Bailout Money Goes to Greece, Only to Flow Out Again

Jul 31 2015

By JACK EWING and LIZ ALDERMAN – The New York Times
FRANKFURT — The Greek businessman was nervous as he carried a suitcase stuffed with cash through security at the Athens airport a few months ago. But the distracted and overworked officials waved him through.

A few hours later the man touched down in Frankfurt, where he quickly deposited the money in a German bank.

The stash was part of 40 billion euros, or about $44 billion, that businesses and individuals have withdrawn from Greek banks since December, exacerbating the country’s financial woes.

The cash exodus is a small piece of a bigger puzzle over why — despite two major international bailouts — the Greek economy is in worse shape and more deeply in debt. It is a politically charged issue that will color the negotiations on a new financial assistance package worth €86 billion, about $95 billion.

Much of the previous bailout funds have gone to pay off Greek bonds held by private investors and other eurozone governments, rather than stoke growth. Within Greece, the money was supposed to help replenish banks’ capital, to get them lending to revive the moribund economy. Instead, it sat in banks’ coffers as bad debts piled up, and it bought time for Greeks and foreign investors to get their money out.

Where the Greek Aid Went

Since 2010, Greece has received nearly 230 billion euros in bailout funds. Most of the money has gone to pay the country’s debts and bolster the banks’ capital, rather than stoke economic growth. Here’s a breakdown of the spending, including the bailout and other funds raised by Greece.

“I know it’s not patriotic,” said the cash-toting Greek businessman, who spoke on the condition of anonymity to protect his reputation. But the money, about €14,000, represented the life savings of his retired parents, he said, and it was no longer safe in the local bank.
Since 2010 other eurozone countries and the International Monetary Fund have given Greece about €230 billion in bailout funds. In addition, the European Central Bank has lent about €130 billion to Greek banks.

The latest financial aid package is following a similar pattern to the previous ones. Only a fraction of the money, should Greece get it, will go toward healing the economy. Nearly 90 percent would go toward debts, interest and supporting Greece’s ailing banks.

The European Commission has offered to set aside an additional €35 billion development aid package to jump-start the economy. But the funds are difficult to obtain and will become available only in small trickles later in the year.

Greeks understandably feel that the latest bailout package is not likely to benefit them very much.

“The bailout is mostly going to banks and our creditors,” said Nikos Kalaboyias, 54, a grocery store owner in central Athens who said his clients had stopped shopping for all but the most basic goods, putting the business he has run for more than a decade in jeopardy.

“I hope it will help, but the banks are not lending, and I see no sign that any money is going to help this economy,” he said.

In Germany and other northern European countries, the opposite sentiment prevails. The wealthier countries lent huge sums to Greece, the thinking goes, and the Greeks wasted it.
“The country’s economy is destroyed,” Wolfgang Schäuble, the German finance minister, said in an interview published last week in the German magazine Der Spiegel. “The Greek government has to answer for that.”

In the meantime, another bailout complicates one of Greece’s biggest problems: its mountain of debt. The extra aid will only add to that pile, stifling the potential for an economic rebound.
In the talks between Greece and its creditors, there is a growing recognition that Greece’s debt burden must be eased. On Thursday, a senior official at the International Monetary Fund said that European countries needed to come up with a concrete plan for easing Greece’s debt before the fund would participate in any new bailout.

But leaders elsewhere in Europe believe that Greek leaders have not done enough to reduce debt and achieve better growth, by selling state assets, cracking down on tax evasion or reducing red tape.

“Some debt relief will be needed,” said a senior official at the European Central Bank who spoke on condition of anonymity. “But it’s important that it be linked to reforms which ensure that Greece can grow again.”

Growth was never the primary consideration when Greece first started receiving bailouts.

Back in 2010, political leaders in the eurozone as well as top officials of the International Monetary Fund were terrified that Greece would default on its debts, imposing huge losses on banks and other investors and threatening a renewed financial crisis. The debt was largely held by Greek and international banks. And Greece, officials feared, could be another Lehman Brothers, the investment bank that collapsed in 2008, setting off a global panic.

Forcing banks to take losses on Greek debt “would have had immediate and devastating implications for the Greek banking system, not to mention the broader spillover effects,” said John Lipsky, first deputy managing director of the I.M.F. at the time, during a contentious meeting of the organization’s executive board in May 2010, according to recently disclosed minutes.

To prevent Greece from defaulting on debts, creditors granted Athens a €110 billion bailout in May 2010. But that did not calm fears that other heavily indebted countries might also default. The Greek lifeline was soon followed by bailouts for Ireland and Portugal.

When Greece again veered toward a default in summer of 2011, it got a second bailout worth €130 billion, not all of which has been disbursed.

Instead of writing off those countries’ debts — standard practice when a country borrows more than it can pay — other eurozone countries and the I.M.F. effectively lent them more money. One of the main goals was to protect European banks that had bought Greek, Irish and Portuguese bonds in hopes of making a tidy profit.

The banks and investors did not escape the pain. In 2012, when Greece was again at risk of default, investors accepted a deal that paid them only about half the face value of their holdings.

Much of the aid dispensed to Greece has revolved around banks. Since 2010, Greece has received €227 billion from other eurozone countries and the I.M.F. Of that, €48.2 billion went to replenish the capital of Greek banks, according to MacroPolis, an analytics firm based in Athens. More than €120 billion went to pay debt and interest, and around €35 billion went to commercial banks that had taken losses on Greek debt.


How Germany Prevailed in the Greek Bailout

By NEIL IRWIN – The New York Times

BERLIN — At the height of crucial negotiations over the latest bailout of Greece this month, Germany circulated a proposal that undercut decades of promises about the march toward deeper European unity: Greece, it said, could be offered a temporary exit from the euro.

The proposal reflected some muscle-flexing by hard-liners in Berlin. But it was first broached privately not by the Germans, but by Slovenia, a tiny eurozone member whose finance minister demanded a “Plan B” for a leftist Greek government he compared to the former Yugoslavia’s Communists.

Slovenia’s proposal was a double triumph for Germany. Greece’s economic crisis not only has done nothing to soften Germany’s insistence on adherence to rules, fiscal austerity and dire consequences for countries that fail to live up to their obligations, but it has also actually reinforced the willingness of Germany’s allies in Europe to impose even harsher conditions on Athens.

Yanis Varoufakis, Greece’s former finance minister, wrote in a blog post Monday that the country would have “been remiss had it made no attempt to draw up contingency plans.”

The European Central Bank effectively forced Greece’s banks to close on June 29, when it capped the emergency cash it provides to them at €89 billion. That limit will now be €89.9 billion.

From Lisbon to Latvia, from creditor countries to debtors, among some left-wing leaders as well as conservative governments, the response to Greece reflected a deep aversion to government spending as a tool to fight economic slumps and faith in deregulated labor markets. It is a vision of austere, market-based policies that are a break with Europe’s past.

Germany persuaded European leaders to rally more firmly around what might be called the Berlin consensus by a combination of patient diplomacy and clever brinkmanship and by exploiting alarm over the antics of Greece’s leaders, numerous participants in the crisis talks recounted in interviews.

It was a victory, many of those participants acknowledge, that reflected the politics of today’s Europe rather than a viable plan to help Greece’s economy in the short run. Despite forecasts that recovery would follow the bitter medicine Germany and lenders like the International Monetary Fund have been prescribing for Greece for five years, the country is stuck in a depression-like slump. The latest package tightens austerity rather than relieving it.

In the view of many economists, particularly in the United States and Britain, the continued imposition of a budget-cutting-first approach during an extended downturn is holding back recovery not just in Greece but also across the Continent, which continues to suffer from towering unemployment and tepid growth years after the United States began recovering from the financial crisis that started in 2008.

The eurozone unemployment rate is above 11 percent, more than double that of the United States. Its economic output in 2014 was lower than in 2007, before the global crisis.

Youth unemployment is particularly high, raising the possibility of long-lasting damage to the Continent’s economic potential as young people are idle at a time when they would normally be developing key skills. Nationalist and populist political movements on both the left and the right, drawing strength from economic dislocation, are undermining support for European unity.

“The belief that the euro can be used to bring about the economic ‘re-education’ of Europe’s south will prove a dangerous fallacy — and not just in Greece,” Joschka Fischer, a left-leaning former German foreign minister, wrote this week.

The rising influence of the Berlin consensus despite these trends has much to do with the political backlash in Europe to the Greek government under Prime Minister Alexis Tsipras and his radical-left Syriza party. Mr. Tsipras’s heated arguments against austerity, however much they reflected the views of many economists, were undermined at least in part by his government’s inconsistent policies and frontal challenges to German leadership.

But previous efforts by the current governments of France and Italy to encourage more flexibility in imposing austerity have also made little headway.

Like Greece, they have run up against a combination of subtle German diplomacy by its seasoned center-right leaders, Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble; German credibility and power derived from a strong domestic economy; and, perhaps most important, domestic political considerations in countries across Europe that are encouraging their leaders to express greater devotion to the German way of doing things.

That philosophy, as applied since the financial crisis began upending global economies in 2008, transcends typical lines of right versus left (one of the chief engineers of the latest Greek bailout, which demands new austerity and major reforms, was the Dutch finance minister, who is from his country’s Labour Party). And it is not simply a matter of creditor versus debtor (Portugal, among other debtor countries that signed on, insisted Greece make the same difficult reforms it has).

In the end, in a crucial debate that set up Europe’s position against Greece in negotiations the week of July 12, 15 nations embraced the hard-line position with only three, France, Italy and Cyprus, isolated as preferring a more generous approach open to debt forgiveness.

“Yes, certainly Germany has been in the driver’s seat through this process, there’s no denying it,” said Alexander Stubb, the Finnish finance minister and one of Berlin’s hard-line allies. “Part of it is personalities. Part of it is Germany’s economic track record. But it’s also that they know their stuff. They go into negotiations well prepared and with a determination to stick to the rules we’ve agreed on.”

Germany has long been known as Europe’s “reluctant hegemon,” for its reluctance to be too assertive in diplomacy given its history of militarism. But the unique circumstances of the Greek crisis, especially since the start of this year, have helped make it a country that is both a little less reluctant and a little more of a hegemon.

Merkel’s Deft Touch

There is a common thread in Ms. Merkel’s uniquely influential role guiding the politics of Europe throughout the financial crisis and its aftermath. At the same time that she has been the leading voice for the principle that countries must follow the rules and pay the consequences if they do not, she has also embodied the strong German instinct to keep knitting Europe closer together.

To do so, she has applied a deft diplomatic touch. The German government maintains a fleet of Airbus planes marked “Bundesrepublik Deutschland” for its high officials, and Ms. Merkel has made full use of them in her decade at the head of Western Europe’s largest economy.

She had visited what were then all 27 nations of the European Union by the end of her first four-year term in office. She will often visit a country and return home the same day, much the way an American president makes the rounds to various states. She also cultivates foreign leaders at home, hosting them in Berlin with grand welcome ceremonies with military honors.

Within meetings of the European Council, she is almost uncannily immersed in the details of whatever is under discussion, crossing out lines and replacing words with a focus that might be expected of a former engineer.

Meanwhile, Mr. Schäuble, Ms. Merkel’s finance minister, is a hard-nosed politician who was paralyzed from the chest down by an assassination attempt in 1990, and he is more popular in Germany (70 percent approval in a recent ARD-DeutschlandTrend poll) even than Ms. Merkel (67 percent).

Ms. Merkel and Mr. Schäuble both bring long experience to the negotiating table that few can match. Mr. Schäuble has been in the German Parliament since 1972, two years before Mr. Tsipras was born.

When Mr. Schäuble circulated the proposal raising the prospect of a temporary Greek exit from the euro, he was able to do so knowing he had support from a number of other countries, like Slovenia, which first put forward the idea in April during a closed-door meeting in Latvia.

Ms. Merkel and Mr. Schäuble regularly mix forceful advocacy of German positions with a willingness to pull back in the interest of maintaining unity, above all with the other great power of the eurozone, France (Ms. Merkel and President François Hollande of France speak on the phone almost daily).

Mr. Hollande played the role of intermediary between Greece and its European creditors during the July negotiations. After Germany broached the notion of Greece’s temporarily leaving the eurozone, Ms. Merkel set aside the idea after objections from France and Italy.

And while Mr. Schäuble — known as tough and competitive — has a reputation as a hard-liner, he, too, knows the diplomatic art of using deference. In meetings of the European finance ministers, Mr. Schäuble rarely speaks first, generally leaving that role to a smaller country, before coming in with his own comments on the subject at issue later.

Greece’s Debt Crisis Explained

Behind the efforts to resolve the country’s debt problems and keep it in the eurozone.

“Mr. Schäuble has his vision, his point of view, that he puts on the table,” said Johan Van Overtveldt, the Belgian finance minister. “But he never says, ‘Take this or leave it.’ He has been very democratic. I can’t remember one point in time where there was a diktat.”

Indeed, while from an American or British vantage point the Germans often seem like the heavies in negotiations over the Greeks, they have actually been restrained by the standards of German voters and some Eastern European countries.

“Mrs. Merkel has behaved in an incredibly modest way,” said Marcel Fratscher, president of the D.I.W. Berlin think tank. “You couldn’t find her saying a bad word about Greece or anything populist, and even though German public opinion was very strongly in favor of a Grexit and no bailout deal,” he said, using shorthand for a Greek exit from the eurozone, “they secured a deal with no Grexit.”

The Greek government often took a rather different approach.

Conflicting Greek Signals

When Mr. Tsipras’s Syriza party won the Greek elections in January, it was determined to change the entire playing field for European economic policy.

But rather than rallying the opponents of austerity to their cause, the Greeks sent so many conflicting signals that even potentially sympathetic governments became exasperated, never more so than when Mr. Tsipras abruptly decided in late June to subject European demands for a new bailout package to a national referendum.

A dynamic that might otherwise have been debtor countries versus creditor countries or North versus South instead became Everybody versus Greece.

The Greek economy had been devastated by a series of spending cuts and tax increases demanded since 2010 by the “troika” of the European Commission, the International Monetary Fund and the European Central Bank (or “the institutions,” as Mr. Tsipras’s government asked that they be called to avoid the negative connotations that had built in Greece around the term “troika”).

When elected, Mr. Tsipras pledged to force Europe to focus on spending money to encourage growth, writing down unmanageable debts, and helping Greece and other troubled economies like Italy and Ireland get back on their feet. He tried to rally support among Europe’s left-wing parties in hopes of generating a mass democratic uprising.

“The issue of Greece does not only concern Greece,” Mr. Tsipras wrote in the French newspaper Le Monde in May. “Rather, it is the very epicenter of conflict between two diametrically opposing strategies concerning the future of European unification.”

But while Mr. Tsipras attracted allies like Podemos, a similarly inclined left-wing party in Spain, the mainstream governing parties of Europe viewed Syriza’s ideology as more of a threat than a way forward. They feared that making major concessions to Greece would only strengthen their own domestic opponents when many European electorates were flirting with anti-European populist movements.

“Calling the referendum was the moment when 95 percent of the creditor countries said: ‘That’s it. I don’t want to be blackmailed by Greece, and don’t want to live in a union with a country that blackmails me,’ ” said Guntram Wolff, the director of the Bruegel think tank in Brussels.

At a crucial moment in late June, the finance ministers met and excluded Yanis Varoufakis, then Greece’s finance minister, from the room, a symbol of how isolated the country had become.

After the decision, the European Central Bank president, Mario Draghi, said in the closed-door meeting, “I guess we can go back to calling it the troika.”

Mr. Tsipras was not the first European leader to try to push the Continent’s politics away from austerity. Mr. Hollande did the same after his election in France in 2012, as did Matteo Renzi when he became Italian prime minister last year.

But they have had little more success than the Greeks in altering policy or even shifting the terms of the debate. Mr. Hollande, for example, has advocated, so far unsuccessfully, “Eurobonds” in which European countries borrow money collectively that could be used to fund infrastructure projects or other growth-spurring investments without exposing any individual country to the risk of excessive debt.

Part of the reason is the rise of domestic political constraints on anything that could put taxpayers in one country at risk for economic mismanagement in another. Just as the unpopular United States bank bailouts of 2008 and 2009 helped usher the Tea Party’s small government philosophy into prominence in American politics, the use of billions of euros in European taxpayers’ money to aid Greece has been a boon for the populist right.

In Slovakia, a coalition government fell because of its support for a previous Greek bailout. In Finland, a right-wing populist party now known as the Finns is part of the governing coalition and opposes concessions to Greece.

In particular, the nations allied against the Tsipras government fear that writing down Greek debts further would only encourage other countries with high debt burdens — particularly Italy, with debt of 132 percent of its gross domestic product.

The leaders of the debtor countries themselves, meanwhile — especially Ireland, Portugal and Spain — have complex incentives of their own.

Those economies have suffered from years of misery amid the imposition of fiscal austerity, including a Spanish unemployment rate that has been above 20 percent for five consecutive years.

There are modest flickers of hope; the Spanish economy grew 1.4 percent in 2014, for example, after contracting for the three previous years. So leaders of Spain and the other debtor countries can point to that progress as evidence that they were right all along to acquiesce to painful cuts and reforms.

“We must appreciate the difference between serious policies and unserious policies that lead to situations such as those in Greece, where people can’t access their own money,” said Prime Minister Mariano Rajoy of Spain in a recent news conference.

For now, the core of Europe remains 19 countries with very different economies, their own budgets, and yet a single currency. That means when some countries are persistent debtors and others persistent creditors, it becomes hard — as the last five years has shown — to fix the imbalance.

“Debtors and creditors in the end never have a good relationship,” said Hans-Werner Sinn, a leading German economist. “It is like between friends. If you have a friend you don’t give him a loan, you give him a gift. You make a gift and don’t expect to get it back. But when you become his creditor he stops being your friend.”

Reporting was contributed by Alison Smale and Melissa Eddy from Berlin, James Kanter and Andrew Higgins from Brussels, and Jack Ewing from Frankfurt.

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