's making and where as a result, ... the bloated public service doesn't seem to be giving us the services that we want.
So these are fundamental things that as a citizen, let alone a politician, [I] would like to see right, and in a hard way, this is exactly what we're doing right now. ...
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