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Where does Greece's debt come from? Part 1/3: the Greek source

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Where does Greece's debt come from? Part 1/3: the Greek source


Greece’s debt has been a concern for the European Union since 2009. Little by little, attention was drawn away from the first countries within the euro zone to have austerity measures imposed – Ireland, Spain and Portugal – and eventually, the focus came to rest on Greece. But where does its debt come from?

Greek origins

A country with a history of debt

  • Greece was already in debt under the military dictatorship of 1967-1974. One source was the sheer amount of military spending which would benefit arms makers, particularly those in Germany and France.
  • With Greece’s entry into the euro zone, its debt became a source of worry. However, standing at 104 percent of GDP, it was not the highest. For Italy and Belgium it stood at 108 and 106 percent, respectively, after the euro zone was co-founded in 1999 with debt levels of 113 percent.

Democracy prolongs the issue

  • After the military dictatorship, the leadership of Greece alternated between two big political groups: PASOK (Socialist Party) and New Democracy (Conservatives). The two parties were in the hands of three big familial and political dynasties: the Papandreous (PASOK), the Caramanlis (ND) and the Mitsotakis (ND).
  • A culture of lax policies on taxation
    According to Transparency International, tax evasion and corruption in Greece accounted for 30 percent of GDP in 2011.
  • The country’s finances were weakened further by the fact that the Orthodox church and arms dealers, two powerful and rich groups, weren’t paying taxes.
  • Society was relying on the civil service and an underground economy which accounted for 20 percent of GDP.

Growth through debt

  • The country was in debt, but growth was possible until 2008. The debt did not pose an immediate problem.
  • Household debt was relative to this growth (+5.8 percent in 2006). Greek households consumed, but entered into debt in the process. According to the NGO Committee for the Cancellation of Third World Debt (CADTM), household loans and mortgages multiplied sixfold between 2000 and 2009.
  • The Maastricht Treaty ignored this household debt and only advocated limiting public debt to 60 percent of GDP.
  • Officially, Greece’s public debt in 2001, when it entered the euro zone stood at 103.7 percent and private debt at 60.5%. By way of comparison, Germany’s stood at 59.1 percent and 123.2 percent.

The debt time bomb

  • Before joining the euro in 2001, Greece was seeking to reduce the extent of its debt in response to the demands of the Maastricht Treaty. With help from Goldman Sachs bank, the state converted its debt into yen and dollars. The move is known as « Credit derivative swaps » or « sovereign CDS  ». It is legal; the bank even outlined the operation on its website.
  • The operation even allows a country to obtain from the bank an initial payment in cash which will be reimbursed when the credit matures. It enables the rate of debt and the country’s deficit to be corrected, at face value. But the operation caused a scandal because the exchange rates were set in an artificial way and the bank is accused of being paid handsomely for its services.
  • In 2009, George Papandreou of the left-wing PASOK party came to power and revealed the true figures surrounding the country’s debt and deficit: the latter passing from the 3 percent displayed, to more than 8 percent.

The time bomb of Greek debt would then explode into the heart of Europe.

> Read the second part: Where does the Greek debt come from? European roots (Part 2/3)

By Marie Jamet

Every story can be told in many ways: see the perspectives from Euronews journalists in our other language teams.

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