Evidence mounts that Greece cooked the books

Feb 16, 2010
Edward Helmore

Euro falls as the scent of a pan-European ‘sub-prime’ debacle spooks markets

There are new questions over the reliability of Greek accounting - this time over the extent of its austerity package. European politicans, already unnerved by Greece's accounting prior to its entry into the euro and fudged deficit figures, are demanding further austerity measures to ease the country - and the euro - back from crisis.

But the new calls for further and deeper cuts in Greece's runaway public sector spending come as the European Union's statistical agency, Eurostat, has had its powers to audit member states weakened. This bizarre and contrary manoeuvre comes less than a day after it was revealed that two Wall Street firms, Goldman Sachs and Morgan Stanley, helped Greece and possibly other member states keep the full extent of their borrowing off the books.

The scent of a sub-prime debacle re-enacted on a pan-European scale continues to spook the markets and there is widespread unease that other peripheral states will eventually be forced to reveal that they, like Greece, submitted incorrect figures to conceal the size of their deficits. Yesterday, the euro fell to a nine-month low.

The Greek government says its measures will reduce the budget deficit to 8.7 per cent from 12.7 per cent of gross domestic product this year and pledges that by 2012 it will be back under the three per cent limit for euro membership. But many officials describe Greece's projections as fantastic as its fables and the EU is looking toward a stringent programme of verification.

It is also questioning the Greek government over its unannounced use of complex, Wall Street-devised financial instruments designed to mask deficits. "The truth is that we cannot just assume that trust is sufficient," Jean Pisani-Ferry, director of Bruegel, a research institute in Brussels, told the New York Times. "This is a precedent and the conclusion is that you have to be much tougher on actual statistics and the quality of them."

But others point out that cooking the books is not so unusual: both France and Germany have at various times sold off assets to trim deficits. "Fiddling the books has become the order of the day," Karl Heinz Däke, president of a German taxpayers' lobby group, once explained. "The German government and other European countries are hiding their cards from the public."

What of the banks? In most instances, governments were helped by the big investment houses. The question is to what extent have the banks profited not only in terms of fees - one of Goldman's Greek deals earned $300 million in fees, as I reported yesterday - but in terms of shorting Greek bonds using knowledge that the states finances were worse than publicly known.

The New York Times' lead economist Floyd Norris says the EU should go further. "It should seek to find out if the banks that helped Greece lie — and thus knew its numbers were false — made money betting against it." If they did, they should be made to give up their profits.

Sign up for our daily newsletter