After six years of ongoing bailouts amounting to more than €220 billion, or $253 billion in loans, Greece just cannot get out of crisis mode.
It is tempting to blame those who refused to reform the country’s pensions and labor markets for the latest calamity. But a study by the European School of Management and Technology, a copy of which Handelsblatt has obtained exclusively, gives another perspective. The aid programs were badly designed by Greece’s lenders, the European Central Bank, the Europe Union and the International Monetary Fund. Their priority, the report says, was to save not the Greek people, but its banks and private creditors.
This accusation has been around for a long time. But now, for the first time, the Berlin-based ESMT has compiled a detailed calculation over 24 pages. Their economists looked 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 comes as the European Union and the Greek government prepare to hold negotiations about further debt relief. E.U. Economics Commissioner Pierre Moscovici said he hoped all sides could reach an agreement at a special meeting of the Eurogroup of euro-zone finance ministers next Monday. Extensions of credit repayment periods, deferments and freezing interest rates are all being discussed. This “debt relief light” would not affect private investors – just the loans from Europeans.
At the moment, German Chancellor Angela Merkel and her colleagues are not inclined to listen to the Greek prime minister, Alexis Tsipras, as he asks for a new multi-billion euro aid package. It is easy to understand why. The chancellor must feel she has seen it all before. She has experienced many near state bankruptcies since early 2010 when she put together the first bailout for Greece.
“European taxpayers bailed out private investors”
But Jörg Rocholl, president of the 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 recapitalize 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, although Greece has been de facto bankrupt since 2010.
“European taxpayers bailed out private investors,” said Mr. Rocholl who is also on a board that advises the German finance ministry.
Many economists 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, or DIW. He said such a move “would have protected small taxpayers in Greece and the whole of Europe.”
Mr. Rocholl admits that if that had occured, then the German government would possibly have had to support German banks with state aid too. “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.
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 in the meantime, these aid packages to the banks have been almost completely wiped out. Since their recapitalization in 2013 the banks have lost around 98 percent of their stock exchange value – primarily for political reasons: At the beginning of 2015, the bank index fell by 44 percent, just in the first three trading days following the election victory by Mr. Tsipras. Market capitalization fell by €11.4 billion.
The politically motivated bank crisis in the summer of 2015, when the banks could only be rescued from collapse by closing them for three weeks and introducing capital controls, also led to dramatic losses. So the third bailout saw another €25 billion in capital injections being reserved 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 stabilized,” said Ralph Brinkhaus, deputy chairman of the center-right Christian Democrats parliamentary group, in defense 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 Ms. 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. But in view of the renewed agonizing disputes between Greece and its creditors on the subject of austerity programs, surely this view must also be questioned.
Especially as Mr. Tsipras is currently being courted by financiers who want to make life easier for him. The IMF and the European Union have spoken to him about the possibility of debt alleviation.
Mr. Schäuble still opposes this, but Germany is looking increasingly isolated in this position.
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.
Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy Berlin bureau chief. Thomas Sigmund is the bureau chief in Berlin, where he directs political coverage.To contact the authors: email@example.com and firstname.lastname@example.org