Debt Mechanism in Greece

Chapter 4

11 August 2015 by Truth Committee on the Greek Public Debt

Chapter 4, Debt System Mechanism in Greece reveals the mechanisms devised by the agreements that were implemented since May 2010. They created a substantial amount of new debt to bilateral creditors and the European Financial Stability Fund (EFSF), whilst generating abusive costs thus deepening the crisis further. The mechanisms disclose how the majority of borrowed funds were transferred directly to financial institutions. Rather than benefitting Greece, they have accelerated the privatization process, through the use of financial instruments.

The set of debt agreements implemented in Greece since May 2010 were organized in the context of a joint [1] EU Commission and ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
technical mission, which drew on the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
’s expertise [2] - called 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.

. The justification for these agreements was to address the debt crisis, by making financial support conditional on the implementation of the Memorandums’ measures.

In reality, they provided the tools for the generation of a great amount of debts towards bilateral creditors and EFSF, deepening the debt crisis. The Memorandum’s measures destructively affected Greece’s economy and peoples’ life.

The analysis of the complex texts of the agreements reveal the use of mechanisms that, rather than support Greece, allowed for the majority of borrowed funds to be transferred to financial institutions, whilst at the same time, also accelerated the privatization process, through the use of financial instruments Financial instruments Financial instruments include financial securities and financial contracts. .

Greece had to pay all manner of abusive costs for this process.

What follows is a summary description of some mechanisms identified in the analyzed agreements.

1. MECHANISM under the Loan Facility Agreement and Intercreditor Agreement

The 2010 set of agreements [3] generated pooled bilateral debts by creating a mechanism that provided the transformation of existing debt securities into bilateral loans.

1.1. Mechanism

The mechanism applied was hidden in an Annex, wherein another agreement exists: the “Assignment Agreement”. It allows, through completion of a simple form, [4] the transformation of bondholders, i.e. an “Existing Lender” into a new Party to the agreement, a “New Lender”, called a “Committed Lender”.
The mechanism utilizes an account [5] opened in the ECB by the Commission, created for processing all payments on behalf of the Parties, KfW and the borrower. Prior to the balancing date, all amounts received on the ECB account are distributed to “Committed Lenders”. [6] Thus, the disbursements made by the bilateral creditors into the ECB account would go straight to the “Committed Lenders”, i.e., the bondholders of existing Greek debt obligations.

1.2 Result

The bilateral debt did not benefit Greece, but the banks that held far below par value existing debt securities. The table below evidences the transformation of ownership : [7]

Gross External Debt - Bank of Greece, Statistics Department

Billions of euros, end of reporting period - in market value

2. MECHANISMS under the Master Financial Assistance Facility Agreement MFAFA

In 2012, another set of agreements [8] was implemented in Greece, which resulted in the recapitalization Recapitalization Reconstituting or increasing a company’s share capital to reinforce its equity after losses. When the banks were bailed out by the European States, they were most often recapitalized with no conditions attached and without the States having the decision-making power their participation in the banks’ capital should have given them. of Greek banks, as well as the purchase, exchange and recycling of debt instruments through the PSI and the Debt Buy Back. They generated a large amount of debt with EFSF, other obligations and a great amount of costs.

The MFAFA is connected to the Memorandum of Understanding [9] and covers multiple agreements with the following objectives : [10]

Summary of Transactions mentioned in the Memorandum


Applied to the programme Recapitalization of Financial Institutions

The information in the HFSF Annual Report 2012 and 2013 and the analysis of the MFAFA agreement reveals this mechanism.

1. EFSF issues “Funding Instruments” of different types, [11] such as Floating-Rate Notes (FRN EU000A-1G0AL3) settled as “Pass-through” [12] negotiated on the Luxembourg Bourse. [13]

2. EFSF delivers [14] the proceeds of the disbursement to the Hellenic Fund Stability Facility (HFSF), according to the Acceptance Notice [15] mentioned in the HFSF Annual Report.

3. Greek private banks issue GREEK BANK INSTRUMENTS [16] and HFSF acquires them, using the procedures of the EFSF facility.

4. Bank of Greece registers the EFSF bonds (related to the FRN obligations), thus generating a debt obligation reflected as an EFSF Loan.

5. HFSF creates securities [17] over the GREEK BANK INSTRUMENTS, and the Bank of Greece will pay 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. in favor of EFSF, in addition to fees, costs, expenses or taxes.

2.1.1. Result

The operation exclusively benefits the Greek private banks, while an obligation to Greece reflected as a new Loan with EFSF is generated. HFSF generates other obligations by creating securities over the GREEK BANK INSTRUMENTS.

2.2 MECHANISM 2: Applied to the PSI programme

The PSI’s purpose [18] is a voluntary exchange of debt instruments related to existing “Greek domestic debt obligations” and “other Greek Debt obligations”.

The mechanism involves :
1. EFSF finances the PSI up to €30 billion by issuing EFSF DEBT SECURITIES. [19] It may be funded by risky market operations such as currency and hedge arrangements.

2. Wilmington Trust (London) Limited [20] is the Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. Trustee and establishes the terms under which Greece will issue sovereign bonds named NEW GREEK BONDS [21] up to €70 billion that cofinances the operation.

3. PSI allows for refinance, renewal and roll over [22] operations, including of the instruments that finance the operation.

4. Interest [23] accrued under certain outstanding sovereign bonds issued or guaranteed by Greece was exchanged by NEW GREEK BONDS.

2.2.1 Result

The analyzed mechanisms show that PSI represents a great damage for Greece, instead of the announced haircut that hit mostly small investors, as explained in Chapter 2.

The PSI generated a large amount of debt obligations towards the EFSF, and provided the creation of the NEW GREEK BONDS that benefit international investors.

The PSI also allowed :
• the transformation of interests and “other” unspecific obligations into debt with EFSF ;
• the use of public debt to finance risky market operations, with all costs and losses borne by Greece ;
• the introduction of an expanding automatic course for EFSF debts, through roll over, refinancing, and renewing operations of the same previous operations.

2.3. MECHANISM 3: Applied to the Debt Buy-Back Operation programme

The Debt Buy-Back Operation (DBB) [24] was meant to buy back existing debt instruments issued or guaranteed by Greece, specifically destined to buy the NEW GREEK BONDS issued in the context of the PSI operation. [25] The DBB is connected to another agreement the ECB Credit Enhancement Facility Agreement, whose purpose is to permit Greece to finance [26] the acquisition of EFSF Debt Securities needed for the purpose of the Buy-Back Offer.

The mechanism operates as :

1. A purchase offer is prepared according to prices specified [27] by holders of NEW GREEK BONDS.

2. ECB [28] notifies EFSF about the existing NEW GREEK BONDS that will be bought back.

3. EFSF delivers [29] EFSF DEBT SECURITIES drawn to finance Debt Buy-Back Operations.

4. ECB receives the EFSF DEBT SECURITIES [30] and uses them for the purpose of effecting settlement under such Buy-Back Offer by ECB as Greece’s Agent. [31]

5. Greece will keep the NEW GREEK BONDS repurchased until maturity or cancel them. [32]

6. Greece records a debt with EFSF.

2.3.1 Result

The problematic NEW GREEK BONDS issued in the context of the PSI programme were recycled and exchanged into a new obligation for Greece, reflected as Loans with EFSF.

3. Acceleration of the privatization process

The ownership of strategic assets and profitable public enterprises has always been the prime objective of the elite private sector. Such objective has been satisfied by the debt system, which functions as the justification to oblige the selling out of State properties to pay debts.

MFAFA introduced the issuing of financial instruments called SECURITISATION NOTES, which allow not only for the acceleration of the privatization process, but also the direct use of those notes to pay debts owed to EFSF.

The mechanism involves :
1. Private Special purpose Companies or Funds issuing SECURITISATION NOTES. [33]

2. SECURITISATION NOTES are structured by or on behalf of Greece or the Greek privatization agency – HRADF [34] - which holds :
• shares in state owned companies which will be privatized ;
• land and buildings, natural gas storage rights, economic rights, voting rights or other assets or rights which will be privatized ;
• the right to proceeds of privatization transactions whose rights have been transferred to such company by Greece.

3. SECURITISATION NOTES facilitate the financing of the Privatization process through the Hellenic Republic Asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). Development Fund - HRADF.

4. Greece may use SECURITISATION NOTES to pay EFSF Loans. [35] If Greece pays the debt to EFSF in cash, it will use privatization proceeds, as specified in the Medium Term Fiscal Strategy Framework, imposed by the IMF, the European Commission and the ECB. The document explicitly states: “the net revenue generated will be reimbursed to Treasury for debt reduction”.

3.1 Result :
The use of SECURITISATION NOTES accelerated the privatization process.
Greece’s State Assets are transformed into a payment method for EFSF.

4. Conclusion

The analyzed mechanisms show that the set of agreements did not support Greece, but served the interests of the private financial sector.

The agreements generated a current outstanding debt of €183.9 billion towards bilateral creditors and EFSF, besides other liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). and abusive costs. They also provided a solid tool to accelerate the privatization process, and to enable the transformation of public assets as means for debt payments.

The agreements contain abusive clauses, such as [36] : “provisions which are fully or in part invalid, illegal or unenforceable shall be interpreted and thus implemented according to the spirit and purpose of this Agreement and the Facility Specific Terms”, and others, as further analyzed in Chapter 7.

All agreements were subject to compliance with the Memorandums which had devastating consequences.

The result is a tremendous damage to Greece and the population. Perhaps this is no surprise; the agreement mandated the use of Cleary, Gottlieb Steen & Hamilton [37] as a private legal advisor. [38] This firm is known in Latin America for its advice on the transformation of odious and lapsed external debt into new bonds under the “Brady Plan”. This represented a disaster for many Latin American countries, as proven during the Official Debt Audit in Ecuador (CAIC) [39] and the Parliamentarian Investigation Commission in Brazil (CPI). [40]

These primary findings demonstrate the importance of further investigations and audit procedures.

Chapters :
Chapter 1 : Debt before the Troika
Chapter 2 : Evolution of the Greek public debt during 2010-2015
Chapter 3 : Greek public debt by creditors in 2015
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


[1European Commission, 2010. Extraordinary Council meeting Economic and Financial Affairs Brussels, 9/10 May 2010. Available at: [Accessed June 12, 2015].

[2European Commission, 2010. Statement by the Heads of State or Government of the European Union. Available at: [Accessed June 12, 2015].

[3European Commission, 2010. Intercreditor and Loan Facility Agreement, under Euro Area Loan Facility Act 2010. Available at: [Accessed June 12, 2015].

[4LOAN FACILITY AGREEMENT, Annex 6 - Assignment Agreement and Schedule to the Assignment Agreement, and Article 13.

[5INTERCREDITOR AGEEMENT, PREAMBLE (7) and Article 3, and Loan Facility Agreement, Article 7 (3).


[7Bank of Greece, External Debt Statistics. Available at: [Accessed June 12, 2015].

[8EFSF, 2012. MASTER FINANCIAL ASSISTANCE FACILITY AGREEMENT – MFAFA (as amended by the Amendment Agreement dated 12 December 2012). Available at: [Accessed June 12, 2015].

[9The “PSI MoU” entered into between the European Commission, Greece and the Bank of Greece on 1 March 2012. Ibid. PREAMBLE (5) and (6).

[10Ibid. PREAMBLE (1).

[11Ibid. PREAMBLE (2).

[12HFSF, 2012. HFSF Annual Report for the financial year from 21/07/2010 to 31/12/2011. Available at: [Accessed June 12, 2015].

[13Bourse de Luxembourg, EFSF FRN 19/04/2018 | EU000A-1G0AL3. Available at: [Accessed June 12, 2015]. The code ISIN EU000A1G0AL3 is the first series at the depiction on the HFSF (2012) p. 31,32.

[14MFAFA, Article 1 Definitions “Disbursement Date” and Article 7 (8) (a) and (b).

[15LOAN FACILITY: FACILITY SPECIFIC TERMS AGREEMENT, Annex 2 – “Acceptance Notice” to be used to finance the recapitalization of financial institutions.

[16MFAFA, Article 1. Definitions “Greek Bank Instruments” and Article 5 (5).

[17MFAFA Article 5 (1) (e) and Article 5 (4) and (6).

[18MFAFA Article 5 (2) (g) and PSI LM Facility Agreement, Article 2 (2) and Article 1, Definitions “Invitation”.

[19LOAN FACILITY: FACILITY SPECIFIC TERMS agreement, Article 1 (b). Funding Instruments denominated in a currency other than euros, hedge arrangements, Pre-funding. All currency hedging additional costs and losses will be paid by Greece. PSI LM Facility Agreement, Article 3 (4) and (5).

[20CO-FINANCING AGREEMENT, PREAMBLE (A) and Article 1 – Definitions and Interpretation “Bonds”. These bonds are issued on dematerialised and uncertificated form. Have many restrictions because they are issued directly for a certain purpose and not offered in market, as SEC rules determines. They are issued under an exception rule destined for private issuers, not for States.

[21MFAFA, Article 1. Definitions “New Greek Bonds” and PREAMBLE (6).

[22PSI LM Facility Agreement, Article 3 (6) (a), (b), and (c).

[23MFAFA, PREAMBLE (6): payment by exchange with interests.


[25EFSF, 2015. European Financial Stability Facility (EFSF). Available at: [Accessed June 12, 2015].

[26Bank of Greece, 2012. ECB Credit Enhancement Facility Agreement. Available at: [Accessed June 12, 2015].

[27LOAN FACILITY: FACILITY SPECIFIC TERMS agreement, Article 4 (3) (ii) and MFAFA, PREAMBLE (5) (ii).

[28MFAFA, PREAMBLE (5) (ii).

[29LOAN FACILITY: FACILITY SPECIFIC TERMS agreement, Article 4 (3) and (4) and PREAMBLE (5) (ii).

[30LOAN FACILITY: FACILITY SPECIFIC TERMS agreement, Article 1 (b) “DBB Instalment”.

[31ECB CREDIT ENHANCEMENT FACILITY AGREEMENT, Article 6 (2) (a) text after (iii).

[32LOAN FACILITY: FACILITY SPECIFIC TERMS agreement, Article 5 (ii) C.

[33MFAFA, Article 1 – Definitions – “Securitisacion Notes”.

[34HELLENIC REPUBLIC ASSET DEVELOPMENT FUND, HRADF - created under MoU determination to enable the acceleration of the privatization process in Greece. Ministry of Finance of Greece, 2011. Medium Term Fiscal Strategy 2012 - 2015. Avail-able at:[Accessed June 12, 2015], p. 44.

[35LOAN FACILITY: FACILITY SPECIFIC TERMS agreement, Article 7 (iv) and (v).

[36MFAFA Article 14 (1).

[37Olmos, A., 2012. Los asesores del fraude de la deuda. CLEARY, GOTTLIEB, STEEN Y HAMILTON. CADTM. Available at: [Accessed June 12, 2015].



[40Fatorelli, M.L., 2013. Citizen Public Debt Audit - Experiences and methods. CADTM. Available at: [Accessed June 12, 2015].

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