The truth about Greek debt Why it is an European problem? With Abstracts of the preliminary report of…

The truth about Greek debt Why it is an European problem?

With

Abstracts of the preliminary report of the Commission of the Greek Parliament for the Truth on the Public Debt

Thanos Contargyris ( [email protected] )Member of the Commission

Founding Member of

% ΑΤΤΑC HELLAS (GREECE)Presentation for meeting in Berlin

February 2016

DEBT EXISTS EVERYWHERE…In Germany as much as in Greece!

Debt as % of GDPof GDP in 2012

Country Total Banks Corporations Households Public

Ιreland 1.166 689 245 123 109UK 847 547 118 101 81Japan 641 188 143 77 233Spain 457 111 192 87 67France 449 151 150 61 87Belgium 435 112 175 53 95Portugal 422 61 149 106 106Italy 377 96 110 50 121USA 376 94 90 92 100Greece 333 22 74 71 166Germany 321 98 80 60 83

DEBT OF HOUSEHOLDS

Loans instead wage increases!

Loans based on real estate trends…

Which, like in US in 2007can reverse, and provoke sub-primes risks and crisis

Consequence: losses of pensions funds and banks

Pressure on wages

Part of wages in % of added value 1976-2011

DEBTS OF BANKSLoans to play casino!

Deregulation started when the distinction – imposed by Roosevelt in 1929 – between banks of deposits and banks of investment has been abolished.New technologies allowed an acceleration of transactions while the creation of new financial instruments, out of any control, has also grown (titration of loans, derivatives, CDS,…): the over-exposure to risky debts without any coverage increased.The opposition to the introduction of financial transaction taxes, which could have attenuated these phenomena, allowed an acceleration of these trends: they explain 2007 crisis. The worse of all that is that states are asked to intervene and accept new debts to save the banks…

Deregulation

PUBLIC DEBTSLoans instead of taxes!This trend is very strong in Eurozone due to very attractive low interest rates.But governments have put themselves in the hands of banks and markets by transferring to banks the exclusive right to get loans from ECB allowing them to negotiate loans at a higher rate with governments. Not only that: they also ask to be bailed-out when they make losses!Debt of France = cumulated bank benefits paid since 1974

Fiscal competition

Evolution of taxes on benefits in Eurozone

1995 - 2011

THE RESULT: PUBLIC DEBT HAS INCREASED EVERYWHERE SINCE 2007 CRISIS…

Nobody respects the golden rule of 60%

Συνολικό Χρέος σε % του ΑΕΠ το 2012

DETTE EN % DU PIB > 60% PARTOUT…2008 2009 2010 2011 2012 2013

World 66 76,2 79,7 79,9 81,3 81,5

Advancedeconomies 81,5 95,2 101,4 105,5 110,7 113,6

UnitedStates 76,1 89,7 98,6 102,9 107,2 111,7

Euroarea 70,2 80 85,4 88 93,6 94,9

France 68,2 79,2 82,3 86 90 92,1

Germany 66,9 74,7 82,4 80,6 83 81,5

Greece 112,6 129 144,5 165,4 170,7 181,8

Ireland 44,5 64,9 92,2 106,5 117,7 119,3

Italy 105,7 116 118,6 120,1 126,3 127,8

Portugal 71,6 83,1 93,3 107,8 119,1 123,7

Spain1 40,2 53,9 61,3 69,1 90,7 96,9

Japan 191,8 210,2 215,3 229,6 236,6 245

UnitedKingdom 52,2 68 75 81,8 88,7 93,3

Canada 71,3 83,3 85,1 85,4 87,5 87,8

WHY THE GREEK PUBLIC DEBT WAS HIGH?

Public deficits represent a total increase of debt/GDP ratio of only 28,3% of GDP.If military expenses had been similar to those of the average of EU countries the

public deficits would have been eliminated and the debt/GDP ratio reduced at <80%

Les composantes de la dette grecque (en % du PIB) 1980-2007

66% of the Greek public debt increase from 1980 to 2007 was due to the accumulated interests (snow-ball

effect) paid to private banks

The Greek deficits were exclusively due to excessive military expenses: > 30% of GDP (85/240) and 28% of debt (85/300) of 2012

An excess of military expensesDue to some very contestable military imports (from FR, DE, UK, US...)

Justified for the defense of very sensitive European borders

Cumulated excess of military expenses of Greece compared to EZ countries

Only for 1990-2012 period(billions € at 2010 prices)

Source: Eurostat (%GDP in EZ and GR) AMECO (GDP at 2010 levels in Billion €)

A big part of it is explained by Cumulated Military Imports of

Greece since 1980 (Millions of $ at 2010 prices)Source : SIPRI database (imports)

Source AMECO (GDP prices 2010 - 1990)

Other structural causes of Greek debtStructural problems of Greek public finances

Badly addressed (wage & social cuts only) Almost not addressed until 2015 (flat tax increases)

Source Eurostat – Commission for the Truth on Public Debt of Greece

Expenses lightly over EZ average, A problem of COLLECTION of taxeslower after correction of excessive & employers’ social contributions military expenses and bad spending - high tolerance for those not paying their taxes(clientelism, corruption, bureaucracy, low services) - lower taxation and parallel economy at 30%

Other structural causes of Greek crisisExternal unbalances accentuated by an

excessive increase of consumption loans offered by European banks after 2004

Balance of goods and services(in billion euros)

Source: Bank of Greece

Consumption loans/ Loans of European banks

(in Billion euros)Source : Bank of Greece

Conjectural origins of the Greek crisis 1/2A sudden sharp reduction of high growth rates due to 2007 crisis provokes excessive public

deficits (higher than GDP growth rates)…

Compared growth rates of GDP(in current prices – in %)

Source: OCDE

Annual deficit (% GDP) Growth rates (% GDP)

Source : Eurostat

Conjectural origins of the Greek crisis 2/2The sudden reduction of GDP growth and the increase of

deficits provoked a sharp increase of debt from 100% to 125% of GDP from 2007 to 2009

Debt / GDP and growth of GDP ratios from 2000 to 2011 Sources: Eurostat and IMF

Market reaction to Greek (and EU) debt crisis: judges EU reactions as being too weak, too late

Speculation on CDS and yields and collapse of the value of Greek bonds

Source: Source: REUTERS Bloomberg and IMF staff calculation

Meanwhile Greek bonds were sold in secondary market between 75% and 85% of their value.

ECB bought part of them at this price to avoid a further collapse…which would have increased the losses of the banks detaining them.

How EU reacted? 1. EU purchased time to allow EU banks to smoothly get rid of Greek loans…

The reduction of the excessive exposure to Greek loans of the banking sector in 2010 and 2011 (mostly FR & DE banks)

Exposure to risk in Greece of foreign banks Exposure of foreign banks to risks in PIGSSource: BRI Source: Bank for Transnational Settlements

2. EU gave loans to Greece to pay back its debt to banks at 100% of its value

EU provided loans to Greece to allow banks to be reimbursed at 100% for their loans to Greek public sector and minimise their losses.

The bail-out of Greece was a bail-out of banks with EU public funds.

…3. EU decided very late a very ineffective debt reduction (PSI) of apparently 100 billion (33%)

in fact 21 (7%)

In 2012 - 2013After having passed 100 billion in public hands

A 100 billion reduction on remaining 200 billion of which:

About 150 had passed in Greek Hands117 of Greek Banks 58 fully recapitalised gain 0

33 of Greek Public bodies (mainly Pension Funds)16,5 lost gain 2

About 50 remained in Private Foreign handsPotential debt reduction 25

- Sweeteners offered - - Those refusing (opt outs)

- NET DEBT REDUCTION < 20 billion

4. EU imposed hard austerity to GreeceA) A big reduction of public expenses

b) Internal devaluation measures: reduction of Minimal Wages by 22% (33% for young people), cancellation of all collective conventions…

Deficit(1) Var deficit

(1) Var Interests

(1) Previous measures

Measures Nov 2102

Total MEASURES

Primary expenses

Measures/ Expenses

GDP forecast

Mesures/ GDP

Var GDP

2009 36624 5681 894 -19074 -19074 112700 -16,9% 2316002010 24125 10592 1964 -16680 -16680 101100 -16,5% 222200 -7,5% -4,1%2011 20001 10020 -2032 -13191 -13191 93000 -14,2% 208500 -6,3% -6,2%2012 14798 3572 211 -1584 -9200 -10784 88000 -12,3% 195000 -5,5% -6,5%2013 7797 1376 749 -3064 -4300 -7364 80100 -9,2% 184500 -4,0% -5,4%2014 2558 185000

TOTAL -53593 -13500 -67093 112700 -59,5% -29,0% -20,1%(1) Source: Ecfin Report March 2012

Source other: EC 2nd Ajustement Plan - November 2012

Impact of internal devaluation 2010 2011 2012 2014 CumulatedInternal demand -7,10% -6,00% -4,20% 0,60% -15,80%Unit cost of manpower -2,40% -8,70% -5,00% -0,40% -15,70%Wages of private sector/head 0,40% -4,00% -975,00% -10,60% -22,20%

The effects of the treatmentSome apparently positive and necessary results

But with unexpected collateral effectsA killing treatment…

Social disaster:-Unemployment at 26% and more than 50% for young people they go abroad-Available average income reduced by 30%-Poverty at more than 30%-Increase of all forms of precarious jobs-Lowering of pensions-Public services (health, education) dismantled->80.000 enterprises closedPolitical effects:

-PASOK, main responsible of the choices, drops from 44% in 2009 to 5%-SYRIZA, grows from 4,6% in 2009 to 36%-Conservatives from 40% to less than 30%-Extreme right from 5% to 7%

Victory of SYRIZA in January 2015. Referendum against austerity at 62%....

Where we are after 5 years?The debt instead of decreasing became completely

unsustainableIMF (14/7/2015) - Debt would peak at close to 200 percent of GDP in the next two years. By 2022, debt projected to be at 170 percent of GDP. Gross financing needs well above the 15 percent of GDP threshold deemed safe and continue rising in the long term.

EC (10/7/2015) - Debt-to-GDP ratio expected to reach 165% in 2020, 150% in 2022 & 111% in 2030 in the baseline scenario. The respective debt/GDP ratios in the adverse scenario are: 187% in 2020, 176% in 2022 and 142% in 2030

Current status of GreeceProvisional conclusion

1. Greece is not out of the crisis: Greeks live the effects of a default (capital controls, austerity, poverty…) without any of its benefits (cancellation of debt, recovery of sovereignty)

2. The renegotiation of Greek debt is vital: for allowing that a lot of concessions have been done since July.

3. Greece is in the situation of Germany in 1919 and 1952• If the solution of Versailles is imposed to Greece (pay all the debt), neither

the default, nor the Grexit will be considered, soon, as threats, despite the risks implied for Greece and EU

• If a solution more inspired by the London’s conference of 1953 prevails, it will recover more rapidly than expected with minimal risks for itself and its EU partners

To prepare a strong negotiation two things are missing:1. Debt Audit Commission preliminary report should be used better2. A public debate on a parallel currency should open: it will clarify if Greeks

can support attempts to get partially free of the constraints of ECB to negotiate their debt

For Greece, what is at stake?A reasonable and fair deal implies from EU side

A debt cut of at least 30% of the debt (100 b €) is neededAn efficient and fair restructuration of Greek debt could be

based on the acceptance that debt due to excessive military expenses cannot be paid by Greeks alone, neither the cost of bailing out other EU countries’ banks : they should be sharedAdditional (not alternative) measures could be:-Lowering interest rates to limit required surplus-surplus<2%-A -4 years?- moratorium of interests and reimbursements to allow Greek economy to recover and Greece to pay back-Private investments to reconstruct the destroyed Greek economy should be encouraged by different meansBut also (for solving other countries cases) it will be good to:-Consider an increase of wages in countries with high surplus

instead of further revenues reductions in Greece

For Greece, what is at stake?A reasonable and fair deal implies that Greece will then welcome,

accept and endorse

- Measures to make investments attractive in order to create new jobs, fight unemployment and refrain educated young people from leaving the country

- Effective actions to fight fiscal fraud- Effective actions to eliminate corruption

- Effective actions to eliminate bureaucracy

- Make Greek rich people pay their share (levy tax on property?)

- Effective actions to make public administration efficient- Effective actions to deliver better public services

- An honest and transparent valorisation of public assets

What about the current alternative?The risk of refusing a true and fair solution

The current dominant scenario is that Greek debt will not be reduced. This implies that Greece will have, soon, with SYRIZA or, worse, later, with an extreme right government, to declare a default and leave the Eurozone and maybe the EU.Except the implied direct losses (impossibility of reimbursing of the biggest part of its debt) other consequences are:•Greece will not be able anymore to buy: a client lost…•Interests located outside EU will take the opportunity to take financial profits (by speculating against the euro), or, political profits by proposing new alliances to Greece compromising the geopolitical balance in a very sensitive region at a very sensitive moment•Other countries, if Greece is better off after that (and it could be after a period), could follow later

The choice is: Versailles or London?The true challenge to be addressed

An excessive debt is a sacrifice to the past condemning the future: it obliges a country to generate excessive surplus for a very long period; as this is impossible the result is that at the end its debt will never be paid back. Nobody will win!Germany has faced twice this situation in its history and has been faced by EU countries, including Greece, with two very different solutions with completely opposed consequences1) For its debt of 1st World War: France claimed that it should pay all its debt - the treaty of Versailles – It lead to a big crisis, Hitler and the 2nd World War. A catastrophe for all!2) For its debt of 2nd World War: US requested in 1953 and obtained (Treaty of London) a reduction of its debt by 50%. US, European lenders (including Greece) and Germany have known a long period of peace, prosperity and cooperation thanks to this decision.

Proposals for a new consensus on public debts at EU level

Public Debt audits should be conducted everywhere in EU • to respond to the obligation created by Regulation (EU) No. 472/2013 of the

European Parliament and of the Council on 21 May 2013• to understand the causes of debt and correct them (overspending – insufficient

taxation)• to understand what part is sustainable, under which conditions; after

recalculating the costs required to face the challenges in front of us

An European Conference on Public debts to agree & decideCommon priorities to face, means required for them and fix the limit s of the maximum surplus for debt service at levels allowing to address them (1,5% of GDP)

• Fix what is excessive debt (>120% of GDP) and haircut it• Redefine target levels (<100% of GDP) and give time to reach them• Freeze the part below target levels with low interest rates <2% • Stop refinancing bank sector ‘ errors with public funds – use FTT instead

Rules and effective cooperation to stop public debts increase over the excessive levelTo ban fiscal and social competition as well as fiscal and social fraud and evasion within EU

The choices we are facing (1/2)Pay for the Past (Fiscal Pacts, Debts) or get enough free of

them to be able to face creatively the real challenges in front of us (ageing population, climate change, poverty,

inequalities, decent jobs creation)?CONSEQUENCEDE L' OBJECTIF DE 60% DE 2011 A 2030…

EXCEDENT A DEGAGER COUT VIEILLISEMENT EXCEDENT A DEGAGER /AN % des dépensesde 2011-2030 PAR AN de 2011-2030 PAR AN pour payer vieillissement publiques pour ramener ses dettes à 60% et ramener ses dettes à 60%.. pour retraites % des recettes % du PIB % du PIB % des recettes % du PIB % du PIB

Italie 12,15% 5,6% -1,0% 9,43% 4,60% 13,00%France 11,42% 5,80% 1,60% 14,07% 7,40% 12,80%Portugal 13,87% 6,20% 4,20% 24,13% 10,40% 12,40%Grèce 25,67% 10,50% 3,40% 31,31% 13,90% 12,10%Autriche 3,75% 1,80% 4,20% 12,16% 5,90% 11,20%Espagne 29,86% 10,60% 2,10% 27,82% 10,10% 10,20%Tchequie 5,21% 2,10% 0,60% 6,55% 2,70% 9,80%Finlande -2,60% -1,40% 4,60% 5,90% 3,20% 9,80%Belgique 10,53% 5,20% 4,80% 19,88% 10,10% 9,60%Allemagne 2,02% 0,90% 2,00% 6,76% 3% 9,20%Irlande 33,43% 11,40% 1,50% 37,07% 12,90% 8,10%

Source: Rapport du FMI d'Octobre 2012...

The choices we are facing (2/2)Austerity + Fiscal Competition

OrSolidarity and Fiscal Convergence

AUGMENTER RECETTES DES ETATS POLITIQUES D'AUSTERITE (actuelles) POLITIQUES DE CONVERGENCE vers le hautLES RECETTES Recettes A TROUVER Recettes Augmentation Réduction Recettes Augmentation Dépenses Réductionou DIMINUER actuelles % PIB 2017 des Recettes Dépenses 2017 des Recettes 2017 DépensesLES DÉPENSES? % des recettes % des recettes % des recettes % des recettes

Italie 46,1 4,60% 49,00% 6,29% 3,69% 50,7% 9,98% 50,70% 0,00%France 50,8 7,40% 52,70% 3,74% 10,83% 53,9% 6,10% 58,20% 8,46%Portugal 44,7 10,40% 42,20% -5,59% 28,86% 53,9% 20,58% 55,10% 2,68%Grèce 40,9 13,90% 41,40% 1,22% 32,76% 53,9% 31,78% 54,80% 2,20%Autriche 48 5,90% 48,50% 1,04% 11,25% 53,9% 12,29% 53,90% 0,00%Espagne 35,5 10,10% 36,80% 3,66% 24,79% 45,6% 28,45% 45,60% 0,00%Tchequie 40,3 2,70% 41,40% 2,73% 3,97% 43,0% 6,70% 43,00% 0,00%Finlande 53,9 3,20% 54,50% 1,11% 4,82% 53,9% 0,00% 57,10% 5,94%Belgique 49,4 10,10% 51,00% 3,24% 17,21% 53,9% 9,11% 59,50% 11,34%Allemagne 44,5 3,00% 44,10% -0,90% 7,64% 47,5% 6,74% 47,50% 0,00%Irlande 34,1 12,90% 34,10% 0,00% 37,83% 47,0% 37,83% 47,00% 0,00%Ecart Min - Max 19,80 20,40 6,90

Max % du min 58,06% 60% 16,0%

Quit, Rebuild EU or Rebuild consensus? What vision EU offers today?

A EU which will blow up, under nationalist pressure?•Organised divergence – Exacerbated competition•Grexit? Brexit? Frexit? South against the North, or West against East? •End of the Euro, of Schengen.. – Back to closed bordersAn European empire with vassal states ?-Fight against any form of convergence or solidarity-Take over of the control of the resources of the South & East by the North & West?-Young people leaving the South & East to go North & West?-More production in the South or in the East, at low prices to re-localise productions currently delocalised outside EU?A democratic, social, federal, integrated, solider EU?•Policies of convergence and consensus democratically agreed•Reduced deficit & surplus and mutualisation of risks & opportunitiesAs it is, EU, last months, evolves more to the first scenarios…

ConclusionEU is in a deep crisis facing several simultaneous challenges: austerity, debts, refugees, terrorism, regain of nationalisms

Greek case revealed a lot of terrific aspects of EU governance It should provoke a citizens’ debate at EU level in favor of another EU

EU citizens should engage and impose this democratic debate•For re-establishing the rights of politics & democracy over the markets & technocracy •To allow Democracy to defend itself against Plutocracy•To re-establish the status of Collectivity and Society in all policy choices•To re-establish at national and European level key values such as social justice, solidarity, human rights, consensus and inclusive society

From the collective answers, at EU level, the citizen will be able to deliver the choice on the future of EU will depend

Is it time to blow EU up or/and to rebuilt it?Is it any hope left to rebuild a consensus in it?

Thank you for your attention