When the new government in Greece came to power one of
things they promised was to set up an investigation, a committee hearing on how
the Greek debt accumulated over the years.
Yesterday at the Hellenic Parliament conducting the
hearing on the Greek debt, testified the former representative of Greece to the
IMF. His revelations were astounding. In speaking before Greek and foreign
dignitaries who came in as technical experts in various fields, the former
representative made interesting revelations on the debt, the opening up of
closed trades, special interest groups in Greece, tax evasion, the economic
crisis of 2008 – 2010.
The first issue the former rep mentioned was that of
cartels and the obsessions by the IMF on closed trades. His view is that
cartels would have been a serious and important reform in Greece, which never materialized
because all the governments covered up and protected special interest groups.
Cartels are responsible for high prices since they form price collusion.
Instead the prior administrations had obsessions (as were told by the IMF) with
freeing up closed trades, such as taxis, trucking transportation, pharmacies
and what hours they would operate. In his view, this will not bring (and has
not indeed) growth.
Indeed, since there was an opening up of trades like
taxis, if one goes outside of hotels, hospitals; one can see a long line of
taxis waiting to pick up passengers. The opening up of operating hours of
pharmacies has only brought up more pharmacies opening that ever before, but
did not contribute to growth in the economy. Trades such as contract lawyers,
lawyer also was an empty promise to economic growth.
On the issue of taxes, his view was that higher taxes
imposed by previous Greek governments, as were “advised” by the IMF only
brought further tax evasion, recession, the closing of small and medium
businesses, and less income for consumers to spend, on top of their wage cuts.
However, he said that the IMF in a report, considered that the Greek
governments had no political will to combat tax evasions, no political will to
punish interest groups and corruption in Greece. This answer came from a
question by a member of the foreign dignitaries committee on the debt, Eric
Toussaint.
Mr. Toussaint said that other countries took advantage
of the lists, like that of Christine Lagarde (IMF CEO). This list of names in
electronic form was handed over to the Greek government to be investigated for
tax fraud, of Greeks who took their money out of the country, and evaded paying
taxes. The former Greek rep to the IMF agreed, and said that other countries,
like Germany and France, took advantage of their similar lists, and had the tax
evaders pay taxes, and avoid further audit.
On the Greek debt, the former IMF rep began with a
retrospective of Greece’s entrance in the Eurozone. A time in which low
interest rates were predominating and investment capital was affluent as well as
investment activities. Greek banks invested this flow of capital to Greece (in
the banking system) to risk bearing assets, like real estate, in the form of
loans to consumers. Their exposure grew since they had greater return on their
money, hence high liquidity. Banks contributed to the crisis by giving out
loans to consumers, and today 45% of those loans are in default.
Banks were borrowing at low interest rates and
invested their funds at higher rates. One other exposure in their investment
was on Greek T bills and bonds. They were purchasing bonds at zero cost, hence
avoiding any risk. During 2007 – 2008, the former rep said, banks should have
proceeded with an increase in shareholders capital. Instead, the banks forced
the government (majority shareholder) to do so in preferred stock, rather than
common stock. This had an impact on debt restructuring since they privatized
the profits, but the bill was not paid by preferred stockholders.
The former IMF official gave an example of other
countries, such as Cyprus’s bail in, which was imposed by Germany.
Shareholders, bondholders and depositors lost their money from Cypriot banks
high exposure to the Greek debt through Greek bonds. They all were influenced negatively
from the Greek haircut of Bonds.
The next interesting pointy he brings up to the
committee is a memorandum from the Greek embassy in Washington during 2010.
This was the year that the Greek debt problem was becoming headlines, and the
US wanted Greece not to be excluded from the financial markets, since in the
view of the United States, it would have a dominating effect to the rest, a
chain reaction, as he described it. The US wanted a strong and clear support
from the rest of the EU countries on this issue of support. But the EU
countries did not follow. This cost Greece credibility, increase in the spreads
of Greek bonds, and its exclusion from the markets (too high cost of
borrowing).
The consequences were to impose a two year
recessionary program (2010 – 2012) in Greece, with the hope of growth in the
future (we know that the IMF has admitted to its failed policy in Greece, and
said it was sorry!!). Their policy of growth (according to the former
representative of Greece to the IMF) was a cut in wages, pensions, high
taxation, and the closing of businesses. The former rep said that 75 – 80% of
growth in GDP in a country depends on consumption. ‘They destroyed consumption”.
Another issue was the debt restructuring which was
delayed, and the markets knew that the Greek debt was unstainable. In its memo
by the IMF (3/2010) they considered the program, which they imposed on Greece
as “unfeasible”. During the Greek haircut, the former rep to the IMF, said that
something weird happened. Private investors gained from the haircut in Greek
bonds, while the bill was paid by (the losses) by the Greek treasury. Those
investors beard absolutely no risk on their investments, which he called as the
Morale Hazard problem.
While I was participating in a course on financial
markets by Yale University on the coursera platform, I remember having
discussed this in class in week six, when we discussed central banks. In my
notes, I read that bank runs can be triggered by random shocks, like the real
estate bubble in the US. I further read in my notes the difference between
adverse selection securities and Morale Hazard. What is the difference? Adverse
selection is when there is a lack of symmetric information between a buyer and
a seller, prior to a deal. Moral Hazard occurs when there is asymmetric
information between two parties, and there is change in one, after a deal. This
is a situation where one party is at a disadvantage. Who was at a disadvantage
during the Greek crisis? Those that beard risk. Those with less information,
the bond holders and investors did not know that they would suffer a haircut on
their investments….but others someone knew ahead ….
Moral Hazard occurs when someone provides misleading
information and changes his behavior when he does not have the bear the risk Greek
banks continued to buy more bonds when in fact they knew there was going to be
a haircut. And not only banks, but public insurance funds, pension funds, etc.
The chairman of the Bank of Greece, at the time, according to the former IMF
official, said he was aware of this, and instead he falsely warned that the ECB
would cut off financing to the Greek banks if debt restructuring would go
ahead, and so was the ECB head at the time, Trichet. Why was this? According to
the former Greek official at the IMF, because in the event of a Greek debt
restructuring German banks had also high exposure, would lose money.
Bill T. Alexandratos
Billalex60@gmail.com
