Debt before the Troika

Chapter 1

23 July 2015 by Truth Committee on the Greek Public Debt

Chapter 1, Debt before the Troika, analyses the growth of the Greek public debt since the 1980s. It concludes that the increase in debt was not due to excessive public spending, which in fact remained lower than the public spending of other Eurozone countries, but rather due to the payment of extremely high rates of interest to creditors, excessive and unjustified military spending, loss of tax revenues due to illicit capital outflows, state recapitalization of private banks, and the international imbalances created via the flaws in the design of the Monetary Union itself. Adopting the euro led to a drastic increase of private debt in Greece to which major European private banks as well as the Greek banks were exposed. A growing banking crisis contributed to the Greek sovereign debt crisis.

Greece’s public debt is a legacy of past trends. This first chapter analyses the growth of the Greek debt since the early 1980s. Our main findings are the following:
• Rather than being a product of high public budget deficits, the increase of debt was clearly related to the growth in interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. payments. Greece entered the crisis with a debt inherited over the period of debt accumulation of 1980-1993; the main contributor to debt accumulation was the ‘snowball effect’ – present when the implicit interest rate on the debt is higher than GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
nominal growth. This explains two thirds of the increase of debt between 1980 and 2007.
• Public expenditure was lower than that of other Eurozone members. The only primary public spending which was higher (as a ratio to GDP) was in defence expenditures, about which a series of corruption scandals need to be further investigated. The excessive spending in defence constitutes €40 billion of the debt created from 1995 to 2009.
• Primary deficits feeding the debt have been further affected by poor performance in income tax col-lection and employers’ contributions to social security collection. These were much lower than the rest of Eurozone, and are attributed to fraud and illicit capital flows - explained below - benefiting only a minority of the population. The cumulative losses due to these two types of income from 1995 to 2009 explain the remaining growth of debt.
• Illicit capital outflows provoked further tax revenue loss, amounting to €30 billion from 2003 to 2009. This was accompanied by lower amounts of spending for other expenditures, like social security, education and R&D as compared to other EU countries.
• Adopting the euro led to a drastic increase of private debt, from 74.1% to 129.1% of GDP, to which major European private banks, as well as Greek banks, were exposed. This provoked a banking crisis in 2009, which triggered the Greek sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crisis.

1. The growth of the debt: an overview

Three distinct phases can be observed in the evolution of public debt between 1981 and 2009 (Figure 1.1):
• 1981-1993: after Greece joined the European Union in 1981, we observe a strong increase of public debt, from 25% to 91% of GDP.
• 1993-2007: quasi-stabilization from 91% to 103% of GDP. During this period, Greece enters into the Euro-zone in 2001 with a debt of 100% of GDP and a deficit close to 3%, which will be impugned in 2004. [1]
• 2007-2009: sharp increase from 103% to 113% which, after a contested [2] statistical revision, jumps to 127% of GDP, amounting to approximately €300 billion euros.

Debt-to-GDP ratio 1980-2009
The annual change in public debt is the addition of three elements:

Source : Ameco

• Primary budget balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. : measured as the difference between expenditures excluding interests payments and fiscal revenues
• Interest payments
• Stock-flow adjustment measured as the statistical difference between the change in the debt stock Debt stock The total amount of debt and the total annual deficit
Once this decomposition is applied, as in Figure 1.2, the major role that interest payments play in increasing public debt is clear.

The components of increase in debt (€ billion)

The debt-to-GDP ratio can be disaggregated into three distinct elements:
• Primary budget balance (in % of GDP)
• Stock-flow adjustment (in % of GDP)
• ‘Snowball effect’ (in % of GDP) which is positive when the implicit interest rate paid to service government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. is higher than the nominal GDP growth rate.

Table 1.1 below summarizes the contribution of these different factors to the change in the debt-to-GDP ratio. Between 1980 and 1993, the debt-to-GDP ratio increased by 70.4 percentage points of GDP: the ‘snowball effect’ contributed 58% to this change, cumulated primary balance by 32%, and tock-flow adjustments by a further 10%. For the period 1993-2007, the contribution of the ‘snowball effect’ itself is higher than the change in the debt-to-GDP ratio.

Factors contributing to the debt-to-GDP ratio

This first insight leads us to the following three conclusions:
1. Prior to 2007, Greek debt was the main heir to debts accumulated during the period 1980-1993.
2. The snowball effect was the main contributor to this change. This effect was triggered by high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
combined with a decrease in the exchange rate of the drachma.
3. Although fiscal deficits were important, they were not the main cause in the increase of the debt. The results are summarized in Figure 1.3: between 1980 and 2007, the debt-to-GDP ratio increased by 82.3 percentage points of GDP. Two thirds of this change (65.6%) is attributable to the ‘snowball effect’ and only a third (33.4%) to the cumulative deficits, including stock-flow adjustments.

Components of the Greek debt (% of GDP) 1980 – 2007

1. Contrary to what is frequently proclaimed, Greek public expenditure (excluding defence) does not explain the debt increase. Public expenditure was lower than in Euro Area countries (EA-11, which comprises Euro-Area countries excluding Greece).

Comparative evolution of total general government expenditure (1995-2005)

Source : EUROSTAT – COFOG – ESA 95

From 1995 to 2009 the average expenditure is lower in Greece (48%) than in EA-11 (48.4%). Available data indicate that Greece maintains a higher primary expenditure only on defence spending, with Greece at 3% of GDP, compared to the average of 1.4%. As a counter-factual scenario we estimate that if the percentage of GDP devoted to defence spending was equal to the level spent in EA-11, then the total public expenditure as ratio to GDP would have been lower in Greece than in EA-11 countries until 2007.

We estimate that overspending in defence contributed to a debt increase of at least €40 billion. [3] Most of this spending is due to large-scale contracts for the purchase of military equipment supplied by companies based in current creditor countries. [4] Concerns about illegal operations, such as bribery, have been raised in several cases, particularly regarding excessive pricing or inadequacy of the equipment. [5] Greece’s current lenders linked the 2010 bailout to the confirmation of pending military purchase orders, even though a part of this spending contributes to common EU defence objectives, [6] which should not, under normal circumstances, have been paid by Greece alone.

The primary deficits that contribute and feed the growth of public debt are mainly due to low levels of col-lection of public revenues. The taxes and social contributions collected after 1999 decreased to levels close or lower than 34% of GDP, in contrast with a level of more than 40% in the Eurozone countries.

FIGURE 1.5 : Comparative evolution of total collection of taxes and social security contributions

As illustrated in Figure 1.5, the low levels of income tax collection and insufficient actual contributions of employers to social security explain the difference be-tween pubic revenues in Greece and in the EA-18 countries. The difference is mainly due to fraud facilitated by corrupt and inefficient collection mechanisms, limited and complacent sanctions for fraud and weak procedures [7] for recovering unpaid taxes and contributions amounting to €29.4 billion at the end of 2009. [8]

The debt that was contracted to compensate for low levels of income tax collection represents €88 billion during this period. [9] This increase in debt mainly benefited a minority of the population, as the majority, 77.5% of the population in 2009, [10] which is dependent on wages or pension incomes, are on the whole reliable tax sources. Low tax collection is also attributable to unjust tax legislation which facilitates the legal tax evasion of privileged groups. The shortfall of revenues attributable to insufficient actual social contributions of employers (rather than employees) represents €75 billion during this period.

Corporate income tax reductions have contributed to the deficit, as corporate income tax has been progressively reduced from 40% to 25% over the period. As a result, while in 2000 the contribution of this tax represented 4.1% of GDP (and 3% in EA-18), after 2005 it reached a level lower than EA-18 levels (2.5%) and 1.1% in 2012.

2. Illicit capital outflows: last but not least leak variable

The website LuxLeaks [11] provides information on nine Greek firms which benefited from “fiscal agreements” with Luxemburg. These are Babcock & Brown, BAWAG, Bluehouse, Coca Cola HBC, Damma Holdings, Eurobank, Macquarie Group, Olayan Investments Company Establishment and Weather Investments.

Illicit capital outflows are an even more radical way to evade taxes. To approximate their annual amounts, we used data from Global Financial Integrity, [12] a NGO which evaluates illicit outflows as the difference be-tween the financial outflows from a country and the inflows received from that country by the rest of the world. As this methodology can only identify the most visible part of financial outflows, its results must be considered as a lower bound. [13] The detailed data available for Greece show a cumulated outflow of €200 billion between 2003 and 2009.

Illicit financial outflows (€ billion)

Source : Global Financial Integrity

To assess the impact of these illicit capital outflows, we assume a moderate tax rate of 15% (half the actual). The shortfall for government revenue is therefore €30 billion. With an appropriate legislation preventing illicit financial outflows, and fair taxation, the Greek public debt would have been (taking in account the interest payments) €40 billion lower in 2009.

3. After the accession to the euro area (2001)

The economic growth after 2001 was mainly driven by a growth of consumption and led to an increase of the deficit of the trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. . The main trade partners of Greece have benefited from the Greek economic expansion of that period by increasing their exports to Greece. These exports included military equipment as well as telecommunication equipment, some of which are related to corruption and financial scandals. The most well-known are the cases of submarines, Leopards tanks and Siemens procurement.

Balance of Trade in Goods and Services
in € Billion

Source : Bank of Greece – Annual balance of goods and annual balance of services

Greek imports after 2002
Greek Imports of Goods in € Billion

Source : Eurostat – CN8

4. Low real interest rates provoked increased exposures of Greek and European banks to Greek private debt

As inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. in Greece was higher than in the Euro Area after 2001, the Greek public and private borrowers could offer attractive nominal interest rates to foreign financial creditors attracting an inflow of foreign capital to both private and public sector. Important European private banks, mainly French and German, have participated actively in the sharp increase of private loans in Greece, such as through the direct participation in Greek banks as in the case of Geniki and Emporiki. The risks of creating a bubble through such an excessive exposure where not adequately considered. This led to GDP growth rates being higher than in the rest of the Euro Area. During this period, the public debt to GDP ratio remained relatively stable while the private debt to GDP increased fairly rapidly from 74.1% (2001) to 129.1% (2009). [15]

The sharp increase of private loans given by Greek banks relied on international finance

Source : Bank of Greece – Financial accounts

Foreign Claims on Greece
Banks’ consolidated foreing claims on Greece (ultimate risk basis, € bn)

In 2009, with the beginning of the recession in the Greek economy, private Greek and foreign banks faced increasing risks from non-performing private loans. The foreign banks (essentially EU banks) had a high expo-sure to Greece (€140 billion), against public sector (45%), banks (16%) and the non-financial private sector (39%). [16]

In 2009, Greek and foreign banks faced greater risks than Greece with regard to its sovereign debt. [17] The bailout of the Greek economy with public money without a restructuring of public debt was an advantageous solution for foreign banks: it offered them time to diminish, at a relatively low cost, their exposure at least to Greek public and banking sectors. It was also an advantageous solution for the Greek banks, which diminished their exposure to the public sector from €45.4 billion in the 2nd quarter of 2009 to €23,9 billion the 4th quarter of 2011. [18] George Papandreou’s government by emphasising and boosting the public deficit and debt in 2009 helped to present elements of a banking crisis as a sovereign debt crisis (See Chapter 2). Frequent announcements about a deteriorating situation provoked speculation in Greek sovereign CDS CDS
Credit Default Swaps
Credit Default Swaps are an insurance that a financial company may purchase to protect itself against non payments.
, thus increasing – past the point of affordability - the interest rates re-quested to roll-over expiring Greek bonds.

Throughout this report we demonstrate how the majority of the bailout loans given to Greece after 2010, under strict conditionality, have been used for the exclusive benefit of private banks, whether to reimburse their holdings of government bonds or for the recapitalisation of Greek banks. Far from the frequent assertions that the loans “assist” or “aid” the population or the state their purpose paints an altogether different picture; the private financial sector is the primary beneficiary from the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

’s loans.

Foreign Banks’ exposure to Greece
Banks exposures to Greece (€ bn)

Chapters :
Chapter 2 : Evolution of the Greek public debt during 2010-2015
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


[1This concerns the SWAPS of Goldman Sachs affair and changes in the treatment of military purchases used to lower deficits and debt in order to enter the Eurozone.

[2This relates to discrepancies arising from illegalities in debts certified and later incorporated that led to an increase of the debt. Notable examples are the enterprise debts, hospital arrears, ambiguous treatment of Goldman Sachs’s swaps and finally, operations leading to an underestimation of GDP

[3Bank of Greece, 2014. Annual Report 2013. Available at: [Accessed June 12, 2015].


[6For example, the defence of EU borders, NATO strategic plans (PATRIOT missiles and F-16) and NATO external operations in Libya, Somalia and Eastern Mediterranean, see Milakas, 2012. Debt and Military Spending. How They Sold Us “Trash” for “Gold”! Available at: [Accessed June 12, 2015].

[7For example, more than 110.000 tax cases are pending in the courts and approximately 5% of the amounts of cases judged are ever recovered. Ministry of Finance of Greece, 2015. Statistical Data. Available at: [Accessed June 12, 2015].

[8Kathimerini, 19.02.2015. Available at: [Accessed June 2015 ].

[9Calculation based on the difference be-tween actual tax income and that which would have been received if the average Eurozone rates were applied. Eurostat COFOG – ESA-95.

[10Op. Cit 7.

[11ICIJ, 2015. Explore the Documents: Luxembourg Leaks Database. Available at: [Accessed June 12, 2015].

[12GFI, 2015. Global Financial Integrity. Available at: http://

[13Economist Intelligence Unit, 2010. Country Report: Greece; OECD, 2009. OECD Economic Surveys GREECE. Available at: [Accessed June 12, 2015]; ELIAMEP, 2010. Economic Fact Sheet Greece 2009/10.

[14Op. Cit. 12.

[15OECD, 2015. OECD Statistics. Available at: i4sQSY [Accessed June 12, 2015].

[16OECD, 2015. OECD Statistics. Available at: [Accessed June 12, 2015].

[17Including BNP, Société Générale and Crédit Agricole for France (through its participation in Emporiki), Commerzbank, Baden Bank, Postbank and DZ Bank for Germany and NBG, Ag-ricultural Bank, Piraeus, EFG Eurobank, Hellenic Postbank and Alpha for Greece.

[18Bank of Greece, 2015. Financial Accounts. Available at: [Accessed June 12, 2015].

Other articles in English by Truth Committee on the Greek Public Debt (17)

0 | 10



8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80