We never bailed out Greece. We bailed out its private-sector creditors.

The Greeks have voted no!

Even though almost everyone agrees that it is unclear exactly what has been voted on, most of Europe’s rightwing politicians and pundits – and quite a few on the center-left – have been reacting with scorn at these Hellenic rebels: First they spend and spend, the argument goes, and now they are upset that they have to save a little. What a spoiled nation.

It has been pointed out many times that Greece’s economic problems do not simply stem from feckless spending and that, to bust just one myth, Greece’s effective average retirement age has been among the highest in Europe until the onset of the economic crisis in 2010.

Moreover, individual pensions have dropped dramatically – many by 30 % or more. According to the blog MacroPolis, the average pension was in March 2015 €884 a month, including both public and private fund contributions; 45 % of pensioners, however, received less than the €665 a month poverty limit.

Greece’s healthcare system has seen severe cuts as well: where it took up 7.1 % of GDP in 2010, it took up only 5.3 % of a much lower GDP in 2013, according to the IMF.

A common misconception in Northern Europe in particular is, however, that the Greeks ‘keep spending money that they don’t have’ – meaning, on welfare benefits such as pensions, the health-care system and unemployment benefits; and that, since Greeks are lazy, they use Northern money now that they’ve run out of their own.

But in fact, the vast majority of the first two bailout funds – one bilateral and the other multilateral – has gone to the international creditors who hold Greek sovereign debt, as has already been reported on in the Guardian and mentioned by Joseph Stiglitz in the same place. However, while Stiglitz is right about this being a political, and not a primarily an economic question, he does not back up the claim with data.

And while the data is complicated, there are some relatively simple points to be made: the bailouts were given to hold major European financial institutions free of losses, not to sustain Greek public spending.

On the left, these financial institutions have often been called ‘reckless’. However, that misses the point: they received high payoffs through comparatively higher interest rates. That reflects the market’s willingness to gamble: those who are willing to lend to a poorer country receive a higher payment, but also run a higher risk of the debtor defaulting on the loan.

Except, of course, when other governments step in to short-circuit that mechanism to keep banks based in their own countries free of damage.

EU governments have been unwilling to realize that an early default was needed. Instead, they simply transferred the burden of Greece’s debt from the private lenders who had received interest rates on giving the loans to public hands – European and, through the IMF, international citizens.

Interestingly, IMF stakeholders were painfully aware of this, as can be seen from the leaked minutes of the IMF board meeting in 2010 when the IMF approved its engagement in the First Economic Adjustment Programme. The documents were leaked by the Wall Street Journal, no less.

Basically, every non-EU envoy made it clear that they thought the program was flawed in this way:

““Several chairs (Argentina, Brazil, India, Russia, and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement (PSI) to avoid, according to the Brazilian ED, ‘a bailout of Greece’s private sector bondholders, mainly European financial institutions.’”

And in the words of the Swiss envoy,

“We have “considerable doubts about the feasibility of the program…We have doubts on the growth assumptions, which seem to be overly benign. Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term…Why has debt restructuring and the involvement of the private sector in the rescue package not been considered so far?””

The most succinct statement, however, was delivered by Brazil’s representative:

“The risks of the program are immense…As it stands, the programs risks substituting private for official financing. In other and starker words, it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions.”

And so it happened. Not only did the conditions included in both packages act fiercely pro-cyclically, severely contracting public spending when an expansion was called for; but the money that was lend to Greece – this was never a donation, as some seem to think – did little to change the Greek debt burden, because it simply made the loans change hands.

This is the reason that Greece’s debt today is higher, not lower, than when the Troika started intervening: in 2010, it was €310 billion, and currently, it stands at around €342 billion. That would be an astounding failure if the aim were to stabilize Greece and relieve it from debt.

Graph of Troika's loans to Greece, per area of expenditure

In billions of Euros. Source: IMF and jubileedebt.org.uk.


As summarized by the pro-debt relief group the Jubilee Debt Campaign, in fact only 8 % of the €252 billion loaned by Greece from the Troika has gone to Greek public spending. The rest has gone to pay off on the principal and on interest on privately held loans – mostly from German and French banks; on ‘recapitalizing’ Greek banks – i.e., buying large shares in banks that held government debt and which would likely collapse after the debt swap in the second agreement; and to cash payments for private investors – again, mostly the same banks and investment funds – as part of the debt swap agreement.

Finally, around €20 billion have been injected into Greek government budgets: a figure that will do little good when overall unemployment stands at 26 % and youth unemployment is at 49 % – and which will have to be paid back, with interest.