How Greece sleepwalked off a cliff in 2009, in black and white

Agora Contributor: Yiannis Mouzakis

Nine years since facing bankruptcy and subsequently having experienced the most severe economic crisis in its modern history, which took away a quarter of the economy and employment, a country should at least have identified the reasons that it found itself in such a mess.

A self-respecting political system burdened by the responsibility of chronic shortcomings should have reached a consensus, which would ensure that future generations will never face a similar calamity.

Greece, though, is not a normal country and certainly does not have a political elite that respects itself, or anyone else.

All these years, Greeks have been fed a diet of half-truths, conspiracy theories and witch-hunts that mainly aimed at deflecting the attention and discouraging any serious debate about what happened in 2009.

All sorts of ridiculous claims have been thrown around, from a global conspiracy to steal the country’s “rich natural resources” to scapegoating the head of the statistical office even though he hadn’t even started the job when the events unfolded.

Those assertions do not stand up even to the most basic scrutiny, but the aim was to generate so much noise that it would stifle any voices of reason. A complicit media allowed figures ranging from the centre stage all the way to cult characters from the fringes of the political system to dominate the public discourse in most mainstream outlets.

The debate about the year that sealed Greece’s fate became a playing field for demagogues rather than reformists.

The data regarding this matter is publicly available from various official sources and the events of 2009 are part of Greece’s sad history. The responsibility of the government led by Kostas Karamanlis is beyond dispute.

Last week, Yannis Palaiologos presented in Kathimerini an internal report by the Bank of Greece issued at the beginning of October 2009, just after the general elections that saw Karamanlis’s administration lose to George Papandreou’s PASOK in a landslide. This document was known to exist but nobody had reported on it in any detail before.

Despite being technocratic in nature, you can almost sense the author’s agony when each excruciating piece of fiscal data presented outlines how Greece was sleepwalking towards bankruptcy.

The key to what happened in 2009 is encapsulated in one paragraph: “we are facing an unprecedented fiscal derailment, which is only partially justified by the downturn in economic activity. It is absolutely certain that the country’s current fiscal position is unsustainable.”

In September alone, expenditure rose by 25 percent year on year, while revenues dropped by 24.2 percent compared to the same month in 2008.

The deficit in September was 1.5 percent of GDP, while during the year the deficit had been growing by 1 percent of GDP each month.

This fiscal laxity took the nine-month deficit to 9.7 percent of GDP. This is double the deficit of the same period in 2008, which stood at 4.9 percent of GDP.

The primary deficit over the nine-month period was 5.9 percent of GDP compared to 1.4 percent during the first nine months of 2008.

Revenues during the period in question dropped by 3.4 percent compared to the previous year. Expenditure increased by 16.4 percent due to higher primary expenditure.

During the first half of the year, debt had increased by approximately 30 billion euros and reached 267.1 billion, or 109.6 percent of GDP.

In the preceding years, Greece was issuing bonds in the region of 30 billion euros: 29.74 billion in 2007 and 29.9 billion in 2008. Repayments of existing bonds accounted for 17.86 and 19.68 billion, respectively. But in the first nine months of 2009, bond issues reached 54.54 billion euros, of which 25.7 was for repayments and the rest was needed to finance the runaway deficit.

Net treasury bill issuance over the nine-month period to September reached 6.57 billion from 137 million for the entire 2008.

Based on the current trend, the cash deficit for the whole year was expected to reach 30 to 35 billion euros, something between 12 and 14 percent of GDP. Debt was seen settling at 110 percent of GDP.

Despite this information being available at the time, just one week before this report full of dismal fiscal data, Karamanlis’s government had communicated to Eurostat that the general government deficit for 2009 would be 5.9 percent of GDP and debt at 105.5 percent.

The BoG report finds those estimates disconnected from reality and raises the question about how the debt in the second half of the year would be reduced by 4.5 percentage points.

The cash deficit up to September doubled to 23.68 billion euros, or 9.7 percent of GDP. If you exclude the farmers’ fund surplus, which would be spent anyway, and revenues from a privatisation, the deficit reaches 10.8 percent.

The level of the deficit was not justified by public investments spending since the portion attributed to the public investment programme in 2009 was the same as in 2008. Interest expenditure was not the reason either as the interest bill growth during the period of 2009 was half of that of 2008, 6.4 percent versus 14.3 percent.

It is beyond any doubt that the source of the fiscal derailment lay in primary expenditure and revenues.

The report outlines how the Karamanlis government’s fiscal performance during 2009 deteriorated early and steadily without anyone making any attempt to avert the disaster. The deficit of the first nine months in 2009, 23.68 billion, had already exceeded the entire 2008 deficit by 6.6 billion euros.

Although the initial estimates point towards a deficit in the region of 30 to 35 billion or up to 14 percent of GDP, given the dismal figures for September, if that trend continued then the deficit would reach 15 percent of GDP.


Based on the BoG’s calculation, the general government deficit according to the ESA methodology used to communicate fiscal data to Eurostat would probably be a couple of percentage points of GDP lower and was estimated reaching somewhere between 10 and 12 percent of GDP.

Just days before the report was issued and with all the data available, the Karamanlis government told Eurostat that the 2009 deficit would reach 5.9 percent, broadly the same as that of 2008, although it was already double that figure in September.


Over the period in question, revenues dropped by 3.4 percent to just under 35 billion euros, when even the revised revenue targets for 2009 contained an estimate that revenues would grow by 14 percent.

Indirect taxes in the first six months were down by 5.3 percent, led by VAT intakes that were short by 10 percent.

The report anticipates revenues marginally recovering towards the end of the year due to some seasonality in tax collection but at the same time sees little prospect of the government meeting some of the targets of collecting revenues from the voluntary declaration of illegal modifications to buildings, property taxes and tax evasion. Even if the overly ambitious ETAK property tax was collected in full, the fiscal position had deteriorated so severely that the deficit would only be reduced by 1.2 percent of GDP.

The BoG anticipated that with the available data, revenues for the whole year in 2009 would fall short of their target by 9 billion euros. The underperformance would reach 10.5 billion if added measures that were announced in June did not meet their estimate of 2.5 billion euros in revenues.

The expenditure disaster

However, the true disaster lies on the expenditure side. Expenditure in the January to September period increased by 16.4 percent, jumping from the 15.4 percent up to the end of August. Expenditure in September increased by a quarter compared to September 2008.

Up to September, expenditure reached 54.16 billion euros, surpassing by far the estimated rise for the entire year of 9.3 percent.

The main source is primary expenditure, which jumped by 18.1 percent vs an annual growth estimate of 9.8 percent.

Based on first half of the year, the stretching of primary expenditure is attributed to increased benefits, the introduction of a special wage grid for judges and public doctors, increased subsidies to social security funds (IKA, NAT, OAEE, OGA), contributions to local governments and higher tax returns.

It is beyond any reasonable doubt to declare that there was no effort to control spending.

The report stresses that although Karamanlis had announced a series of measures to curtail spending along the lines of “freezing the public sector wage bill” and other discretionary spending, the attitude of his government since the start of the year did not point towards the reining in expenditure but rather moved in the opposite direction.

The author highlights that this trend in expenditure seems irreversible given that some pension spending had yet to be realised and the state had 15 billion euros in obligations to settle until the end of the year. The spending situation was so severe that drastic measures in containing primary expenditure had to be taken after the elections.

Public debt

Karamanlis’s government managed to grow the debt by 30 billion euros in just the first six months of 2009 so that it reached 267.1 billion, or 109.6 percent of GDP from 99.2 percent of GDP at the end of 2008.

The average debt servicing cost was 4.6 percent which, combined with the anaemic anticipated growth of 1.9 percent in 2009, led to accelerated debt dynamics even if the situation were to improve fiscally.

Factoring in the fact that in 2009 the primary deficit was expected to reach somewhere between 4 and 5 percent of GDP, it is evident that Greece found itself facing explosive debt dynamics.

The BoG warns that these debt developments would soon be reflected in the country’s credit worthiness, which would further impact the debt dynamics through higher servicing costs and with detrimental effects on the Greek economy.

The report stresses that stabilisation of the debt to GDP ratio was essential and should be the utmost priority for Greece's fiscal policy. Primary surpluses between 5 and 6 percent of GDP would be required to achieve that stabilisation and considering the primary deficit in 2009 was estimated near 5 percent, the primary gap that Greece would have to tackle stood at between 9 and 11 percent of GDP.

In its conclusions, the report stresses that the fiscal derailment that started in 2007 was disproportionately large compared to the downturn of the economic activity and is obviously structural in nature. It highlights again that the estimates which were sent to Eurostat at the end of September were disconnected from reality.


Greece's crisis was multifaceted. The country was not adequately prepared to join the euro and wasted the euphoria of the first decade of the single currency with little of the adjustment needed to share a currency with Germany and without addressing the variety of issues that were stifling its potential.

Its economic standing was so weak that it required the maximum level of fiscal discipline to ensure that the known structural worries would not translate into solvency concerns and expose all the country's shortcomings.

Sadly, this is exactly what happened on Karamanlis’s watch. The then prime minister was about to face the perfect storm but he acted like he wholeheartedly believed that the Greek economy was, in his own words, “fortified.”

Uncontrolled spending and a ballooning deficit with a heavy dependency on market access, which was soon about to shut down in a volatile global and European environment, meant there would be nobody willing to finance Greece’s profligacy and rollover in the following years tens of billions of its public debt.

Nearly a decade later, the two leading figures from Greece’s political class have been unable to lead Greece through the catharsis that is necessary. Despite representing the younger generation, they seem unable to enlighten voters and both are trapped by political miscalculations and internal party dynamics.

Alexis Tsipras’s strategy to gain power was to focus on a different enemy, while placing the Karamanlis era and the man himself well away from the firing line. Kyriakos Mitsotakis, meanwhile, cannot amass the courage to accept his party’s clear responsibility without qualifying it with weak excuses that seek to deflect blame.

If these are the two men who are supposed to take Greece into a new era, leaving behind the trauma of the crisis, the country’s prospects look grim.

5 Comment(s)

  • Posted by: Klaus Kastner

    While I totally agree that the Karamanlis government, with its totally irresponsible financial conduct, put the final nails in the coffin of Greece's sudden stop, I think more context is necessary. It all started with Greece's joining the EU in 1981 and, at the same time, Papandreou's introducing a deadly mix of a bloated and inefficient welfare state with stifling
    intervention and overregulation of the private sector. At the same time, EU membership increased Greece's "creditworthiness" and foreign funds flowed in to finance many excesses.The political legacy of Pasok was even more devastating in the long-term since its political success transformed New Democracy into a poor photocopy of Pasok. From 1981 to 2009 both parties mainly offered populism, cronyism, statism, nepotism, protectionism, and paternalism. The net result was the outcome of a disastrous competition between the parties to offer patronage, welfare populism, and predatory statism to their constituencies. The Spraos Report of 1997 warned of a collapse of the Greek pension system. The head of the Greek Trade Union Confederation reacted: "The Spraos Report suggests that the Greek Pension System will collapse by 2010. Well, before the Greek Pension System collapses, the Greek State will collapse". Well, as it turned out, both happened (but the Spraos Report was forgotten). Joining the Euro only provided a turbo to a development which had acquired a self-reinforcing power. There is very little that a 'serious' Karamanlis government could have changed by the time they got into office. On the other hand, an 'irresponbible' Karamanlis government made sure that if Greece was going to go down the tube, it was going to do that in grandiose style.

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  • Posted by: Günter Weber

    "Primary surpluses between 5 and 6 percent of GDP would be required to achieve that stabilisation ..." In 2009. Right after the global economy took a huge hit. You could as well write 'we need a miracle, followed by devine intervention and then a lucky streak.' Hard to see what could have been done to stop the crisis from happening at that late stage.

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  • Posted by: N S

    Very interesting, thank you.

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  • Posted by: Alec Mally, Foresight Strategy and Communications

    If I recall the New York Times ran an article or two a few years back detailing how the Karamanlis government actively worked to suppress IMF documents circulating internally in 2008 and early 2009 (possibly) that gave that institution a preview of the deficit problem. The Bank of Greece was not the only source of troubling information and maybe an investigation is warranted into precisely who gave the orders to suppress what would have been a useful revelation for the markets and prevented the disaster that followed...

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  • Posted by: John A Galani

    Thank you, a terrible indictement of Greek society at large and the lack of grounded “polis” education that gives rises to such extreme incompetence

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