Yanis Varoufakis: many possible moves

The debt is illegitimate

Yassamine Mather looks at the background to the Greek crisis

Monday February 16 was labelled a crunch day in the battle between Greece and its creditors, as finance ministers gathered in Brussels, Germany and France reiterated the troika’s position of insisting that Greece sticks to the current terms of the bailout programme. While the dispute continues and the mass media speculate on ‘who will blink first’, it is worth spending some time understanding how this debt was accumulated and consider ways of challenging its legitimacy.

According to the BBC online explanation of the euro zone crisis,

Greece was living beyond its means even before it joined the euro. After it adopted the single currency, public spending soared. Public-sector wages, for example, rose 50% between 1999 and 2007 - far faster than in most other euro zone countries. The government also ran up big debts paying for the 2004 Athens Olympics. When the global financial downturn hit - and Greece’s hidden borrowings came to light - the country was ill-prepared to cope. Debt levels reached the point where the country was no longer able to repay its loans, and was forced to ask for help from its European partners and the IMF in the form of massive loans.1

There are a number of obvious mistakes in this supposedly ‘neutral’ assessment by the BBC, yet this kind of ‘analysis’ forms the basis of the establishment and media consensus.

In 2010 the EU instructed Greece to cut public-sector wages and improve tax collection. However, Greece’s economic problems have nothing to do with “public-sector wages”. If you add up the entire state expenditure on public-sector pay since the turn of the century, it will be a tiny fraction of government expenditure. According to Thanasis Maniatis, associate professor in economics at Athens University,

Greek labour - defined as persons who earn or earned their livelihood from the sale of their labour-power, whether currently active or retired, together with their dependents - is a net creditor to the Greek state. In other words, when you factor in all the income and benefit flows and discount all the tax flows, the working class give more to the state than they receive ... Greece spent 19.3% on social expenditure in 2000 and 23.5% in 2011. The equivalent figures for Germany are 22.1% and 26.2%. The EU average in 2011 was 24.9%.2

According to the Organisation for Economic Cooperation and Development, during the period 2000-13 the average Greek worked roughly 500 hours more per year than the average German, and about 400 hours per year more than the average Briton.

One should look elsewhere for the reasons behind Greece’s financial crisis. We can say with confidence that welfare provisions, public-sector pay, a ‘lazy’ workforce, etc are definitely not on the list of causes. Of course, the lie has had its consequences and in the last few years successive Greek governments have made dramatic cuts in public expenditure as well as in pay and pensions, while state welfare spending has been slashed, causing poverty, homelessness, mass unemployment and emigration.

Black economy and arms

Bourgeois economists agree that the underground economy is growing in most advanced capitalist countries and this is happening to such an extent that at times it plays a crucial role, including in the major capitalist economies. Yet, when it comes to Greece, we are told the country’s black economy is another major source of all its problems. No doubt it is true that the black economy in Greece accounts for a higher percentage of GDP than in other European countries. The economic crisis, and lack of job security, has led to an increase in self-employment, whose proportion is higher in Greece (31.9%) and Italy (23.4%) than in other EU countries (average of 15%). However, Greece’s higher share of self-employed is directly related to the size of its agricultural sector and the number working in rural areas.

In 2011, professor Friedrich Schneider of Linz University estimated that “in 2010 the Greek black economy was worth 25.5% of GDP (compared to 10.7% in the UK, 13.9% in Germany, 19.4% in Spain and 21.8% in Italy)”.3 Clearly, while the black economy plays a more significant role in countries facing economic crises, the role of this sector in the current crisis in Greece and other euro zone countries should not be exaggerated.

In addition to ‘public-sector pay’, the likes of the Financial Times and the Wall Street Journal are very good at reminding us of ‘corruption and tax-dodging’ amongst Greek capitalists, and no doubt there is a lot of truth in this: the shipping magnates (whose industry has apparently paid no tax since before World War II), the owners of energy and construction groups who have bought up football clubs, newspapers, broadcasting channels ... However, one should always be wary of attempts by mainstream north European media to present south European and third-world capitalists as the only bad apples in an otherwise perfect cart - those honest west European and American bankers, financiers and industrialists are mostly beyond criticism.

As the HSBC scandal showed last week, nothing can be further from the truth. British capitalists constantly seek and obtain (sometimes official) advice on how to avoid paying taxes - all banks are involved in such practises. The Channel Islands may be renowned as tax havens, but everyone in the financial sector knows (although very few admit) that the City of London has become a much less talked about, yet very profitable, haven for non-domiciled tax exiles, including Greek oligarchs. Newspapers that keep complaining about the corruption of Greek oligarchs cannot be taken seriously when they fail to mention the role of the City of London, amongst others, in all this.

One of Greece’s most expensive outgoings is the interest on its debt. The country pays twice as much as the EU average on the servicing of debt - a debt which, according to Global Research Canada, was “incurred not to pay for relatively high levels of expenditure, but to cover for relatively low levels of revenue”.4 In addition, successive Greek governments have spent colossal amounts on military expenditure, and the country has the highest levels of defence spending (as a percentage of GDP) of any Nato member except the United States. Most Greek defence contracts are with the USA, but over the last 10 years France and Germany have done their best to link loans to successive Greek governments with contracts for military expenditure with their respective arms and electronics industries.

Of the Greek government’s current debt of €323 billion, the euro zone is owed 60%, the International Monetary Fund 10%, the European Central Bank 6%, and other banks 5%. The remainder is accounted for by bonds and other small loans.5 A good slice of this debt is made up of loans taken out to pay interest on previous borrowing and I have already pointed to the role of western governments in linking loans to military expenditure. The new Greek government could well challenge their legitimacy on the basis that the money was immediately spent on such contracts, as well as pointing to the payback to corrupt Greek officials and ministers.

Throughout the last decade of economic crisis, Greece has been a major customer of German and French arms exporters. In 2012 Greece was the world’s 10th biggest importer of conventional weapons - a drop from the position it held between 2002 to 2006, when it was the fourth largest. In 2011 the Pasok defence minister, Akis Tsochatzopoulos, was charged with accepting various bribes from German companies. Yiannis Panagopoulos, head of the Greek trade union confederation, GSEE, is well known for challenging Angela Merkel on this issue. In a visit to Berlin, when the German chancellor was meeting European trade unionists, he asked Merkel why Greece had so many weapons contracts with Germany, when it obviously could not afford such deals and was slashing wages and pensions. According to Panagopoulos, Merkel replied: “But we never asked you to spend so much of your GDP on defence.”6

According to Syriza MP Dimitrios Papadimoulis:

If there is one country that has benefited from the huge amounts Greece spends on defence it is Germany ... Just under 15% of Germany’s total arms exports are made to Greece, its biggest market in Europe. Greece has paid over €2 billion for submarines that proved to be faulty and which it doesn’t even need … It owes another €1 billion as part of the deal. That’s three times the amount Athens was asked to make in additional pension cuts to secure its latest EU aid package.7

It is common knowledge that no area has contributed as heavily to the country’s debt mountain as arms expenditure. Had Greek defence spending been at a level similar to other EU states over the last 10 years, it is estimated it would have made a saving of €150 billion - in other words, more than Athens had to pay for its last bailout. In 2010, when alarm bells were already ringing about Greece’s economic crisis, major European countries continued to sell aircraft, tanks, artillery and submarines to the Greek military. In other words, EU bailout funds were in large part needed to pay for lucrative deals with the French and German arms industry. During the 2011 negotiations over a bailout, France and Germany told the Greek government that all existing arms contracts must be honoured.

Greece has been involved in dubious ‘swaps’ in order to reduce its debt as a proportion of gross domestic product - it must not exceed 60% for euro zone member-states. According to Goldman Sachs London spokesperson Fiona Laffan, “The swaps were one of several techniques that many European governments used to meet the terms of the [Maastricht] treaty.”8

However, successive Greek governments failed to meet the 60% requirement, and the only way they could adhere to the three percent ceiling for budget deficits was through false accounting - some high military expenditures were omitted and others concealed. According to Der Spiegel, “In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12%.”9


In December 2008, Ecuadorean president Rafael Correa halted payments on foreign bonds he called “illegal” and “illegitimate”, putting the South American country in default. The Ecuadorean government refused to make a $30.6 million interest payment. The jury is still out on the long-term effects of Ecuador’s debt default, but in the short term the country managed to buy back a substantial part of its debt at a lower rate. According to Hans Humes of Greylock Capital, it was a spectacularly successful strategy - “one of the most elegant restructurings that I’ve seen”.10

Ecuador is considered a serial defaulter for having taken similar steps in the 1980s and 90s, but it is not the only country to have defaulted in recent years. For all the denials of president Cristina Fernández de Kirchner, Argentina defaulted on its sovereign debt for the second time in 13 years in August 2014. While a majority of Argentina’s creditors accepted a vastly reduced payout, or ‘haircut’, on their bonds when the external debt was ‘restructured’ in 2005 and again in 2010, a minority of ‘holdouts’ made no such agreement. Rating agencies duly downgraded the country’s economy to a status of “partial”, “technical”, “restricted” or “selective” default. Argentina, like Greece, was already labelled an economic disaster, but the Buenos Aires index remains stable and the world has not come to an end. Argentina survived by printing more money to stay afloat and maintain a public-spending programme.

Of course, Greece is not Argentina - it will not be able to print more euros, obviously. Furthermore, for the troika the main issue is not Greece itself, but the precedent any such default would set for Spain, Portugal Italy, Ireland ...

Ironically, however, Greece might have a reluctant ally in the United States. Soon after the breakdown of talks between Greece and the EU on February 16, US stock futures fell 0.4% (Japan’s Nikkei share average shed 0.1%). US Safe Haven bond yields fell 1.6 basis points to a fraction over two percent - Safe Haven bonds are investments that are expected to retain or increase their value in times of market turbulence and they play an important part for investors, as they limit exposure to losses during market downturns. All this reflects fears that economic stagnation in the euro zone will have severe consequences for the world economy.

The US is keen to avoid a major economic crisis and its treasury officials have begun questioning German-style European austerity. The US is also concerned that failure to reach an agreement with the Syriza government might lead to a rapprochement between Athens and Moscow, so there can be no doubt that America is quietly urging Germany and France to look for a settlement.

The stakes are high and no-one at this stage can predict how far the troika will go to enforce debt payment. However, Syriza looks likely to continue challenging its legitimacy. This issue is not just about Greece: it has repercussions for dozens of peripheral countries in Europe and beyond.



1. www.bbc.co.uk/news/business-13798000.

2. www.globalresearch.ca/the-greek-economic-crisis-the-social-impacts-of-austerity-debunking-the-myths/5431010.

3. Ibid.

4. Ibid.

5. See www.bbc.co.uk/news/business-30988166.

6. See The Guardian April 19 2012.

7. Ibid.

8. www.bloomberg.com/news/articles/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels.

9. www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-mask-its-true-debt-a-676634.html.

10. http://blogs.reuters.com/felix-salmon/2009/05/29/lessons-from-ecuadors-bond-default.