The Greek Debt Crisis — How Did It Get Here?

The ongoing Eurozone crisis has taken on the dimensions of a long, repetitive Greek drama. After years of imposed austerity, Greece voted against accepting the bailout terms proposed by its EU creditors in a referendum in early July 2015, only to see the leftist government under Prime MinisterAlexis Tsipras accept another bailout in exchange for yet another infusion of Euros. In the absence of such a deal, Greece would have had to default on its loans and would have been cut off from future disbursements of Euros. Such a scenario would have precipitated a Greek exit from the Eurozone, or “Grexit,” an outcome which is still a possibility given the fragile state of the Greek economy.

So how did Greece wind up in such a precarious position? The combination of questionable economic practices, a poorly-funded welfare state, and the massive cost of hosting the 2004 Summer Olympics worked to bring Greece to its knees. However, the revelation in 2008 that Greece had been under-reporting its deficit was the final straw, as lenders’ confidence in the Greek government’s ability to repay its loans quickly deteriorated, and the Greeks had to go in search of  bailout as their ability to borrow quickly collapsed.

Thomas Miller, who served as a political officer, Deputy Chief of Mission, and then Ambassador to Greece, explains his own experiences in Greece and the shoddy economic practices that caused the current economic crisis. Thomas Niles served as Ambassador to Greece from 1993-1997 and also lends his observations of the problems with the Greek economy at that time.  E. Wayne Merry worked as Deputy Political Counselor at the Athens embassy from 1987-1990, during which time he observed the origins of the economic problems between Greece and the EU.

You can also read about Japan’s Lost Decade.

A Problematic Reputation Among Foreign Investors

Thomas Niles, Ambassador to Greece, 1993-1997

If you are going to invest in the European Union market, do you invest in Greece? Probably not. Since Greece has become a member in the European Union there has been little new U.S. investment and some disinvestment. The latter was largely because of the crazy economic policies pursued by the Papandreou government in the 1980s, which featured nationalizations and enormous budget deficits.

One of the things I tried to emphasize with American businessmen was the potential of Greece as the window into southeastern Europe. The problem is that southeastern Europe is not that attractive either. But, as people look ahead and see Bulgaria, Romania, the countries of the former Yugoslavia beginning on the path of economic development, Greece takes on new importance.

In that sense the city of Thessaloniki could again become the hub of an economic region, as it was during the time of Alexander the Great, the Roman, Byzantine and Ottoman Empires. The potential is there but it has not been realized.

One of the problems that any ambassador would run into in Greece was the inability of the Greek government to stick with its agreements. This frustrated investors who came into Greece in good faith under certain assumptions only to find that six months later things had changed.

Frequently that had to do with personnel changes at the top. Ministers didn’t always pay attention to the commitments of their predecessors. I spent a lot of my time going around to ministers saying that a deal is a deal and they couldn’t just push these contracts aside.

This was really difficult in the case of licenses to run casinos in Greece. During the New Democracy government, the Greeks issued casino licenses, most of which to American companies. Then the government changed and they decided they weren’t so keen on casinos. In the meantime American companies had come in and spent a lot of money on licenses, casinos and hotels.

My role was to tell them that whether they liked casinos or not was irrelevant now that they had a law on the basis of which the previous government had sold licenses. I told the Greeks that when you jerk a company around the word spreads and soon Greece would becomes known as a dreadful place to do business because the rules are constantly changing.

I can’t say that I was satisfied with the results I achieved in the commercial area. We established a better framework for the future but it was frustrating dealing with the Greek bureaucracy.

By the time Papandreou left office in 1989, Greece had become heavily dependent upon funding from the European Community, which amounted to around five or six percent of the Greek GDP.

“The Greeks just would not, or could not, do anything by the rules”

Wayne Merry, Deputy Political Counselor, Embassy Athens, 1987-1990

MERRY: The future financial crisis between Athens and Brussels was evident even that far back [to the late 1980s]. Our Economics Section did excellent analyses which showed in stark terms how far outside of European standards the Greeks remained. They cheated on EU rules by orders of magnitude more than anyone else. The shamelessness of Greek behavior was infuriating to the other Europeans.

I heard this a lot from European colleagues. Many of them said bluntly that letting Greece into Europe had been a mistake. An Irish colleague told me Dublin was the only EU capital which wanted Greece in, because the Irish were no longer viewed as the bad boys of Europe, the Greeks being so much worse.

When you keep in mind that, without the European Union and its subsidies, Greece has a Third World economy, it is striking how little the Greeks felt they even needed to go through the motions of adhering to European rules.

During my final year, I was acting Political Counselor during the time when Greece held the six-month rotating presidency of the EU. I can say with complete candor it was the most aggravating six months of my professional life. I later went through two attempted coups in Moscow, but would do that again in a heartbeat rather than another Greek EU presidency.

They just would not, or could not, do anything by the rules. To make my job more difficult, Washington would not, or could not, comprehend what the Europeans all understood, that nothing could get done during a Greek presidency. The other Europeans were willing to wait for the Spanish presidency, but Washington insisted the embassy get answers from the Greeks that simply were not forthcoming.

Rather than give a wrong answer and be embarrassed, the Greeks gave no answers. Washington blamed the embassy, of course, not the Greeks. Today, the shift of the Greek burden from America to Europe is pretty much complete, thank God.

The current Greek financial crisis is not the U.S. Government’s problem. Nobody at the Treasury Department or the Federal Reserve will have to shell out money to save Greece. The only Washington institution that’s involved is the International Monetary Fund.

In those days, by contrast, there was a huge asymmetry between the reality of Greek importance to the United States, which was small and due to American ethnic politics, and the Greek perception, which was that they were the absolute center of American interests and were the most important country in the world to the United States.

“There was concern the Greeks were spending a tremendous amount relative to the GDP”

Thomas Miller, Ambassador to Greece, 2001-2004

All you had to do was look at the streets of Greece and Athens then or now, and you could see it. And coming from all directions. Coming from Africa, that’s pretty obvious. But also coming from Afghanistan, Iran. And a lot of this was through the islands in the Aegean.

Once you got to the islands, you were in Greece, and the Greeks, of course, accused the Turks for years — this is one of the irritants in their relationship — they would say to the Turks, “You’re just sending them on and they end up here.” And of course, when Schengen —  the common border came into effect, the rest of Europe woke up and said, “Jesus, when you’re in Greece, you’re in Europe.” And they got really exercised over this.

The Greeks tried to do what they could. It never really worked that well, because there was so much territory to police. And they would periodically roust people. You see it even today. The police come by, and the guys who have the sheets with all the goods, the phony Gucci bags and all that stuff, the police will be walking by and leave them alone, and then every once in a while they’d do a sweep to show that they are doing their jobs.

These guys then gather the sheets up with the phony Gucci bags, phony Rolex watches and scatter and then 10 minutes later they’d be back where they were. And that’s always, that’s just the landscape of an Athens street today.

Q: What were you getting from your economic reporters in your embassy about Greece and its debt?

Well, any country unless you’re in the bowels of the ministry itself, you have to go on the basis of the [deficit] figures they put out. And when they’re putting out phony figures, as it turned out was the case in Greece, you know, it changes the whole dynamic.

Did we know at the time they were phony figures? No. Am I surprised now? Not particularly. But even the figures they were putting out were pretty horrendous.

The phony figures were twice as good as they actually are, but even those phony figures were not that good, you know, were pretty bad. The debt was massive, the debt service was quite large, the deficit was quite large.

And other things we knew, like for instance the fact that Greek banks were buying so much Greek debt. And so, it was like a house of cards. If the Greek banks are buying all the debt and the debt’s value is called into question, then the value of the banks is called into question. But the reality is this was happening around the world.

And there was basically a credit pyramid that was going on around the world — including this country, just done in different ways — that I don’t think any of us were focusing on until things imploded in 2008. And you know, Greece was just one of the worst examples and one of the most extreme examples of what was going on. And then what happened, what we’ve seen happen since then was a total loss of confidence in Greece’s ability to service this debt.

And really underlying that was the kind of stuff we see on the streets of Greece, and that is the fact that the labor unions are so powerful that the kinds of austerity measures that would have had to be taken that are now being taken if they’re indeed enough, which are the kinds of things that no prime minister could carry through it. You know, he would lose support; he’d be tossed out of office. So things got so bad. Prime Minister Papandreou thus far has been able to sustain it. But it was a different time then.

And again, I want to emphasize one point. When I was there—most of the time I was there it was the build-up to the [2004 Summer] Olympics. So in Greece and elsewhere around the world in terms of the Greek economy there wasn’t a focus on deficits.

The feeling was like past Olympics, you spend a lot, but you get a lot more back directly through the tourism that comes through the Olympics, but indirectly through the infrastructure that you would have had to build anyway. And this was true in Sydney, this was true in Atlanta, this was true in Barcelona. You go back and—you know, in Seoul—every Olympics, the same kind of story.

There was a bit of concern that the Greeks were spending just a tremendous amount relative to the GDP (gross domestic product). And I remember saying to the Greeks in many cases, often on security issues or security purchases, procurements — you don’t need the Mercedes, you can get the Chevy—and my feeling was they were often buying the Mercedes. They bought a security system that was put together by an American company that was what? 800 million dollars? And at the time it struck me that they didn’t need all the bells and whistles, they could have gone with less. But I think they felt a need to go with all the bells and whistles so that no one would doubt their commitment on the security front. So you see the dynamic that’s happening.

Greece had come into the EU in 1981 and now there’s comments from some EU members saying we shouldn’t have let them in, we should have looked at the books a little bit more carefully. Greece got — particularly in the ‘80s and ‘90s — they got a tremendous amount of EU support funds, I mean billions and billions and billions of Euro-equivalents or dollars, whatever at the time. And this enabled them to build a lot of their infrastructure, roads, what have you. I think in hindsight a lot of that money was probably wasted.

But Greece was always seen in most instances as kind of one of the smaller countries, not necessarily an irritant, but not necessarily a big guy. The Greeks always resented that the big guys kind of ran the show, the French and the Germans and the Brits to a large degree. And they were never really happy that they didn’t have much of a say in things.

I don’t recall that there was a lot of focus on their economic situation then. I mean there were a number of countries that people would kind of roll their eyes when they were talking about the situation. But the feeling was that Greece had a number of very healthy years particularly in the lead-up and after the Olympics, and that somehow, in a Spain kind of way after the Barcelona Olympics in 1992—that somehow you’d grow yourself out of these problems.

So now, there were a couple of areas that were irritants between Greece and some of the EU countries. Kosovo was definitely one. The whole Bosnia—the whole Serb connection. To understand Greek foreign policy you just have to understand the importance of orthodoxy and sticking by your Orthodox brethren. Even though the Serbian Orthodox and the Greek Orthodox were different, Orthodox segments or parts of—they would stick by them. And so Greece was always on a different side from us and most of the Europeans on Kosovo, on Bosnia. Even though it didn’t stop them from sending peacekeepers to Bosnia.

The other irritant was Turkey. And that was a big, big irritant because Turkey was a member of NATO. And there was always an increasing need to overlay NATO and the EU because basically they have the same membership except for a few countries, and one was Turkey. Turkey was in NATO but not in the EU. And so efforts to have an EU military capability always suffered with Greek vetoes because they didn’t want Turkey to have any role in this. And that kind of continued through the ‘90s.

What happened in 2000 was there was a very significant earthquake in Turkey and then shortly after that there was a very significant earthquake in Greece. And largely through the efforts of the current prime minister in Greece right now, George Papandreou, and his Turkish counterparts, they sent a lot of humanitarian help to each other. And that kind of broke down a lot of the hostility. It’s still there to certain degrees but no longer is Greece acting as the veto on Turkey for getting in the EU. In fact, Greece is often the biggest cheerleader saying it’s better to have these guys inside the tent than outside. Other than that their relationship with the EU was, they were a small player in a bunch of big guys.

“What were we going to do about it? This is a sovereign country.”

And we all knew that you could retire from the Greek civil service in your early 50s and get a pension of 80, 85 percent of your salary.

Well, it doesn’t take a rocket scientist to figure out that that’s going to eventually break the bank. It doesn’t take a rocket scientist to figure out that with the demographics changing, with more and more people living longer, there were less and less people to support that kind of system. All of that of course we knew.

But Greece was just the extreme example of much of Europe, much of Western Europe. What we suspected but didn’t really know was the double bookkeeping, this other stuff that came up later. We knew by the Olympics — I’m getting out a little bit ahead of myself — when I was Ambassador, that they were spending just gobs of money, untold sums of money on the Olympics….And there’s only so much that you can spend when you’re a country of 11 million.

I think the entire Olympic bill was about $10 billion. And we knew that it didn’t all add up, and we knew that there were a lot of state enterprises. Again, this was a pretty much of a socialist state. There were a lot of state enterprises. And the premium was on saving jobs, not turning a profit or making money or being productive or any of the rest of the stuff.

So all of that stuff we knew, but what were we going to do about it? This is a sovereign country. We weren’t going to march in there with the troops and say, “You’ve got to get your finances in order.”