Corruption - the real cause of the Greek crisis

Colin Greenland, GUEST COLUMNIST

The multiplicity of explanations postulated by both local and international analysts concentrate mainly on the economic and political factors, with few mentioning or even expounding on the protagonistic role that corruption played in the Greek meltdown.

How much did corruption contribute to this Mediterranean tourism Mecca, resulting in total debts of US$175 billion owing to foreign banks at the end of 2010, according to 'Quarterly Review (June 2011) of The Bank for International Settlements (BIS)'?

How did corruption contribute to Greece's humungous public debt-to-GDP, according to the European Economic Statistics (2010 edition; tables 4.24 and 4.26)?

Today's estimates from various sources range between 140 per cent to a massive 150 per cent. Did corruption feature greatly in influencing the three prominent ratings agencies (Moody's, Standard and Poor's, and Fitch) to downgrade Greek debt to 'junk' status, or estimates of its 2011 government to figures around a gigantic €327 billion?

Was corruption the reason why Greece has the European Union's (EU) lowest Corruption Perception Index ranking (according to Transparency International), Index of Economic Freedom (according to The Heritage Foundation) and Global Competitiveness Index (source: World Economic Forum), ranking 78th, 88th and 90th in the world, respectively.

Tax Evasion

Some writers trace Greece's deep-rooted 'culture' of tax evasion from its historical period of foreign rule by the Ottoman Turks in the 19th century when Greeks 'patriotically' avoided paying tax as a form of resistance or retaliation. It is felt that this unfortunate culture continued into the 21st century where Greeks resist the complex and high levels of taxation, as detailed in sources such as Eurostat's publication titled 'Taxation trends in the European Union 2011 Edition'.

In fact, according to Euronews, then Greek prime minister, George Papandreou, bemoaned in mid-2011 that the evasion of tax and social-security contribution was costing Greece around €30 billion a year. These facts were corroborated by the Tax Justice Network (TJN), which claims that there is more than €20 billion in Swiss bank accounts held by Greeks and the amount of Greek-owned offshore companies top 10,000.

Allegations are that this culture is so endemic that 'everybody' cooperates to evade indirect taxes. Bills are avoided in transactions, with both buyer and seller colluding to keep transactions recordless, and hence taxless. As a result, despite being a developed country ranked in 2010 as the 32nd largest in the world (nominal GDP), and the 37th largest (in terms of purchasing-power parity (PPP)), the underground economy is estimated to be equal to between 25 and 37 per cent of the economy today. Accordingly, the World Bank's 'Ease of Doing Business' table (up to June 2011) ranked Greece as far down as 100.

Government Fraud

The details of Greece's economic history would be too lengthy to address here but, in summary, from about 1993, the public debt-to-GDP ratio has been consistently above 100 per cent. Critics have alleged that successive Greek governments cooked the fiscal accounts in ways that allowed them to keep borrowing and averting disaster.

Upon ascending to political power, new administrations, on realising this legacy of debt burden, regarded it as political suicide to discontinue this trend by cutting back on welfare measures. Successive leaders lacked the political courage and astute leadership, and instead took the easier path of continuing to borrow, widening the revenue/expenditure gap, interest burden and public debt-to-GDP ratio.

In 2001, when Greece needed to join the EU to access the benefits of the EMU, its debt ratios were above the required level, plus its deficit was nowhere near the stipulated minimum of three per cent. Perceptive financial analysts contend that to achieve this aim, Greek politicians used 'creative accounting' to manipulate derivative financial products, not easily understood, to magically cause the deficit to befuddle European accountants.

derivatives-focused programme

Media reports, including The Guardian (February 26, 2010), pointed out that a major US investment bank was instrumental in managing a derivatives-focused programme for the Greek Government to hide the state of its public finances from the EU authorities ahead of its membership to the euro in 2001.

In fact, at the time, Ben Bernanke, chairman of the United States Federal Reserve, revealed that the Fed was examining the conduct of Goldman Sachs and other Wall Street banks in the troubled southern European country. "We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece," he disclosed, adding that the Securities and Exchange Commission was also interested in the matter.

Government fudging of the Greek deficit numbers continued up to about 2009 when discrepancies began to surface and the 2009 deficit had to be revised from between six and eight per cent to 12.7 per cent, and then up to 15.4 per cent, as several artificial accounting was unveiled. During 2010, Eurostat confirmed these revisions and their damning comments rattled markets across Europe, causing the FTSE index in London to lose all its early gains, falling 59 points, or 1.03 per cent, in one afternoon, to 5664.5.

In summary, the current Greek crisis, like most throughout history, was the result of various factors; fiscal indiscipline, misguided policies, inefficient administration, ineffective tax authorities/ enforcement agencies/judicial system, excessive regulation/bureaucracy, immoral tax-evasion culture and an inept European Commission.

They may have all have played roles. When one dissects the details, however, forensically, the stench of corruption seems to reek heavily throughout the Greek scenario.

Collin Greenland is a forensic accountant. Comments to: columns@gleanerjm.com or cgreeny.collin@gmail.com.