The run-up to the Greek economic crisis

This is one of the most interesting articles I’ve read in the past months. It was written by journalist Pavlos Papadopoulos for the popular Sunday newspaper To Vima (16/10/2011). I decided to translate it for anyone who is interested in the backstage political activity during the first months of the Greek economic crisis. I have re-phrased some parts in order to facilitate the article’s understanding and, of course, to make it easier for my mediocre translating skills. I originally posted it separately in four parts, trying to split the 3.000+ words article so that it makes it easier to read online. This is a page that includes all four parts (now that I’ve translated it all) for those interested.

Apart from the journalistic interest, this article can also prove to be useful in order to understand the suspiciousness of the Greek public against the current administration and the reasons why so many people react by protesting in the streets. Simply, try to imagine what kind of trust would you show to your government if you knew that your current state of misery is due to the amateur handling of extremely crucial issues. It is also interesting to notice how some of the decisions were not taken under the motivation of doing the right thing for Greece but were rather the results of small-party political machinations.

So here’s the article.

“We were like prostitutes after their first time” a top government official confessed in his attempt to describe the Cabinet member’s psychological situation during their meeting to sign the Memorandum, on the 5th of May 2010. “We were looking at each other and we were all pale” he says. “We felt very ashamed since we couldn’t believe that we, PASOK, led Greece to the IMF, having chopped the salaries and the pensions”. And then he concludes “Since then we have been completely prostituted. We’ve done the same things over and over again without feeling any shame”. Almost all PASOK politicians admit in private that the Memorandum, despite its provision of some necessary reforms, is synonymous at the same time with the sentencing of the economy to a prolonged depression and with the mortgaging of the country to its lenders. However they recognize that it was the last choice in order to avoid bankruptcy and to secure the savings and the pensions, especially since the government had previously failed to implement the prior solutions.

“The Memorandum was hastily written by us and the troika” admits a high-ranking government official who participated in the (so-called) negotiations. “We had no idea of what we were writing and the troika experts were equally confused, working under great pressure from the European Commission and the IMF”. According to first hand accounts, the slightest preparation hasn’t been made and simply, on the last moment, they isolated part from older IMF Memorandums as those with Turkey, Mexico or Hungary and they would hurriedly adapt them to form the Greek Memorandum. “It’s a bad compilation, a Frankestein-styled Memorandum” says a Minister who admitted that he had less than three hours to read, understand, evaluate and approve the part of the agreement which would commit his Ministry for the next four years.


Only the first two chapters of the Memorandum are purely Greek. They consist the “legal introduction” which was written by professors Evangelos Venizelos and Haris Paboukis in an office at the fifth floor of the Ministry of Development, in Mesogion Avenue.  A lot of government officials found refuge in that 10 years old building, the design of which reminds the optimism of the European Monetary Union’s era. The centre of Athens was impassable because of the tear gas and the riots which concluded that afternoon in the assassination of three young people at the Marfin Bank Stadiou Street branch.

“We’ll become like Argentina. They will enter and they will kill us” Theodoros Pangalos shouted when he was informed of the three bank employees’ death. He was at the Parliament and the MPs next to him who heard him got afraid that the mob will come inside and lynch them. But they haven’t taken into account Aleka Papariga. The General Secretary of the Greek Communist Party, an always suspicious and proactive woman, has given strict orders to the safeguarding team of PAME (the Communist trade union). The strapping communists, instead of invading the former Palace (i.e. the Greek Parliament), obeyed and sheltered it by standing in the way of a united crowd of extreme leftists and parastatal protestors who were trying to break through the police collar at the Monument of the Unknown Soldier. Once more, the Greek Communist Part had saved the bourgeois democracy.

“George knew everything” admits to “Sunday’s Vima” newspaper a top government official. “Since February 2009, eight months before the elections, we knew that Greece was technically bankrupt. The actual bankruptcy was a matter of time”. In February 2009, there was a sudden increase in the difference of the interest rate (spread) between the Greek and the German state 10-year bond. That development, which panicked the Karamanlis administration, didn’t go unnoticed by the PASOK leader and his close associates.

After talking with Greek and mostly foreign experts (Economics Nobel Prize recipient Joseph Stiglitz and investor George Soros, to name but a few) Mr. Papandreou is said to have concluded that the dynamics of the public debt was so powerful that a catastrophic bankruptcy was certain. According to the same source, the PASOK chairman then thought the obvious thing: the states which are on the verge of bankruptcy address to the International Monetary Fund (IMF). However he realized that the capital which was necessary for Greece to avoid bankruptcy was five times more than what the IMF could offer. So he concluded that Greece needs an “international solution” and he started examining the initiatives that he could take.

“Our mistake was that we didn’t prepare the people” says the same party member, “and the Party either”. Mr. Papandreou underestimated the “domestic front” even though he knew that Greece was heading towards bankruptcy. He didn’t abandon his vision of “Green Development”, neither did he direct his Financial advisors to more “careful” declarations. In the summer of 2009, the total cost for benefits was 30 bn euros. A lot of the MPs have called 2009 as the “new ‘81”.

Mr Papandreou stubbornly insisted in a vague rhetoric. He reckoned that a combination of green development, institutional reforms and a (completely unspecified) international initiative would solve the debt problem without targeting the people. This is why the warning by George Provopoulos, Governor of the Bank of Greece, that the 2009 deficit would be a double digit figure didn’t mean much for the wannabe Prime Minister. What he actually believed was that Greece would go from over-borrowing to prosperity without walking the distance in between. And some accused him that, had he taken tough measures back then, he could have avoided the worse that followed.

There was no “socialist allergy” at the Finance Ministry when it came to austerity measures. The Minister often called confidential meetings. “Think of shock measures” was his request to his associates . He believed that the austerity measures were necessary to restore the international markets’ trust. One of his most radical and risky ideas that was heard in those meetings was the “10% haircut of the savings” for all the bank accounts which had more than 100.000 euros. They would implement it at the same time with the (French inspired) freezing of any account which would be instructed to send more than 100.000 euros abroad, in order to proceed to a tax details check.

These proposals, as many others, were triumphantly rejected. Mr. Papaconstantinou did not possess the political prowess to enforce a different policy, while he never recovered the control over the tax-collecting mechanisms. He was good enough abroad. Domestically he achieved the minimum while he didn’t avoid deficiencies and the equivocations which increased the insecurity and the uncertainty. The measures that were announced were like aspirins and even them were causing reactions. Like the reaction by Christos Papoutsis when they announced the freezing of salaries in the public sector for those whose paycheck was more than 2.000 euros (which was rejected by the Prime Minister too).

During the early period of his administration Mr. Papandreou visited Moscow and Paris in order to “surround” Berlin, since Angela Merkel didn’t want to accept, especially after her alliance with the Liberals, a “European solution” in co-operation with the IMF. Mr. Papandreou reckoned that, if he could convince Moscow and Paris, he could then take Berlin. Having his mind in an “international solution” he kindly avoided Vladimir Putin’s proposal of geopolitical significance for an interstate loan to Greece.

While waiting for the international solution to mature, it was preferred to flirt with Goldman Sachs and Deutsche Bank. According to banking sector sources, the Greek government appointed these two banks at the same time with the order to investigate the possibility of a 25 bn euros loan (private placement) from the markets. However the international practice necessitates that such orders are given only to financial institutions. At the end of 2009 Gary Cohn, CEO of Goldman Sachs, met Papandreou at the Pentelikon hotel in Kifissia suburb. At the beginning of 2010 the head of Deutsche Bank, Josef Ackermann, visited the Greek Prime Minister’s office. The players who were involved in these initiatives were having preferential access to the core of power. The initiatives failed. The two banks (and their middlemen) lost important commissions. And the markets’ lack of trust against the Greek government increased.

“The Prime Minister regretted for not insisting to have the Memorandum voted by 180 MPs” says a Minister. This was a proposal that came from Mr. Venizelos and Mr. Pampoukis but the rest of the Cabinet members disagreed. Papandreou regretted for not adopting that proposal because, if he had done it and New Democracy wouldn’t vote for it, he could call for an early election. According to converging sources, Papandreou thought that the Memorandum couldn’t be implemented by a one-party government. This is not what he expected when he was counting on an “international solution” (see Part 2 for an explanation of the international solution).

The extraordinary political and social circumstances tested his psychological strength, his close associates were well aware of that. He was feeling trapped in power. In many occasions the men of his security team tried to prevent him from appearing in public which was something he could never think of. He gave considerable thought to the idea of calling an early election at the same time with the local elections in November 2010 but he hesitated once more due to the tight time constraints for the disbursement of the bailout installments.

On the morning of 15 June, the day the Medium-Term Program (the so-called Memorandum No2) was brought to the Greek Parliament, while the prime ministerial car was heading to the Maximou Mansion, some gathered citizens welcomed him with a rain of eggs (see video above). For Papandreou, that experience was decisive. He was personally hurt. He reckoned that the attack was an indisputable sign of destabilization, given the fact that at the same time in Syntagma riots were reaching a climax. When he arrived in his office he called Antonis Samaras. “The country is being dissolved. We must form a government of cooperation” he suggested. “The PM should be a third person” was the answer of New Democracy’s leader. “I have no problem” replied Papandreou with an emotionally charged voice and added “I will not become an obstacle to my country’s salvation”. For New Democracy it was a sudden “cold shower”. They didn’t want this development and they were not ready to govern. They leaked the information in order to provoke the expected reactions which would cancel the deal.

The Prime Minister’s associates called Nikos Papandreou who rushed to the Maximou Mansion and discussed with his brother. They were just the two of them for quite some time. Nobody knows what was discussed. People who know them insist that they are totally aligned politically and they always act after mutual consultation. According to some sources, the Andreas Papandreou’s second son also called Antonis Samaras, whom he knows personally through the friendship of the New Democracy leader with the Prime Minister. “If you form a government of cooperation, you’ll share the price” he allegedly said to Samaras. However, this specific information has not been officially confirmed.

While the drama of a soon-to-resign Prime Minister was evolving at the Maximou Mansion, the hesitant coup of Mr. Venizelos was unfolding at the Ministry of Defense. Already by Tuesday 14th of June, those who had visited the Minister of Defense were left with the impression that he was about to resign. An MP who visited him had the impression that the secretaries were collecting the Minister’s folders. Venizelos himself was implying in his discussions that he could even resign. Of course, he would never mention the word “resign”. “You tell me. What should I do?” was his meaningful question to his interlocutors. This stance inspired other PASOK MPs, as Paris Koukoulopoulos, Kostas Spiliopoulos, Nikos Salagiannis and Dimitris Lintzeris, who were promoting at the Parliament the idea of a government’s overthrow. This “rebellious atmosphere “ is said to have influenced PASOK MP Yannis Floridis who finally decided to resign irrespective of what the Venizelian wing would do. The day after Papandreou’s failure to form a government with Samaras, several MPs who were loyal to the Prime Minister were ordered to appear in front of tv cameras and remember the “ghost of Apostasy” (read more about the history of Apostasy/July events/Royal coup) in order to restrain the Venizelians’ attack. The 46-year-old ghost has once more served the Papandreou family. At the same time Papandreou proceeded to a government reshuffle and at 4am of the 17th of June, he appointed Venizelos to take the responsibility of the economy since, for the second time in two years, Lucas Papademos had declined to head the Ministry of Finance. A historic member of PASOK said for Venizelos: “An apostate in the morning, a vice-president in the evening”.

Greek Minister of Finance, Evangelos Venizelos

Venizelos was reassured by the Prime Minister that night that he could have as Deputy Minister the chairman of the National Bank of Greece, Vasilis Rapanos. However, instead of him, he got Pantelis Oikonomou who, as soon as he accepted the post, took all his speeches off his website. He was against the Memorandum in all of them. Another important point is that Venizelos demanded from the Prime Minister to strip Theodoros Pangalos from his responsibilities. He wanted to be the only vice-president in the government. The Prime Minister invented a “Solomon solution”: he formed a governmental commission without the participation of Pangalos. In that way, Venizelos was “first vice-president”. Thanks to his special political weight, his popularity and his rhetorical prowess, he “passed” the Medium-Term Program from the Parliament. Even if that was partly because he “checked” the intra-PASOK dissident MPs who he himself controls.

The “first vice-president” accepted the Ministry of Finance because he estimated that the Prime Minister would later be obliged to call for elections in which PASOK would be defeated and thus he would substitute Papandreou as the party leader. “I know that Evangelos wants elections but I won’t do him the favor” Papandreou is said to have commented to one of his associates during the summer. Most Ministers in their personal discussions they accuse Venizelos of postponing the implementation of the Medium-Term Program’s commitments while waiting for elections. With the possibility of having him as their leader in the near future though, they are very careful in their public statements. When, on the 2nd of September 2011, the troika demanded the immediate implementation of the reforms, Venizelos unexpectedly suspended the negotiations. The heads of the troika left Athens within a few hours.

The troika’s embargo against Greece lasted for 27 days. The delay of the bailout’s sixth installment was in no way agreed and the responsibility for bringing the state on the verge of a domestic cessation of payments lies completely to the Minister of Finance. Highly respected European sources say that the deviation from the agreed commitments has overthrown the, generous for Greece, deal of 21 July. The new negotiation, with an uncertain and (probably) worse outcome, is under way. According to Greek and foreign officials, Greece has been ostracized from that deal. Two years after PASOK’s election victory, the improvisations are continued and the uncertainty keeps intensifying…

“Neither Papandreou nor any of us believe in the Memorandum” says a Minister. “I’ll remind you that the Medium-Term Program was fifth in the row when discussed at the Cabinet, right after the legislation for companion dogs. The whole government is in denial”. This denial led to a blackmail, using the drachma. On Friday 6 May 2011 Papaconstantinou traveled to Luxembourg for a secret meeting with several powerful euro zone Finance Ministers, presided by the Eurogroup head, Jean Claude Juncker.

According to the most probable version the cause of that meeting was that, some days earlier, Papandreou had implied at a talk with German officials that the Memorandum’s policy and the German strictness on its implementation could make Greece return to the drachma. This indirect threat annoyed the Germans. It is alleged that Wolfgang Schaeuble himself leaked the information to Der Spiegel Magazine, which posted it in its web edition that Friday evening, after the closure of euro zone banks, in order to drag the Greek government into a disorderly retreat.

Despite the upheaval that was caused in Athens, Papandreou delayed for two hours (!) to allow the then government spokesman Giorgos Petalotis to issue a rudimentary rebuttal. He first wanted to learn the European partners’ reaction to the “Greek ultimatum”. The reaction was not a polite one. Papaconstantinou was attacked by Juncker and and Schaeuble, while Jean Claude Trichet left the meeting within a few minutes. The “Greek blackmail” collapsed but it inspired Schaeuble to examine the famous “Plan B”, which is a “euro zone without Greece”. Despite all these, the Greek demands for a new bailout program with decreased interest rates and a prolongation of the deadlines for loan repayments were accepted. It was exchanged with a deeper “domestic devaluation” (of prices and incomes) through a Medium-Term Program which almost led to the fall of the government.

George Papandreou with Dominique Strauss Kahn

Papandreou maintained a secret communication channel with Dominique Strauss Kahn, looking for a platform for IMF intervention in Europe. Within the Papandreou family the IMF is thought to be an organization with a positive impact around the world. Papandreou’s brother, Nikos Papandreou, who participates decisively in the administration of the country (though always in backstage), was a supporter of the recourse to the IMF. The Papandreous believed that an advanced “international” model of administration should be applied to Greece. They have underestimated the fact that IMF means submission.

The Pushkin Cafe in Moscow

While the prime ministerial mind was lying in Washington D.C., where the IMF headquarters are, Moscow brought Greece closer to… Tel Aviv. The first secret meeting between Papandreou and the Israeli PM, Benjamin Netanyahu, took place at the Russian capital’s Pushkin Café. Greece would provide Israel an alliance and the gateway it needed to push the Leviathan deposit’s natural gas towards Europe. The energy diplomacy with Israel (which couldn’t start paying off but in 5-10 years) was considered a basic component of the strategy for the avoidance of bankruptcy (!). So this is why time was passing by and the government was taking zero efficiency measures, the government’s staffing was carried out through open.gov (unless Nikos Papandreou was intervening in order to promote persons of his own influence into key-posts) and the Ministers were in a constant state of confusion when it came to strategy and responsibilities.

George Papandreou in Davos (January 2010 - photo by Reuters)

The real shock for the Prime Minister came at Davos, at the end of January 2010. “The Hungarian Prime Minister approached me and told me to take measures” Papandreou said to the Cabinet meeting that he called right after his return. “Things are different compared to how they were a month ago” added Papaconstantinou. The Social Democrat Hungarian Prime Minister, Ferenc Gyurcsany, had recent experience with the IMF and wanted to share it with Papandreou. Some time later, he would be defeated at the elections by the Right. After Davos, the atmosphere within the Greek government was like a funeral. They had realized that they “lost” the time. Likewise they also lost the banks. “For a long time they believed that the warnings from bankers were only about the banks’ interests” say sources from the banking sector. They were too late to realize that the state’s exclusion from the markets is accompanied by a similar exclusion of the banks, having as a result the postponing of lending to individuals and corporations which slows down the economic activity, spreads poverty and increases unemployment.

The European Mechanism which was presented in 25 March caused the markets’ attack to Greece instead of making them not to do so. Why would the markets lend a state when they can much more safely lend the Mechanism that would then lend the state? Greek bond yields skyrocketed in mid-April 2010. On Friday 23 April, the Prime Minister had a planned visit to the tiny island of Kastellorizo, which had to do with issues of regional development. During Wednesday and Thrusday before the trip the telephones in the Maximou Mansion and the Finance Ministry didn’t stop ringing. Heads of governments and Finance Ministers of big states were calling Papandreou and Papaconstantinou. They were demanding that Greece recourses to the Mechanism because the crisis was hitting bank trust towards their own countries jeopardizing their future.

“Are we going to cancel the trip to Kastellorizo?” Papandreou was asked by his associates. “Why should we cancel it? Life goes on” he replied and added “I will make the announcements from Kastellorizo”. The circumstances necessitated a purple tie. In a surreal scenery, with a small fishing boat sailing in the picturesque port, the Prime Minister called forth metaphors from the Odyssey.

He wasn’t wrong. The odyssey for Greece had just started and he was aware of it. This is why he avoided signing the Memorandum. He wanted to avoid an odyssey of an agreement which could chase him forever. The new “social contract” was signed only by Finance Minister Papaconstantinou. Probably the only Minister who really believed that the Memorandum could actually save Greece…

The Memorandum was signed only by George Papaconstantinou

One response to “The run-up to the Greek economic crisis

  1. Pingback: Like a virgin | When the Crisis hit the Fan

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