As Greece teeters on the edge of sovereign default of around $300 billion and sends shudders of premonition throughout the global economy, attention is moving to what exactly went wrong with this country?s public finances and who should bear the blame for it.
This post-mortem is explosive because Greece has a cacophonous domestic political atmosphere marked by fierce partisanship and rebellious forms of expression. Hard questions about the real culprits behind soaring debt and economic mismanagement can make or break governments and political careers in crisis-ridden societies. Greece is a perfect current example of noisy ex post facto soul searching with the ship having almost sunk.
The ruling socialist government is trying to wash its hands of the blame by pointing fingers at its predecessor regime of conservatives, which was in power between 2004 and 2009 when state spending ballooned beyond prudent limits and went into oiling the bloated and dysfunctional public sector. As is the wont in politically charged recriminations, the incumbents are muckraking about a shady character who headed Greece?s National Statistical
Service under the conservatives and who is accused of fudging figures to project a relatively manageable budget deficit when the reality was a lot grimmer.
The shocking disclosure late last year that triggered the current crisis was that Greece?s actual deficit was a whopping 12.7% of GDP, and not 3.7% as was projected by the Statistical Service in early 2009. The statisticians have hit back by presenting themselves as mere scapegoats and blaming the finance ministry of the time for forcing them to report healthier figures. All kinds of debates have since been occurring within Greece about an economic system rotten with political pressures and the lack of genuinely independent statistical bodies. If China was once pooh-poohed as a statistical falsifier about its economic achievements, the joke doing the rounds in Europe today is that the definition of Greek statistics is lies.
As more skeletons fall from the cupboard, it is also coming to light that Greece?s profligacy was abetted and managed for several years by the top Wall Street financial firms via complex instruments. In 2001, before spendthrift Greece could enter the Eurozone by satisfying the deficit limit rules of the currency union, Goldman Sachs entered the picture with a tricky currency trade deal that would hide billions of dollars of additional public borrowing and not make it look like a debt on balance sheets. For this piece of consultancy, which helped Greece join the Euro by hook or by crook, Goldman received fees of $300 million.
In 2005, Goldman sold to the National Bank of Greece an ?interest rate swap?, one of the notorious derivatives that have come under the scanner since the Wall Street implosion of 2008. Greek critics of such dubious debt-hiding transactions had warned their government of the mounting long-term liabilities to the likes of Goldman, but to no avail. According to the NYT, Greece mortgaged revenue-generating assets like the national lottery, airports and highways as part of the agreements with Goldman in what amounted to ?a garage sale on a national scale?.
Goldman Sachs is reported to have again tried a redux of 2001 when its president Gary Cohn landed in Athens in November 2009 with a similar debt deferral proposal that would continue to fool investors and the EU. This time around, Greece did not oblige. But the damage had already been done over a decade of spiralling foreign debt that was repackaged and postponed with the Wall Street?s wizardry. We now know that similar borrowing binges were occurring in the rest of the PIGS (Portugal, Italy, Greece and Spain) economies courtesy of the financial dodging expertise of Goldman, JPMorgan and the entire rabbit?s warren of hedge funds.
Economies of developing countries, especially in Africa and Latin America, have endured decades of bitter experiences of falling into debt traps that sap productive resources, benefit speculative financiers and weaken state capacities to govern. In their cases, the Bretton Woods institutions acted as economic restructuring consultants and funding taps that only opened if the recipients met crushing conditionalities.
John Perkins?s book, Confessions of an Economic Hit Man, reveals how highly-paid professionals with knowledge of macroeconomics and world affairs were deployed to convince political and financial leaders of poor countries to accept massive ?development loans? from the World Bank and USAID. Once ensnared, the supplicants would be subjected to pressure on different issues from Washington.
In the PIGS economies, it was not so much strategically motivated hit men working for the US government but rather some freewheeling American financial corporations that could make a killing out of clients who were addicted to reckless state spending. This week, as the EU began investigating the Wall Street shenanigans in Athens, Goldman defended itself for its Greek misadventures by arguing that they were legal actions consistent with the regulations of their time.
Of course, much of the fault lay with the Greek politicians who were seduced by the Wall Street consultants who, on their part, were simply pursuing the bread-and-butter business of circulating wealth for profit. Had Athens been more disciplined in organising its finances, there would not have been a window of opportunity for Goldman and company to exploit its vulnerability.
But southern Europe?s debt-proneness has systemic consequences of which the Wall Street cannot easily exonerate itself. While there is no evidence to suggest that American investment banks deliberately dug the graves of PIGS to weaken the euro, the disastrous social costs of their financial chicanery call for reparations. It may not be unfair if the EU demands that Goldman, which now leads the earnings chart in Wall Street, should accept moral responsibility and contribute to bailing out Greece.
The author is associate professor of world politics at the OP Jindal Global University