Papandreou Talks Greece's Debt

Original Airdate: June 20, 2010

Neil Macdonald speaks with Greek Prime Minister George Papandreou about Greece's debt crisis and plans to fix it. 

Read the transcript of the full interview with Greek Prime Minster Papandreou

NM - Neil Macdonald 

GP - George Papandreou

NM: Let me start Prime Minister; let’s get one thing out of the way fairly quickly. Greece owes about $270 billion right now and you had to borrow money just to make this month’s interest payments. What is Greece going to do about all that debt? Are you good for it? 

GP: Yes, we've signed on now with this support package from the EU and the IMF and of course very difficult measures we have taken in Greece. We signed, we did this, the basic priority was so we could say we will honor our obligations to our creditors, and that's what we're doing. 

NM: That is a guarantee? Greece will in no way default or force creditors to take less or makes investors to take a haircutter in any way. Walk away from any of the debt? 

GP: Absolutely not, this is a decision we have made. That was a decision we took it off the table for a number of reasons. Obviously, one of the reasons was the package itself. Secondly, Greece is a dynamic economy, it's been a mismanage economy over the last years, but it is a dynamic economy. I’ll just remind you that in 2004 we were growing at a rate of 5% GDP even with the recent visit of the so-called European Commission, the ECB and the IMF in their public statements they said that they see that the statistics are even better than they had assessed although it’s now time to make changes for our growth potential. We are having a supply shock, if you like, as far as making our economy more competitive and we’re getting very high amount of interest from Chinese other sovereign well founds and so on because I think of this package. 

The second reason why we have taken defaults off the table has to do with the European Union. Not only the ECB is now heavily involved in buying up bonds on the market, but we wouldn't want to have a contagion effect. That would not only hurt the Greek banks, if we went to default, but it would also then create a flight from a number of countries in the EU, most likely to German bonds or some other bonds around the world. So it would be a very strong negative signal not only for Greece, but for other countries.  And that's why I think what we have here is not simply in Greece's interest, but in the EU's interest and in the Eurozone interest to make sure Greece doesn't default. 

NM: You know, not to put too fine a point on it Prime Minister but back in 1995 I think Canada was pronounced an economic basket case when it’s debt was 77 per cent of GDP. You are well beyond that and maybe you can tell me why I have such a hard time finding any economist who say that you are not past the tipping point already, you are not past the point of no return. Or you can do nothing really to cope with this debt and rising debt servicing costs. Why are so many economists saying you are past the point of no return already? 

GP: Well, I've heard both sides, but first of all, the fact that we're on track is very important, and those are not my words, those are the words of the IMF and EU. They were just visiting our country. We are in much better shape than we were eight months ago. We have a target of approximately 36% deficit reduction this year, we’re now 40% on the six months mark, I believe we’ll be able to keep that up until the end of the year.  So have shown not only the political will, but also the practical implementation that we can do this. Secondly, there are even rating agencies that have downgraded us in the last few weeks, I feel unjustly, but that’s another question. But even they say that default is not inevitable, they say it could be difficult, but it's not inevitable so we are doing everything to make sure we will not default. 

NM: Those deficits that you came clean on last year - basically the government of Greece was cooking the books for the better part of a decade and that’s according to an IMF official I spoke to, cooked the books to get into the EU in the first place. In other words the Greek government was in a sense defrauding creditors for 10 years. And in this country people have gone to prison for that. What is the difference in what Enron did for example and what your predecessors did? 

GP: Well, first of all, we did get into the Eurozone on merit and there was no fraud there  One could have said that some of the practices of how you do accounting have changed. But that's not, that's not Greece’s fault, that's the international, the international and particularly after the crisis, there has been a new approach to accounting   

NM: There was a lot of suspicious, for example, the EU

GP: For example the stress tests on banks, we're talking about financial regulation, a lot of those practices came actually from the financial sector, so it's not the government per se or governments per se in general that are necessarily to blame.  Now, yes, there was a huge case of fraud with the previous government where when we were going to elections as a matter of fact the official statistics that were even sent just two days before the elections to the EU were six percent deficit, where we found over twelve percent deficit.  But we want to be very honest about this. It is a case, which we are going to be examining in our Parliament, there are responsibilities, there may be legal ramifications for those who actually did this to our country. 

NM: I know that you have mused about investigating the hedge funds and the banks that made bets against the Greek economy in recent months. But what about the people who were involved in those fake deficit figures for so long? I mean those are the elite of your country, among the political leadership of your country. Are you actually willing to go after them? 

GP: Absolutely. Because what we have said, and I think this is a sense of justice that we have to bring. Transparency, we're turning a page, we're making our country absolutely transparent, I think Greece would be one of the most transparent countries in the world. Not only concerning its statistics, we have tabled a law in parliament where every single signature that has anything to do with any Euros in the public sectors for the minister or the Prime Minister to any director in the public service will be on the web so this is just one of the many measures taken to create a much more transparent financial governance in our public sector and fight corruption because this was part of the problem. And of course statistics was this.  We have now created a completely independent autonomous statistics agency and a counterpart in the parliament, which is multiparty, therefore not controlled by the governing party and they are going to be monitoring statistics very carefully. We of course are now under the very strong monitoring of the EU and the IMF so I think that we are very transparent about this and I think it’s the way to go. There’s one other thing I think is important about the Greek economy because we had, we still have a very large, maybe the largest in Europe, informal economy or underground economy if you like, people not reporting their income 

NM: What is the tax compliance right now in Greece ?

GP: Well, we think that there could be up to 25 to 30% possibly 25 to 35% of the tax collection, of taxes could be not collected because of this lack of sort of a "tax consciousness."   

NM: But what percentage of your citizens fully report their income and pay their taxes?  GP: We don't have the exact because if we knew, we'd be able to tap it, but I think it's a very large percentage. It could be 25 30 per cent of the population. We have a large number of…

NM: 25 to 30 percent don’t pay?

GP: Yes, well I don't say they don't pay, yeah, they maybe pay less than they should. So if we are able to deal with a portion even of this tax evasion that will immediately bring economy into our statistics but also into our public sector coffers. And we have seen that starting to change already, we’ve changed the tax… but also, unluckily we’ve had quite rapid corruptions in some areas: hospitals for example, the OECD had a report a few months ago saying that we could cut 30% of the cost without cutting it all in the quality of healthcare, 30% cost if we dealt with the corruption issue in the hospitals. 

So this was very bad, we’re not proud about that but it gives us a different type of a margin to actually make changes that have to do with how we can deal with our deficit and our debt.   

 NM: I want to talk about what you are going to do. Canada did do something approaching what you are trying to do. Back in the mid nineties laid of tens of thousands of public servants, cut government spending by a tremendous amount. Nobody firebombed any banks though. You haven’t actually done that much - you have announced it and you have already had violent riots. Why would anyone believe the Greek people will put up with the kinds of things that you intend to do? 

GP: Well obviously these incidents are not representative of the vast majority of the Greek people. The fact that you have a few groups that are somewhat militant, or violent, which is not a recent phenomenon, we have had that in the past. (But you are going to change a way of life). We’ve already have been taking measures which are quite austere. I would say even people who are not responsible for the crisis are paying the price for this. So there’s a sense of injustice that does exist.  And I can see why people would protest, but at the same time people also realize that they have a patriotic duty. We really have to turn around our country. We have to be credible again. I have said that our biggest deficit is our credibility deficit; it's not the money itself. We have to become credible again, that's what we're working toward, and we have to show determination that we are ready to make some sacrifices, and we've done so. 

NM: Are you going to lay off permanent public servants? 

GP: We already have laid off over contract public servants… 

NM: Permanent public servants. Tenured, permanent public servants with pensions are a large part of your expenditure are you going to have layoffs? 

GP: We have instead of laying off because this is a constitutional issue. We have uh, what we have done is we have cut down employment because we have a very large public sector and that’s one of the problems. Unluckily a lot of employees were employed for political reasons; there was a lot of patriotism and clientelism that put a huge burden on the public sector  What we've done is say that for every five people who leave there will be one person employed. 

NM: So you are going to do it by attrition?

GP: That’s right and at the same time we have cut wages and salaries in some cases up to 20% in the public sector so that does cut down the public sector bill.   

NM: On your retirement reforms, if I understand correctly, you are going to, you want to extend the retirement age from 61 to 65. The Germans, the richest country in the EU have extended it from 65 to 67. Why shouldn’t your people work as long and as hard as the Greeks if they are the ones who are bailing you out?   

GP: In fact the OECD figures say the Greeks work harder and longer (than the Germans?) Than the Germans. Yes. This is one of the stereotypes of course that over the last few months, it's very easy to create stereotypes, you know you go to Greece in the summer, its a great place, you dance you swim you see people enjoying themselves. That of course is the tourist industry and we're very proud of that, but it's not daily life. People work hard in Greece. There have been of course great inequalities in the pensions system; we have people with very low pensions. The lowest pension is approximately, the minimum pension and vast majority has approximately 300 $ a month, it’s not a big pension but then you have high pensions up to five, six thousands in the public sectors too. So, what we’re doing is we’re restructuring this pension system.   

NM: I suspect the Germans would have a hard time swallowing the idea that your citizenry works longer and harder than they do? 

GP: That's not my statistic. That's the OECD. I’m not myself boasting but also what we are saying is 40 years of work and not before 60. So, 40 years of work means that it could be 65, it could be 67 depending on when you begin to work.  There are a number of parameters you have to look at to see that what we are doing is quite fair, even compared to what Germany has today. 

NM: Let’s say that your citizenry accepts the austerity program which is pretty draconian by almost any measure. Government spending accounts for half the entire Greek economy, right now. The plan that you propose, all sorts of economists say, has a very good chance of plunging your country into a very severe recession if not a depression. And that of course will broadside your revenues and you will find yourself in an even deeper hole then ever. 

GP: I think, again, there are two elements here that I’d like to highlight. First of all, there is an informal economy which is there, so as we bring it into the official economy that will change the picture. Second, there is dynamism in the Greek economy, which some people forget about, it's the strongest shipping industry in the world, we bring investment through the shipping industry, we have a very vibrant tourist industry, we are moving into the green energy now, which is a potential we didn’t have. The islands have the highest wind potential for green wind so-called renewable energy in the EU. We are now… 

NM: All politicians talk about those things but when your government accounts for half the spending in the country doesn’t paring it back the way you are doing it run the risk of very severe economic pain for your citizenry? 

GP: The second element I wanted to say is when the EU and the IMF came to our country just a few days ago actually, they said that they had predicted close to minus 4% growth this year… 

NM: There has been shrinkage. 

GP: Yes, there has been shrinkage, but they have now seen that this may need to be revised more positively, that’s what they said publicly. They are not yet going to do that yet, but the trend is not as negative as what we would have thought in the beginning. 

NM: Well let’s talk about the IMF then? 

GP: And if we can also bring investment we’re getting great interest because of this package, because of what we are doing, because of reconstruction of our economy also from foreign investments. The Chinese have come; we’ve signed fifteen agreements for huge investments, "Paris" is going to become the hub for trade to Europe from China. We’ve had a number of sovereign well-funds coming to look for investment from tourism to energy and other even in our banks.  You mentioned the IMF. Their own figures say that if things go well, even if the plans that you are instituting right now work, you are at your debt is at 115 per cent of GDP right now. In three years your debt will be 145 % of GDP. And that is if things go well. Which will mean that you will per force need another bailout in three years. Why would you put your economy through the ringer like this and not simply say look these debts are overwhelming, we are going to have to do what other nations do and our investors are just going to have to accept something less.

Well what they also say is that once we reach that, it's going to start to taper off. So yes, it is a difficult program. But we'll get there in order to have it taper off afterwards, and I think we can do that.   

NM: You have been asked this many times but why not just dump out of the Euro? Why not just go back to the drachma? You would be able to devalue. You would be able to make your exports cheaper. You would be able to make tourism cheaper. It is a classic move. It’s a form of default itself I suppose. But why not consider going back to the old currency and regaining control over your own monetary policy, which you don’t have now. 

GP: Well, the euro obviously has had its difficulties. It is an experiment, a very modern experiment 00 57 40 It has handcuffed you. Yes, it's given us pluses and minuses, the pluses have been growth, we've seen after 2000 we had very very high growth, there was greater access to money. The one thing that Greece doesn’t have that the other countries have is that we don’t have high private debt; I think it’s the lowest in the EU. But, our citizens have had more access to money in order to… for funding in the private sector or… 

NM: Why stay in the Euro?

GP: So that has been positive in the Euro. Second, the Euro is there, the European Central Bank, the institutions are there to protect Greece and to invest in Greece. It is a stable currency it’s had a slight depreciation in the last weeks because of this crisis but that may be a good thing in the end for exports. So, we are in a stable currency, and that has been very important historically thing for Greece. Greece has gone through, just in the last century, crisis, wars, and drachma going up and down, very unstable.  So the fact we are in the Euro is a something that gives great security for our people. 

NM: Do your people want that? Do you sense any nostalgia for the days of the drachma?  No, it’s not like Germany when you may have nostalgia for the Deutsche Mark. It’s the other way around; Greeks are happy that we’ve gone to the Euro and know that the Euro did create some inflation when we first got in and now of course have some of its drawbacks, but on balance people are very much happy to be in the Euro, and are very worried about all this discussion around the world that Greece is going to leave the Euro. We are not going to leave the Euro. 

NM: I am going to ask you one other thing prime minister, you have been downgraded to junk bond status by both the big ratings agencies here. And I know you like the idea of creating a European bond rating industry so you would be less at the mercy of Wall Street, just down the road here. Do you think that you are unfairly treated by ratings agencies? By Wall Street? 

GP: I think there are a number of issues that don’t have to do with Greece only. Is there a conflict of interest with these ratings agencies? How much are they linked up with other interests, and I think this is a question that has been put even by the G20 now, I mean, what kind of transparency do we have in the financial sector? Even by Congress, so that’s one question, is there a conflict of interest? That’s a general question that has to do with Greece and a number of other countries also in the EU.  The second question is the… how they have reacted because of the general fear in the market. They don't seem to be leaders, they are followers. They were followers in the financial bubble, triple a ratings for junk bonds, now they're followers when there is fear in the market. And they just come back and they think…

NM: Do you think that they are making the same mistakes about Greece that they made about the subprime market? 

GP: I think so. I think it’s very easy the markets are jittery and I felt that. The markets can create, when they are jittery, a sense of mob reaction… 

NM: They are also predatory and they see you as weak.   

GP: That’s right. And because Greece is a small country, it’s much easier to attack Greece and through that even attack the Eurozone and their interests are around there also.

NM: Is that what you think is happening?

GP: I think that’s part of the story, it’s not the whole story, obviously I don’t want to try to scapegoat our problems, we have our problems, Greece did run up a huge debt we mismanaged our economy, we have to put it in order. But at the same time, we have these markets after 2008 that really feel jittery. We have to somehow regulate the international governance of the financial system and the markets so that our democratic institutions can in fact work in normal human time and not these computer times that sort of change the stock market going up and down just on these mathematical models. We had just a few weeks ago, Dow Jones in New York fall about 900 points and somebody said this could have been triggered by one of these mathematical models on the computers. Well that is not the kind of system where normal societies, democratic societies can really react and the space and the time our institutions are planned to work. We're not computers, we are human beings, and we have democratic institutions. So, I think these are some deeper issues that have impacted Greece, and they are much wider issues the G20 has to deal with. 

NM: If you were contemplating restructuring or leaving the euro, you would probably have to say the things that you are saying in any event. But you do really believe you can pull this off even with the odds stacked against you? 

GP: I do believe it, and if I didn't believe it, then we would have taken a very different path. We took this off the table. As I said earlier, the question of credibility was the major question that we had in Greece.  I want to show that Greece is a credible country. And we're showing that, we're showing that the Greek people can take the pain, can make the decisions, the government does have the political will, can turn around the economy and what we’re trying to do is also saying is "ok, let’s also make this an opportunity this is a crisis", there have been number of structural problems in our economy and in our society: the issue of transparency, the issue of clientelism, the very centralize and bureaucratic public sector, we had 57 states, we just cut them down to 13 and 1050 local government, we cut them down to 330, so we’ve done some really major small revolution in Greece. So I see this as an historic opportunity to turn Greece around make it a competitive economy, move into this century with a green economy, with high quality tourism, Mediterranean diet which we can export around the world, with a strong educational system to be competitive and to bring an investment which we hadn’t had for the last five six years. 

NM: Prime minister, I want to thank you for taking the time to do this with me, I appreciate it. 

PG: Thank you very much.