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Evolution of the Greek public debt during 2010-2015
Chapter 2
by Truth Committee on the Greek Public Debt
27 July 2015

Chapter 2, Evolution of Greek public debt during 2010-2015, concludes that the first loan agreement of 2010, aimed primarily to rescue the Greek and other European private banks, and to allow the banks to reduce their exposure to Greek government bonds.


As the economy started to deteriorate in 2008, the Greek banking system was con-fronted with a solvency crisis. The main ob-jective of the first loan agreement of May 2010, amounting to €110 billion, was to rescue banks with exposure to Greek public debt. The loan allowed for European and Greek banks to reduce their exposure to Greek bonds, transferring the risk to multilateral and bilateral creditors. As the economy shrank as a conse-quence of austerity measures, imposed in an attempt to service debt, the fiscal situation continued to dete-riorate leading to an increase in the debt to GDP ratio.

The second agreement, which involved additional loans amounting to €130 billion and a haircut of 53.5% of the face value of Greek bonds, worsened the cri-sis. Among the losers of PSI were public entities which suffered losses of €16.2 billion. Most of these losses accrued to pension schemes, with losses of €14.5 billion. In stark contrast, Greek banks were fully compensated while private foreign creditors were partly compensat-ed on the losses induced by the haircut through the use of “sweeteners”.

The management of the crisis was a failure as a result of the fact that it was approached as a sovereign debt crisis when reality it was a banking crisis.

1. From 2009 to May 2010

The snap elections on October 4 of 2009 signaled one of the biggest victories of PASOK during the last decades, gaining 43.92% of the votes. PASOK owed this victory to its pre-election promises. With the famous phrase “we have money”, proclaimed during a rally in rural Greece, the leader of PASOK won the elections. PASOK promised a new period of increased redistri-bution of wealth, tackling the social problems of the “generation of 700 euro” and protecting the most vul-nerable. Nonetheless, just a few weeks after the elec-tions, a series of substantial revisions of statistical data

[see box] took place. As a result, the political climate changed sharply.

The Greek crisis arose from the fragile position of the Greek banking system, demonstrated through the high degree of leverage of the banking sector as a whole. The dependence on short term funding of the banking sector created significant liquidity issues, as well as sol-vency concerns, which eventually led in October of 2008 for the government of K. Karamanlis to provide an aid package of aid to the banks amounting to €28 billion. From this amount, €5 billion were provided to ensure compliance with banking capital requirements. The rest of the resources were promised in the form of guarantees. As it can be observed in figure 2.1, the first increase in the sovereign risk spread took place in this moment, long before G. Papandreou officially declared the exclusion from the markets of the coun-try in the spring of 2010.

Greece Government Bond 10Y
Implied Yield on 10 Year Bonds

Source : Trading | Public Debt management Agency (POMA)

Between the end of 2009 and the beginning of 2010, the continuous announcements of new austerity meas-ures (i.e. spending cuts) and downgrades of Greece by rating agencies marked the betrayal of the pre-election promises of the new government. This paved the way for the deterioration of the fiscal situation that allowed, under an “emergency situation”, to approve further in-jection of public resources to re-capitalize Greek banks. These measures quelled the expansion of the crisis to other European banks, effectively transferring the bur-den of the crisis to the Greek taxpayers.

The new austerity measures that the government of George Papandreou announced in February and March 2010 accelerated the deterioration of public finances.
As a result, the yields of Greek bonds increased. The Greek government declared the loss of market access and officially requested, on April 23rd, the support of other Eurozone members and the IMF, following the decision of the European Summit on March 25. The situation was dramatized, although there were other alternatives to cover the financing gaps of the 2010 budget such as:

- Restructuring of the banking sector, in a similar vein to the measures taken in Scandinavian countries in the 90’s and Iceland in 2008.
Increase domestic borrowing.
- Bilateral loans from non-euro countries.
- Buy-back of Greek bonds from secondary market.
- Accepting more of the €25 billion offered in the last auction of 2010 when the government sought to borrow.
- Other alternatives include the cessation of pay - ments and cancellation of debt.

Issuance of government bonds 2009 - 2010

Source : PDMA, Issuance Calender & Syndication and Auction results.
Falsification of public deficit and public debt

After the Parliamentary Elections of 2009 (4/10/2009), the newly elected government of G. Papandreou illegally revised and increased both the public deficit and debt for the period before the memorandum of 2010. As it will be shown, European authorities collaborated with the new government in the process of irregular and successive increases in the official statistics for the public deficit and debt.

Hospital liabilities

The public deficit estimation of 2009 was increased through several revisions: the public deficit as a share of GDP increased from 11.9% in the first revision to 15.8% in the last.

One of the most choking falsification examples of the public deficit is related to the public hospitals’ liabilities.

In Greece, as in the rest of the EU, suppliers traditionally provide public hospitals with pharmaceuticals and medical equipment. Due to the required invoice validation procedures required by the Court of Audit, these items are paid after the date of delivery. In September 2009, a large number of non-validated hospital liabilities for the years 2005-2008 was identified, even though there was not a proper estimation of their value. On the 2nd of October 2009, within the usual Eurostat procedures, the National Statistical Service of Greece (NSSG) sent to Eurostat the deficit and debt notification tables. Based on the hospital survey traditionally carried out by the NSSG, these included an estimate of the outstanding hospital liabilities of €2.3 billion. On a 21st of October notification, this amount was increased by €2.5 billion. Thus, total liabilities increased to €4.8 billion. The European authorities initially contested this new amount given the unusual circumstances under which it took place suspicious procedures :

“In the 21st October notification, an amount of €2.5 billion was added to the government deficit of 2008 on top of the €2.3 billion. This was done according to the Greek authorities under a direct instruction from the Ministry of Finance, in spite of the fact that the real total amount of hospital liabilities is still unknown, that there was no justification to impute this amount only in 2008 and not in previous years as well, and that the NSSG had voiced its dissent on the issue to the GAO [General Account Office] and to the MOF [Ministry of Finance].
This is to be considered as a wrong methodological decision taken by the GAO”. [1]

However, in April 2010, based on the Greek government’s “Technical Report on the Revision of hospital Liabilities” (3/2/2010), [2] Eurostat not only gave in to Greece’s new government demands about the contested amount of €2.5 billion, but also included an additional €1.8 billion. Thus, the initial amount of €2.3 billion, according to the Notification Table of the 2nd of October 2009, was increased to €6.6 billion, despite the fact that the Court of Audit had only validated €1.2 billion out of the total. The remaining €5.4 billion of unproven hospital liabilities increased the public deficit of 2009 and that of previous years.

These statistical practices for the accounting of hospital liabilities clearly contravene the European Regulations ESA95 2. (see ESA95 par. 3.06, EC No. 2516/2000 article 2, Commission Reg. EC No. 995/2001) and the European Statistics Code of Practice, especially regarding the principles of independence of statistical measurements, statistical objectivity and reliability.

It is important to highlight that a month and a half after the illegal increase of the public deficit, the Ministry of Finance called the suppliers and asked them to accept a 30% discount on the liabilities for the 2005-2008 period. Thus, a large part of hospital liabilities was never paid to pharmaceutical sup-pliers by the Greek government, while the discount was never reflected in official statistics. [3]

Public corporations

One of several falsification cases concerns 17 public corporations (DEKO). ELSTAT [4] and Eurostat, transferred the liabilities of the 17 DEKO from the Non-financial Corporations sector to the General Government sector in 2010. This increased public debt in 2009 by €18.2 billion.

This group of corporations had been classified as Non-financial corporations after Eurostat had verified and approved their inclusion in this category. It is important to emphasize that there were no changes on this issue in the ESA95 methodology between 2000 and 2010.

The reclassification took place without carrying out the required studies; it also took place overnight after the ELSTAT Board was dispersed. In this way the president of ELSTAT was able to introduce the changes without questions from the Board members. Thus, the role of the national experts was completely ignored, inducing a conflict with the ESA95 Regulations. Consequently, the institutionally established criteria for the classification of an economic unit into the General Government sector was infringed. [5]

Goldman Sachs swaps

Another case of unsubstantiated increase of public debt in 2009 is related to the statistical treatment of swaps with Goldman Sachs. The one-person ELSTAT leadership increased the public debt by €21 billion. This amount was distributed ad hoc over the four year period between 2006 and 2009. This was a retroactive increase of Greece’s public debt and was done in contradiction of EC Regulations.

In total, it is estimated that as a result of these technically unsupported adjustments, the budget deficit for 2009 was increased by an estimated 6 to 8 percentage points of GDP. Likewise, public debt was increased by a total of €28 billion.

We consider the falsification of statistical data as directly related to the dramatization of the budget and public debt situation. This was done in order to convince public opinion in Greece and Europe to support the bail-out of the Greek economy in 2010 with all its catastrophic conditionalities for the Greek population. The European parliaments voted on the “res-cue” of Greece based on falsified statistical data. The banking crisis was underestimated by an overestimation of the public sector economic problems.

2. The Memorandum of Understanding of May 2010

The first loan agreement of €110 billion (€80 billion from the Eurozone countries and €30 billion from the IMF) was accompanied by what the President of the ECB, Jean Claude Trichet, described as “strict conditionalities”. [6] The program focused, namely, on three “key challenges”: First, to restore confidence and fiscal sus-tainability through a front-loaded fiscal effort, second, to restore competitiveness through reforms like wage and benefit cuts, and third to safeguard financial sector stability. [7]
In reality, the aim of the first loan was to offer a safe emergency exit to private bondholders that wanted to reduce their exposure to Greek bonds, in a context in which the likelihood of nominal haircuts on the value of the bonds was significantly high.

Consolidated BIS-reporting Bank Claims on Greece
end-2009, percent of total claims

Source: BIS consolidated Bank Statistics and IMF Staff estimates

The exposure of foreign banks to Greek public and private debt is recognized as the key reason behind the unwillingness of debtors to apply an early haircut on bonds: “The exposure of French banks to Greece was €60 billion, whereas Germany’s was €35 billion euro worth [8]]. ;billion euro worth8; if they were obliged to take steep losses on their Greek papers – and
on their other euro government bond holding as well – the financial system’s
viability would come under a huge cloud”. [9]
Hence, its possible to argue that the first loan agreement and the MoU were designed to rescue the private creditors of the country, specially banks, and not Greece.

3. From May 2010 to February 2012

As a result of the refusal of creditors to agree on a haircut of Greek bonds, sovereign debt since the end of 2009 until the end of 2011 increased from €299 billion to €355 billion. This is an increase of 18,78%. More
importantly, there was a dramatic change in the profile of the debt. Due to the massive sell off of Greek bonds by European and Greek banks, public debt privately held was transferred to other Eurozone member states and the IMF. The share of bonds in the total Greek debt de-creased from 91.1% in 2009 to 70.5% in 2011, while the share of loans increased from 5.2% in 2009 to 25.3% in 2011. [10]

In 2010 and 2011 the unprecedented recession (con-traction of GDP of 4.9% and 7.2% respectively) led to a failure in the achievement of nearly all the fiscal tar-gets (from tax revenues to the reduction of the budget deficit). In the meantime, the increasing popular anger against austerity led to a political crisis.

Starting from February 2011, the Troika began to ask for additional spending cuts and measures. This was a clear indication that the first Memorandum was quickly becoming out-dated. On October 26, 2011 the Coun-cil of the European Union decided a new program for Greece, amounting to €130 billion of additional loans. This represented an increase in the value of a previous offer presented in July 2011, which amounted to €109 billion. In the framework of a European Summit, the voluntary participation of private bondholders to take a aproximately 50% haircut in the nominal value of the bonds was proposed. A modified version of this propos-al, called PSI+ (Private Sector Involvement), material-ized under the second loan agreement.

4. The PSI

The progressive change in the composition of the debt paved the way for a restructuring process with the participation of private bondholders. The restructuring of Greek debt was completed on March 9 through the exchange of bonds with new ones bearing a haircut. The total amount of debt prior to the exchange was reduced in February 2012 by €106 billion. This decrease failed to reduce the debt burden of the country as a new loan agreement totalling €130 billion was settled. This amount included an initial allocation of €48 billion to be destined for bank recapitalization. It is clear then that this loan agreement was also designed to protect and minimize the losses of the financial sector. It is not a coincidence that the negotiations that took place during the winter of 2012, which led to a “happy end” for the creditors, were headed by officials of the Institute of International Finance and its then managing director and ex-banker Charles Dallara.
Among the biggest losers of PSI+ were public enti-ties and small bondholders. With the adoption of two laws, the deposits of hundreds of public entities suf-fered losses of a total value of €16.2 billion. Most of the losses were imposed on pension schemes, total-ling €14.5 billion (from a total of capital reserves of €21 billion). These losses had no impact on the total amount of outstanding debt because of their intergov-ernmental nature of this debt. Another group, which registered significant losses, were the small bondhold-ers. It is estimated that more than 15.000 families lost their life savings. This was a result of the fact that for many years sovereign bonds were promoted and sold as a zero-risk form of saving. The unequal distribution of losses opened a social wound, as highlighted by the 17 suicides that have been recorded to date among those who lost their savings. [11] The injustice is made evident if we compare the refusal of the PSI+ scheme to compensate this small group of bondholders, while at the time providing full compensation to Greek banks and the provision of “sweeteners” to foreign banks. The social impact of the PSI+ was augmented as a result of the draconian and punitive terms that accom-panied it (cuts in salaries, privatizations, dismantling of the collective bargaining system, mass redundan-cies of public employees, etc). In addition, the issue of the new bonds under British and law (which makes its restructuring with a sovereign decision much more difficult) undermines sovereign rights to the benefit of creditors.

The neutral impact on Greek debt of the 2012 re-structuring on debt sustainability became evident very soon. In the summer 2013 the same promoters of PSI+, who initially advocated for it as a permanent solution of the sovereign debt crisis, where issuing calls for a new restructuring.

5. From 2012 to 2015

The restructuring of the Greek debt was completed in December 2012 when the ECB implemented a buy back of Greek bonds. This reduced the debt further. Nevertheless, this buy back at a price of 34 cents per euro allowed some hedge funds, like Third Point of Dan

Loeb, to generate hefty profits in a short space of time making $500 million. [12]

During the period of the “Greek rescue” (2010-2014) sovereign debt experienced its biggest increase and got out of control, increasing from €299.690 billion, 129.7% of GDP, to €317.94 billion, 177.1% of GDP. In the mean-time the share of bonds decreased from 91.12% in 2011 to 20.69% in 2014 and the share of loans increased from 5.21% in 2009 to 73.06% in 2014. In particular, the EFSF’s loans constituted 68.4% of the overall Greek debt. The totally ineffective character, in an economic sense, of the two loan agreements was proved in 2015 during the discussions for a new restructuring of the debt. The need for restructuring is a result of the fact that “the two support programmes for Greece were a colossal bail-out of private creditors”. [13]

Setting aside the specific causes of the unsustaina-bility of Greek debt, it is notable that a substantial in-crease in sovereign debt took place all over the world in the aftermath of the 2007 crisis. According to the IMF, general government debt between 2008 and 2014 in-creased from 65% of GDP to 79.8% globaly, from 78.8% to 105.3% in advanced economies and from 68.6% to 94% of GDP in the Euro area. [14] Sovereign debt was a way for the private financial sector to pass the costs of the crisis of 2007 onto the public sectors across the world.

Chapters :
Chapter 1 : Debt before the Troika
Chapter 3 : Greek public debt by creditors in 2015
Chapter 4 : Debt mechanism in Greece
Chapter 5 : The conditionnalities against sustainability
Chapter 6 : The impact of the “bailout” programme on human rights
Chapter 7 : Legal issues surrounding the MoU and Loan Agreements
Chapter 8 : Assessment of the debt as regards illegitimacy, odiousness, illegality and unsustainability
Chapter 9 : Legal foundations for repudiation and suspension of Greek sovereign debt
Preliminary Report of the Truth Committee on Public Debt in PDF

Additional :
Eric Toussaint’s speech at the presentation of the preliminary report of the Truth Committee

Footnotes :

[1European Commission, 2010. REPORT ON GREEK GOVERNMENT DEFICIT AND DEBT STATISTICS. Available at: [Accessed June 12, 2015].

[2GREEK GOVERNMENT, 2010. Technical report on the revision of hospital Liabilities.

[3Ministry of Health and Social Solidarity, 2010. Press Release.

[4In March of 2010, the office in charge of official statistics, the National Statistical Service of Greece (NSSG), was renamed as ELSTAT (Hellenic Statistics Authority).

[5Among a plethora of breaches of European Law, the following violations are especially and briefly described: The criterion of the legal form and the type of state involvement ; The criterion of 50%, especially the requirement of ESA95 (par. 3.47 and 3.48) about subsidies on products ; This violation lead to false characterization of revenue as production cost ; The ESA95 (par. 6.04) about fixed capital consumption ; The Regulations about Capital Injections ; The ESA95 definition about the government-owned trading businesses (often referred to as public corporations) as not belonging to the general government sector ; The ESA95 requirement of a long period of continuous deficits before and after the reclassification of an economic unit.

[6“Loans are not transfers, and loans come at a cost. They come not only at a financial cost; they also come with strict con-ditionality. This conditionality needs to give assurance to lenders, not only that they will be repaid but also that the borrower will be able to stand on its own feet over a multi-year horizon. In the case of Greece, this will require courageous, recognisable and specific actions by the Greek government that will lastingly and credibly consolidate the public budget” ECB, 2010. Keynote speech at the 9th Munich Economic Summit. Available at: [Accessed June 12, 2015].

[7IMF, 2010. Greece: Staff Report on Request for Stand-By Arrangement, IMF Country Report No. 10/110. Available at: http:// [Accessed June 12, 2015].

[8Bastain, C., 2012. Saving Europe: How National Politics

Nearly Destroyed the Euro, Washington DC: Brookings Institution Press. Available at: [Accessed June 12, 2015

[9Blustein, P., 2015. LAID LOW THE IMF, THE EURO ZONE AND THE FIRST RESCUE OF GREECE, CIGI PAPERS NO. 61 — APRIL 2015. Available at: [Accessed June 12, 2015].

[10Hellenic Republic, Ministry of Finance, State Budget, var-ious years.

[11Belegrinis, Y., 2014. Petty Bondholders: The people who trusted the Greek State and were destroyed, December 5, 2014
Huffingtonpost. Available at: [Accessed June 12, 2015].

[12This hedge funds had bought those bonds at a price of 17 cent a euro. Armitstead, L., 2012. Dan Loeb’s Third Point hedge fund makes $500m profit from Greek bonds. The Telegraph. Avail-able at: [Accessed June 12, 2015].

[13The Eiffel Group and the Glienicker Group, 2015. Giving Greece a chance | the Eiffel Group and the Glienicker Group at Bruegel. Available at: [Accessed June 12, 2015].

[1414. IMF, 2015. FISCAL MONITOR—NOW IS THE TIME: FISCAL POLICIES FOR SUSTAINABLE GROWTH. Available at: http://goo. gl/0CVwFw [Accessed June 12, 2015].

Truth Committee on the Greek Public Debt