Thursday, 20 August 2015


This is the third part of my series on the 2008-9 revision of the Greek deficit and the events that led to it; it considers the specific allegations related to the 2008-9 deficit revision. Part 1 of the series is available here, and Part 2 is available here. Part 4 is underway.

The truth is out there

It's hard to overstate just how much of what goes on in the world (even the unsavoury bits) is a matter of record, if not entirely in the public domain. Conspiracy theorists' claims are, as a result, always much more testable than they realise. This is true of Greece's 2008-9 deficit revision.

Here's what you need to make your way through the revisions:
  • Eurostat's rules on Government deficit and debt calculation are in the public domain. The ones in place at the time of the 2010 methodological visits are recorded here, while the revised rules of 2012 are available here. The European System of Accounts (ESA95) which was in force at the time is explained in detail here. We've since moved on to ESA2010.
  • Eurostat keeps a record of its decisions on how methodological matters should be dealt with, and a record of guidance visits and advice to member states. 
  • All notifications under the Excessive Deficit Procedure (EDP) are available hereThe ones most relevant to the 2008-9 deficit review are April 2008, October 2008April 2009October 2009 (the first one, of 2/10), April 2010 and October 2010
  • It's important to remember that the Oct 2009 Notification was fatally flawed; no one accepts it; not Eurostat, not ELSTAT, not the old ESYE, not the conspiracy theorists. No one.
  • Eurostat's report on the 2010 revision of Greek deficit statistics is available here with a very helpful annex here. Their report on the 2004 revision is available here. And here  (pp 31 and 32) is the commission's breakdown of the revisions made back in 2004.
  • Eurostat has also published reports on their methodological visits to Greece in 2006 (Spring), 2006 (Autumn)  and 2010.
  • The 2010 Greek expert report into the reliability of fiscal statistics is available here (in Greek)
Using the EDP notification tables, it is relatively easy to present a history of our 2008 and 2009 deficit forecasts and estimates, by vintage. All timings refer to the EDP notifications in which each estimate was made, but, since EDP notifications don't go back more than four years , I've also added the figures currently cited by Eurostat. For comparability, these are all ESA95 stats.



As you can see, the flawed Oct 2009 notifications conducted by ESYE, ELSTAT's non-independent predecessor, revised our 2008 and 2009 deficits enormously. Yet, while the Oct 2009 notifications were both severely wrong on many levels, their estimates of the 2008 and 2009 deficits weren't overly high - the figures Eurostat and ELSTAT agree on today, and which I think are methodologically sound, are in both cases significantly worse than what came out of the Oct 2009 notification. This means that, unless one rejects all subsequent revisions, the Oct 2009 notification did not inflate the deficit. Conspiracy theorists can only, perhaps, claim that it drew attention to the deficit at the wrong time. Which is true enough, but not treason.
To help you assess the timing of notifications, I've put together a simple timeline, with help from Wikipedia:

  • 2 October 2009: The first October 2009 EDP notification is submitted, revising Greece's 2009 deficit forecast from EUR9.3bn (3.7% of GDP) to EUR30.1bn (12.5% of GDP).
  • 4 October 2009: PASOK wins the 2009 legislative elections
  • 21 October 2009: A second October 2009 EDP notification is submitted.
  • 22 October 2009: Fitch downgrades Greece from A to A-
  • 8 December 2009: Fitch downgrades Greece from A- to BBB+
  • 16 December 2009: S&P downgrades Greece from A- to BBB+
  • 22 December 2009: Moody's downgrades Greece from A1 to A2
  • 2 January 2010: An expert report into the reliability of Greek fiscal statistics is published
  • 8 January 2010: Eurostat publishes its report on Greek fiscal statistics
  • 9 March 2010: Greece's new statistical law comes into force, establishing ELSTAT as an independent entity.
  • 29-31 March 2010: Eurostat methodological visit.
  • 1 April 2010: The April 2010 EDP Notification is submitted, revising Greece's 2009 deficit from EUR30.1bn (12.5% of GDP) to EUR32.3bn (13.6% of GDP).
  • 9 April 2010: Fitch downgrades Greece from BBB+ to BBB-
  • 21 April 2010: Bailout talks begin
  • 22 April 2010: Moody's downgrades Greece from A2 to A3.
  • 23 April 2010: Greece formally requests a bailout from the IMF, EU and ECB.
  • 27 April 2010: S&P downgrades Greece from A to BB
  • 2 May 2010: The first bailout is signed
  • 21-22 June: Eurostat methodological visit
  • 26 July 2010: Regulation no 697/2010 comes into force, giving Eurostat auditing powers
  • 2 August 2010: A. Georgiou takes over as president of ELSTAT.
  • 27-29 September 2010: Eurostat methodological visit
  • 11 October-9 November 2010: Eurostat methodological visit
  • 15 November 2010: Eurostat publishes Greek fiscal data from 2004-2009 without reservations for the first time.

The origins of a revision target - accounting for issuance

As readers know, I do not deal in 'insider' accounts. I am not privy to what went on within ESYE or ELSTAT except through what accounts there are in the public domain. However, I'm willing to bet that, come October 2009, the old ESYE's leadership knew that producing a deficit figure below ca. EUR30bn for 2009 and EUR20bn for 2008 would lose them the last of the international community's remaining goodwill, and I'm willing to bet they were under orders to reach those levels while still allowing their bosses (first ND, then PASOK ministers) to look reasonably good. The reason was simple, and it was not treachery; foreign analysts could see for themselves how much debt Greece was issuing, and it was way out of line with our deficit projections.

It is not impossible to manipulate deficit statistics in order to exaggerate government deficits; however, it is impossible to manipulate the numbers on bond issuance. Bond issues are, after all, probably the most public financial transactions in the world. Eurostat estimates net issuance (all securities issued minus all securities repaid) of EUR23bn in 2008 and EUR38bn in 2009. It would be hard to believe that our deficits (in cash terms, at least) were orders of magnitude smaller than this.

If you're a conspiracy theorist, you may not trust Eurostat on this matter; but bond-watching analysts' estimates at the time might convince you. By Nov 2009, gross issuance for the year was estimated at EUR59bn by Barclays Capital and later at EUR61.3bn by Danske Bank; and since EUR25.9bn of Greek bonds matured or were repaid over the year, that leads us back to a net issuance of EUR35.4bn for 2009. Similarly, as of Dec 2008, gross issuance for the year was estimated at EUR44bn; suggesting net issuance was way ahead of the projected deficit.

It is, of course, possible for a country to net issue more bonds than it needs to, if it is tactically overborrowing to take advantage of low interest rates. But Greece was raising funds in the teeth of literally the biggest bond sale in human history. It was common knowledge that the debt we were raising at the time would cost us dearly. It is also possible, in a conspiracy theorist's mind, for a government to intentionally overborrow in order to bring about a fiscal crisis, but then the bulk of the 2009 issuance was not carried out by the new PASOK government at all. It was carried out by the outgoing ND government which protested the new estimates and started the 2009 deficit myth in the first place!

In any case, it's worth comparing the EUR35.4bn of net bond issuance for 2009 to the conspiracy theorists' own upper-bound estimate for the 2009 deficit: 7.9% of GDP (based on the Oct 2010 notification) before accounting for what they allege was a major GDP underestimate. This produces an utterly impossible net borrowing requirement of EUR18.5bn - these people truly believe the Greek government had issued some EUR17bn worth of bonds just for fun in 2009.

The timing and impact of revisions

Timing is key to the inflated deficit myth: it is, after all, alleged that Greece's 'falsified' deficit figures triggered our debt crisis, hastened the involvement of the IMF in our bailout, or were used to build support for austerity policies domestically. The goalposts keep shifting, so one needs to be careful.

The first EDP notification to significantly review the 2008-9 deficits was the Oct 2009 notification, which came in two parts - the original notification of 2 October, and a follow-up notification on 21 October. Not only was this not prepared by ELSTAT (which did not exist at the time) - the first shocking set of figures was submitted ahead of PASOK winning the 2009 legislative elections. While the timing doesn't tie in well with conspiracy theories, it does tie in with the narrative of the crsis. As you can see here, our October 2009 notification, combined with Dubai's unfolding sovereign debt crisis, was the signal for foreign banks to up sticks and get out of Greek bonds. Greece had put up its hand to ask for a loo break just as investors were wondering who would be the next sovereign to go bust. This is tactically awful, of course, and had I been a PASOK minister I might have tried to stall as long as possible. But the massive deficit and international scrutiny were both already there; a budget would be drawn up in early 2010 no matter what. Greece could not put this off forever.

While foreign banks were individually heading for the exits post October 2009, in other ways the market was slow to catch on. Greece CDS premia were only beginning to diverge from the rest of the periphery in Q4 2009, and it took credit rating agencies, on average, until Q1 2010 to take Greece below investment grade (graph taken from here). Similarly, Google search trends for the Greek deficit only start to really pick up in March 2010. Throughout all of this, the revision of the 2008 deficit hardly made it into the international financial press at all; it was the dramatic revision of the 2009 deficit that was cited most.

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