By George A. Vamvoukas,
PhD Professor of Economics and Econometrics
Athens University of Economics
Memorandum policies have tragically failed in Greece. Since May 2010 Greece has committed itself to loan memorandum contracts and so far the public debt continues to grow at an extravagant pace. Total short-term, medium- and long-term central government debt from € 341 billion in May 2010 rose tremendously to € 1,015.4 billion in June 2018, in a situation of prolonged recession in the Greek economy. The primary objective of the economic policies pursued was, of course, the viability of the country's debt. The term "viability" is considered to be the same as "manageability" in the sense that the country with its own economic powers will in the future be able to serve its public debt. Is it possible for a country's public debt to be characterized as viable when it is rising for years at a rampant pace?
In this article I will argue that all IMF and European Commission Reports do not reliably analyze the real state of public finances in Greece. In this way, readers of the IMF and European Reports do not have objective and reliable information on the state of public finances in my country. The key point to comment on in this article focuses on the undeniable fact that IMF and European Commission Reports underestimate the real size of Greece's public debt. For the reliability and impartiality of our analysis, we will use statistical data on the total short-term debt, medium-term debt and long-term debt of the central government. The source of the data is the State General Accounting Office, a body under the Ministry of Finance. More specifically, the origin of the data is the following periodical versions of the State General Accounting Office: 1) The Monthly Statement of State Budget; 2) The General Government Monthly Bulletin; 3) The Government Debt Bulletin Quarterly; 4) The Annual State Budget Statements; and 5) The Annual State Budget Statement Reports.
The statistics included in Tables 1, 2, 3, 4 and 5 are derived from the above mentioned sources. Tables 1 shows that in the period 1950-1980, the official government debt to GDP ratio of just 3.8% rose to 19.6%. It is worth noting that in the period 1950-1980, the ratio of government debt to GDP never exceeded 20%. After 1980, Greece's public debt started to rise sharply. The dramatic rise in public debt was due to the ongoing widening of deficits of state budget. Between 1980 and 2009 government deficits in the form of a snowball were added to public debt. The steady increase in budget deficits is primarily attributable to the rising upward trend in government expenditures.
However, the rational question is: Which objective factors are attributable to the impressive rise in government spending, resulting in the expansion of fiscal deficits and thus the inevitable upward trend in public debt? In many books, monographs and articles, I have underlined that the terrible increase in government spending during 1980-2009 is mainly due to the very high corruption of the political parties that characterize government power and to the many illegal economic activities constituting the illegal black economy such as smuggling (fuels, drugs, weapons, food, beverages, clothing, toys, etc.), tax evasion, tax avoidance, antiquity smuggling, bribery of political persons and civil servants, etc.
Given that the government deficit is part of government spending, it is concluded that the terrible increase in Greece's public debt over the period 1980-2009 is due to the over-expansion of government budget deficits. The bankruptcy of Greece in 2009 was the unfortunate result of the continuing inflated state deficits in conditions of corruption in the government's power system and the impressive increase in the illegal black economy. Statistical data in Table 1 are very revealing. The official government debt to GDP ratio of just 7.9% in 1960 and 19.6% in 1980 is showing a rapid increase to 125.7% in 2009. In absolute terms, central government debt in the December 1970-June 2018 period from 2.12 increased to $ 345.4 billion. That is, over a period of 48 years official public debt has increased 162.9 times.
The tremendous increase in public debt, especially since 1980, has led to an impressive increase in its service costs. During the period 1980-2009, public debt had an uncontrollable dynamic due to the fact that the steep rise in public debt caused a continuous and accelerating increase in debt service payments. Between 1980 and 2009 increasing debt service payments have proved to be impractical for the state budget. Based on the data in Table 3, total expenditure on interest and amortization for short-term and medium-and long-term central government debt from just € 0.92 billion in 1980 rose to € 8.9 billion in 2000 and jumped to € 78.5 billion in 2009. While in 1980 government debt service expenditures accounted for only 11.8% of total government spending, this figure rose to 52.2% in 2009 respectively.
In early 2010, the then government admitted that Greece could not respond to excessive debt servicing costs. Following a government meeting with foreign creditors in particular, it was decided in May 2010 to include Greece in austerity program covering the period 2010-2014. Foreign creditors were represented by the Troika, the European Central Bank, the European Commission and the International Monetary Fund. The quantitative objectives of the stability program were reflected in the Economic and Financial Policy Memorandum 2010-2014. Under the program, Greece would receive over 2010-2014 a loan of € 110 billion, of which € 30 billion would come from the IMF and the remaining € 80 billion from the European Stability Mechanism. However, the austerity program for 2010-2014 failed, with the result that in June 2011 a new stability program known as the Medium Term Financial Framework (MTFF) 2012-2015 to be implemented. Nevertheless, the government's economic team together with the troika failed to predict successfully the growth performance of the Greek economy and in particular failed to predict the primary budgetary objective of reducing the public debt-GDP ratio. In December 2011, central government debt amounted to € 368.0 billion, accounting for 177.8% of GDP. This huge debt had to be repaid over a period of just seven years, which was impossible to happen in the case of Greece, which was already in the midst of an acute economic crisis. In February 2012, the troika, in co-operation with foreign creditors, decided to restructure Greece's public debt, contributing to impressive debt haircut of € 106.0 billion. In December 2012, the second haircut of the central government was decided, causing a further reduction of € 32 billion. That is, during 2012, the two haircuts helped reduce the Greek public debt by € 138.0 billion. The haircut of 138.0 billion euros is considered an unprecedented haircut in world economic history.
The first haircut in public debt was accompanied by the signing of a second memorandum between Greece and the troika. At the same time, the Medium-term Financial Strategy Framework 2013-2016 was implemented. Unfortunately the state of the Greek economy was deteriorating and the future uncertain. Although debt was cut twice in 2012, public debt continued to grow rapidly in conditions of perpetuation of the crisis of the Greek economy. In April 2014 the then government along with the Troika adopted the Medium-term Financial Strategy Framework 2015-2018. However, this stability program also had the fate of the previous ones.
The failure of the ongoing macroeconomic policy is evidenced by the fact that Greece in August 2015 committed itself to the signing of a third memorandum. With the participation of the European Stability Mechanism (ESM) on the side of foreign creditors, the Troika was renamed a Quartet. Between November 2015 and May 2018, the government along with the quartet committed themselves to the application of tough policy measures under the Medium-term Financial Frameworks 2016-2019, 2018-2021 and 2019-2022. It is obvious that the increase in tax burdens, the drastic reduction in wages, excessive pension cuts, shrinking social welfare costs, etc., reflect the reluctant dimensions of the existing Memorandum policies by all Greek governments after 2010.
The case of Greece is a slogan. After May 2010, when Greece committed itself to the implementation of the Memorandum of Understanding, strict policy measures are applied but public debt is constantly increasing. The figures in Table 2 are very revealing. Column 1 depicts the official central government debt recorded by the Ministry of Finance. It is the official public debt of Greece reported in the Eurostat, OECD and IMF database, among others. The central government's short-term debt in column 2 relates to Greek Government Treasury bills of less than 12 months and their value is recorded under code number 5000 of the state budget. The amounts listed in column 3 concern the stock of treasury bills called "short-term borrowing receipts" by the Treasury. According to the State General Accounting Office, "short-term borrowing receipts" are approximately equal to the amount of "short-term debt repayments".
It should be noted that the figures in Table 2 do not include the total value of the swap agreements. The swaps refer to "Greek government bond swap agreements", with the result that public debt in the form of government bonds is transferred to redemption in the future and thus not counted in the current public debt of Greece. Taking into account various unofficial estimates, the total value of swaps structured in Greek government bonds is currently estimated at 60 billion euros. The fact that swaps are not included in official government debt makes it also for this reason that real government debt is significantly underestimated.
The figures in Table 2 confirm that after 2009 Greece's real public debt is growing at a terrible rate. Between May 2010 and June 2018, public debt of € 341.0 billion or 146.4% of GDP elapsed to € 1,015.4 billion or 562.5% of GDP. The core of Greece's insoluble fiscal problem focuses on the crucial point that besides the official public debt of € 345.4 billion there is an unofficial debt that in June 2018 is estimated at € 670.0 billion. This insidious finding shows that on the basis of June 2018 data, Greece's real public debt is estimated at € 1,015.4 billion. According to the methodology adopted by the Ministry of Finance, the amount of € 670 billion is recorded in the state budget codes as short-term public debt. From a methodological point of view, it should be emphasized that in the process of measuring official central government debt, the Ministry of Finance only records a small percentage of the total stock of treasury bills. For example, according to Table 5, in June 2018, in official central government debt of € 345.4 billion, only 4.26% or € 14.7 billion represented treasury bills (14.7/345.4=4.26%).
Table 4 analyzes the structure of government budget credit revenues. Credit revenues reflect the total short-, medium- and long-term borrowing of the Greek state to finance the annual budget deficits. After 2010, and basically after 2013, Greek government borrowing has grown tremendously, demonstrating the dramatic upward trend in Greece's public debt. Total credit receipts from € 65.5 billion and € 76.6 billion in 2010 and 2013 saw a rapid rise to $ 665.0 billion in 2017. Taking into account the evolution of credit revenues in January-June 2017/2018, it is estimated that in December 2018 total credit revenue will reach $ 740.0 billion.
The spectacular increase in credit revenues after 2010 shows the extent of the failure of the enacted Memorandum of Economic Policies. The Greek governments, together with the quartet, have to explain to Greek citizens the reasons why the credit revenues in the period 2010-2017 from 65.6 went to 665.0 $ and are estimated at 740.0 billion dollars in 2018. The Memorandum Governments of the 2010-2018 period along with the quartet are obliged to answer the following questions: What factors do they attribute the impressive rise in the total value of credit revenues after 2010? What is the structure of short-term debt of € 670 billion expressed by the amount of treasury bills? In simple words, in which institutional bodies Greece in June 2018 owed the colossal amount of 670 billion euros? To what extent are commercial banks responsible for the growth of the country's short-term government debt of € 670 billion? Many questions could be put to the Greek governments and the quartet about the dramatic increase in both the credit revenues and the short-term debt of the central government after 2010.
The figures in Tables 2 and 4 lead to the crucial finding that IMF, European Commission and the other two members of the Quartet, for unambiguous reasons, in their regular reports on the Greek economy do not record the true size of Greece's public debt. Quartet members hide the truth from the international community of 7.4 billion citizens. Given that IMF and European Commission are the main members of Greece's creditors, it ought to have been particularly careful in the recording and processing of Greek fiscal data. It is not possible for the so-called quartet technocrats to be paid annually with many millions of dollars and in practice to prove themselves incapable of accurately analyzing the main fiscal indicators of Greece. Memorandum economic policies have been miserably unsuccessful in Greece.
The Greek governments and the quartet have the sole responsibility for the failure, because since May 2010, their memorandums have led to a dramatic increase in Greece's public debt in a situation of perpetual recession in the Greek economy.