September 2015 Issue 6142 www.theaccountant-online.com

The Accountant EDITOR’S LETTER

Tantalized

Editor: Carlos Martin Tornero Tel: +44 (0)20 7406 6706 A large number of legendary stories, chron- As if Zeus would have hurled Email: [email protected] icles and anecdotes from both history and my- his thunderbolt at Greece’s Deputy Editor: Vincent Huck Tel: +44 (0)20 7406 6709 thology could illustrate Greece’s current trag- accounting books. Eureka! Email: [email protected] edy. The best one, to draw an analogy which There is no unsustainable Reporter: Franchesca Hashemi captures Greece’s burden after the third bailout, debt anymore. The problem is that Greece’s Tel: +44 (0)20 7406 6704 Email: [email protected] is that of Tantalus. creditors either play dumb or don’t want IPSAS The English verb, tantalize, comes from this themselves; otherwise any bailout should have Contributors: Alex Malley and Nick Dunbar hero’s eternal punishment in the Greek under- been subjected to the condition of using those (comment) world or the Tartarus. As the mythological ac- international standards. The Accountant is a sister publication of International Accounting Bulletin count has it, Tantalus was condemned to stand Well, it happens that governments and poli- in a pool, under a fruit tree. ticians are not always for transparency. Take Group Publisher: Ameet Phadnis Whenever he was thirsty, the water would re- Germany for example, Greece’s biggest single Tel: +44 (0)20 7406 6561 cede; and whenever he was hungry, the branch country creditor. For its federal government, Email: [email protected] bearing the fruit would be no more at his reach. Germany still uses cash accounting. That spares Subscription Enquiries: Sharon Howley Similar dynamics can be identified when mea- Angela Merkel of telling taxpayers that the mon- Tel: +44 (0)20 7406 6615 Email: [email protected] suring Greece’s debt, but with a third party com- eys given to the Greeks should have been booked Sales Executive: Alex Aubrey ing in to rescue Tantalus from his as a loss under IPSAS. But Germans Tel: +44 (0)20 3096 2606 torment. are intelligent people, capable Email: [email protected] Official lenders in subsequent of squaring the circle: the rescue Director of Events: Ray Giddings Tel: +44 (0) 203 096 2585 bailouts have given Greece the packages given to Greeks banks Email: [email protected] chance to reach the fruit and quench will also end up servicing their Customer Services the thirst that Tantalus never had. debts with German counterparts. Tel: 020 3096 2636 or 020 3096 2622 Email: [email protected] Among the Good Samaritans are the Don’t get me wrong, Greeks are IMF and European partners, notably the masters of their own destiny, ACCA members may include reading Germany and France. and should take responsibility for The Accountant towards their CPD if it has provided knowledge/skills relevant to their Yet the loans, like a Trojan horse, being stuck in the Tartarus. Yet role or career aspirations hid unpleasant surprises for prodi- Greek mythologies fall short in ex- For more information on accessing The Accountant gal Greece: austerity measures im- plaining this descend to the under- content online, including a five-year archive, please telephone +44 (0)20 7406 6615/6593 posed by what nowadays seems to world. A thorough account of how be the economic orthodoxy. But the debt was formed (and how the London Office A lighter burden by 71-73 Carter Lane whether you are a staunch Keynes- psyche of Greek society contrib- London, EC4V 5EG accountants’ standards ian or a stalwart supporter of Fried- uted to it) can be found in Jason Asia Office rich Hayek, there is a problem at the Manolopoulos’ book: Greece’s ‘Odi- 20 Maxwell Road #04-02J, Maxwell House very outset: Greece’s debt numbers ous’ Debt: The Looting of the Hel- Singapore 069113 don’t add up. lenic Republic by the Euro, the Political Elite and Tel: +65 6383 4688 Email: [email protected] Under accrual-based International Public the Investment Community. Financial New Publishing Ltd, 2014 Sector Accounting Standards (IPSAS), Greece’s Another essential book, shedding light on the Registered in the UK No 6931627 gross debt is 68% of GDP and not 180% – lower connection between democracy and accoun- ISSN 0001-4710 than Germany’s 80% (These are 2013 figures of tancy, is Jacob Soll’s The Reckoning: Financial Unauthorised photocopying is illegal. The contents of this publication, either in whole or part, may not , one of the largest private Accountability and the Rise and Fall of Nations. be reproduced, stored in a data retrieval system or transmitted by any form or means, electronic, holders of Greek bonds). Defying logic and com- The chapter about the first bailout in history mechanical, photocopying, recording or otherwise, mon sense, Greece’s debt is being measured (engineered by Robert Walpole, the first Prime without the prior permission of the publishers. at its face value and not at its fair value. That Minister of Great Britain) will help you debunk Carlos Martin Tornero Te Accountant Editor means the concessionary terms of the bailout the many myths contemporary politicians want Journalist of the Year for Regulatory Issues 2014 (e.g. low interest rates and long-term maturi- to perpetuate. In the meantime, on pages 10- State Street UK Institutional Press Awards ties) are unaccounted for, despite being a sort 15, you can read our country survey on Greece. of debt relief. So with IPSAS the problem seems to be solved. Carlos Martin Tornero

CONTENTS NEWS 02-03 COUNTRY SURVEY 10-15 IN FOCUS 04-09 DATA MONITOR 16-21 www.theaccountant-online.com September 2015 ❙ 1 COUNTRY SURVEY GREECE The Accountant

Debt under IPSAS: Greece’s cathartic hope

Under International Public Sector Accounting Standards (IPSAS) Greece’s debt burden as a percentage of GDP would be lower than Germany’s. After a third bailout Greece is a spectator of her self-inflicted tragedy, yet creditors deny her the catharsis IPSAS might bring to the country’s public finances, writes Carlos Martin Tornero

s chaos, my friend, says on the other sovereign debt in Munich under the auspices country is not getting the benefit that oth- end of the line in California economic of investment firm Japonica Partners, whose erwise should get from rating agencies and historian Jacob Soll. As we speak about founder and CEO Paul Kazarian is one of capital markets.” Greece’s recent bailout agreement, a the largest holders of Greek government As Serafeim argues, if Greece used IPSAS I bonds. the discussion about what the country needs news alert pops up in our phones: Alexis Tsipras, the Greek Prime Minister, resigns At this forum, all accountants agreed that to do next would be re-framed. Accord- and calls for a snap election. in the real world Greece’s debt would have ing to him the culture of transparency and In July Greece and its creditors have agreed been restructured many times and would accountability that IPSAS would bring, on a third bailout package of €86bn ($98bn) not be worth as much, Soll says, while could increase much-needed investor confi- so that the country can avoid defaulting on non-accountants scoffed at this accounting dence in Greece, and internally would lead its debt. dimension of the problem. to better decision making. Yet in June ahead of the deadline for debt Soll says: “They said this is the world of Among those who have attempted to get repayments 61.3% of the Greek people, the politics, not the real world, where we Greece’s debt figures right are, for obvious tired of long-standing austerity measures, have agreements to honour. Now, I under- reasons, Kazarian’s Japonica Partners. They had voted “No” in a referendum about the stand political agreements, but accounting is estimated that at the end of 2013 Greece’s conditions associated with the new bailout. rarely on the public’s agenda: is something gross debt was 68% of GDP (lower than Many had seen the referendum as a de we don’t discuss and gets swept under the Germany’s 80%) and its net debt just 18%. facto ‘Grexit’ plebiscite, a No-vote meaning rug.” Those calculations contrast with the 175- departure from the EU single currency and Another attendee at Japonica’s debt con- 180 % of GDP that the ’s perhaps from the political union as well. ference was George Serafeim, Jakurski Fam- face value definition of debt shows. The rest is already recent history: Tsipras ily associate professor of business adminis- At the standard setting board that sets negotiates and accepts the tough conditions tration at Harvard Business School. IPSAS, technical manager Paul Mason says that come with the deal; the Greek parlia- Serafeim believes that Greece is failing to he hasn’t seen Japonica’s figures himself but ment and the EU partners approve it; and recover because of its inability to build trust the accounting for financial instruments in Tsipras wins the second snap election in a and confidence, in which accounting has a IPSAS is the same as for the private sector year, thus revalidating his mandate to man- big part to play, he says. under IFRS. age the bailout package after being chal- An Athenian himself, Serafeim under- “What you need is all the information lenged by the most anti-austerity flank of his scores that Greece’s debt burden has never about what the terms are and what the mar- own Syriza party. been officially measured using IPSAS. ket rates would have been when those loans For Soll, being the author of The Reckon- “We’ve never tried to do it. People have were taken out. One interesting thing about ing (a book that investigates the connection been using the debt’s face value, which IPSAS is that, in terms of how you would between good public finances and democra- doesn’t mean anything. Under IPSAS you measure the debt, you would get the same cy throughout the centuries) Greece’s conun- always consider the fair value, and that’s log- results as under IFRS. That’s because the drum must seem like a bizarrely familiar ical, because you need to take into account standards we have for financial instruments story of politicians’ vested interests diverting the interest charged on the debt and the are based on IFRS pretty much word for from those of whom they represent. maturity level,” Serafeim says. word, with additional public sector guid- “One of the most fascinating things for me He continues: “The country received this ance,” Mason says. is to take Greece’s debt numbers to account- year another €86bn but that’s based on con- ants, whether they are right or left wing, cessionary loans: very long maturities and Where there’s a will… all agree that according to internationally interest rates below the market rates for a In light of this summer’s bailout the Char- accepted standards of accounting the debt country with the creditworthiness of Greece. tered Institute of Public Finance and would be worth less,” he says. IPSAS would show this implicit debt relief, Accountancy called on Greece to use IPSAS, Soll attended this summer a conference on but because we’ve never measured it, the and its chair Ian Ball wrote a letter to Finan-

10 ❙ September 2015 www.theaccountant-online.com The Accountant GREECE COUNTRY SURVEY

Comment by Nick Dunbar: The eternal Greece of the financial engineer’s mind

Exactly 12 years ago I wrote about a Greek disappearing act: how Well-intentioned as these proposals are, it’s hard not to be in 2001 the country concocted a swap deal with to reminded of deals like the Goldman swap. Twelve years ago, it was conceal almost €3 billion of debt from its national accounts, to help about making the debt appear smaller with Eurostat’s tacit agree- meet Maastricht ratios. This story refuses to die: a former Goldman ment. Now it is about keeping it large. With Greece, the theme banker recently suggested that Greece sue the bank to recover the is always the same: financial engineering deployed to maintain a profits it made on the deal. politically driven illusion. In July I found myself in Munich as part of a discussion wheth- Since the ultimate collateral for Greece to repay its debt is future er Greece could shrink its debt again – this time by hundreds of growth, we find that this is also fertile territory for the financial billions of euros. Instead of a secret derivatives deal, the method engineer’s imagination. Back in the time of Greece’s entry to the would be a more transparent bookkeeping adjustment that would euro, the country busily securitised any future stream of cash flows bring the country in line with modern national accounting stand- it could find to raise cash and reduce its debt burden. All of this ards. I will return to Goldman in a moment, but let’s first consider was a diversion from the real challenge, which was to make Greece Greece’s present predicament. competitive within the . In the Munich conference which was hosted by Germany’s IFO Knowing how badly Greece and its creditors failed at that chal- institute, the driving force was US investor Paul Kazarian, who is lenge, it’s all the more pathetic to see the succession of U-shaped believed to be the largest holder of Greek government bonds. In recession-recovery curves that the creditors used to justify the bail- front of an audience of economists, accounting experts and lawyers, outs from 2010 onwards. None of these bailouts could reverse the Kazarian argued passionately for his idea: if you valued Greek debt downward path of GDP, hastened on its way by austerity. Most on a market value or accrual basis, all the relief measures taken tragic of all was the fleeting recovery in 2014 (when Greece was since 2010 would add up to a €200bn haircut. If you then sub- fleetingly able to borrow in the private markets once more) now tracted Greece’s net financial assets of €90bn from that (this is a erased in favour of a further downward GDP plunge. Eurostat 2013 figure) then you get to a net debt position of €33bn, For such an illusion to persist in the minds of intelligent human or 18% of GDP. beings against the repeated contradictory evidence can Although economists at the conference quibbled only mean that rationality is being displaced by an about some of the numbers (the assets for example), article of faith. And we know what it is: Greece’s the point is that when compared with the equiva- membership of euro currency itself, something lent numbers for Ireland, Portugal or Spain, this Greece’s leaders and its creditor organisations looks like a far from unsustainable burden. It both cling to. doesn’t require any new debt relief programme, So bad is the pain that one can’t be surprised but merely a recognition in accounting terms that the Greeks have a heightened sense of vic- of what has already taken place. Kazarian may timhood, even though many Greeks acknowledge have some heavyweight accountants backing his that the problem starts at home with a culture that numbers, but the political realities left him sounding make them unable to reform. And it isn’t really a sur- exasperated. prise that the idea of suing Goldman over that infamous On one hand, the Eurogroup, led by Germany’s finance min- swap deal is now being suggested. ister, refuses to budge from the official €315bn figure, because it The idea is tempting, because Goldman gouged its client, making doesn’t want to acknowledge the transfer that has already taken over €600m in a single day as I reported for Bloomberg in 2012. place. On the other hand, it suits Greece’s Syriza government to While legal, the deal was wrong and remains a stain on the bank’s say it owes €315bn because it sounds crippling and gives more reputation. However, if I was the Greeks I would be wary about negotiating leverage. starting a lawsuit. In other words, it’s OK to say that Greece has had debt relief but Not just because success in a London court would be elusive. not to recognise it in the accounts. Consider the European Stability After all there is plenty of evidence that the Greek government was Mechanism’s 2014 annual report which lists the various steps taken far from a victim but a “willing sinner” in the words of its former since 2010 – repeated debt maturity extensions and interest rate debt chief Christoforos Sardelis. More to the point, by suing Gold- reductions, amounting to an “economic reduction” of 49% of 2013 man, Greece would risk putting itself on a parallel with Libya, a GDP. Yet when it comes to the balance sheet reporting of Greece’s country far richer than Greece on paper but one that has become debt, the ESM insists these measures “do not entail any financial a failed state. And even if such a case was winnable, Greece would loss or writedown”. be once more distracting itself from its real task at hand: reforming Instead, current suggestions involve an element of financial itself so that it is capable of attracting investors and repaying them engineering: for example, professor Mitu Gulati’s proposal at the like a normal country. conference that Greek debt be tranched like a securitisation, with Until Greeks grasp that nettle they are doomed to remain in a hall official sector lenders taking the most subordinated, junior tranche. of mirrors, trapped in the dreams of financial engineers. Gulati suggested that this would encourage private sector lenders to invest in Greek debt, but it also amounts to a haircut in all but Nick Dunbar is the journalist and author who broke the story on name. (Gulati was involved with lawyer Lee Buchheit in advising Greece’s currency swap deal with Goldman Sachs while working Greece on its 2012 private sector debt restructuring). for Risk Magazine in 2003. www.theaccountant-online.com September 2015 ❙ 11 The Accountant COUTheN AccountantTRY SURVEY GREECE EDITOR’S LETTER

cial Times in which he denounced: former Goldman Sachs investor. The social- acknowledge, according to Dunbar, that the “If [IPSAS] is not an appropriate basis for ists, the conservatives, even the communists, debt burden is unsustainable as it gives the measuring debt, then every company listed nobody wants transparency except for a government more leverage in negotiations. on major stock exchanges around the world Wall Street investor. That’s when you know “So, you have Paul Kazarian pointing out has got its debt measurement wrong. This that the world has turned upside down!” that the emperor hasn’t got any clothes, but pervasive misunderstanding of Greece’s real no one is listening,” Dunbar says. fiscal position has seen agreements reached Greece’s Stockholm syndrome Soll makes it clear that he doesn’t defend between Greece and its creditors which do If accountants (and Kazarian) are right any party. But he stressesn the fact that the not address the real problem and may actu- about IPSAS, shouldn’t any bailout package lack of IPSAS is bringing out the worst in ally intensify it.” have been subject to the condition of using everybody. In June Greece’s former Deputy Finance those international standards to measure the “If I were Germany, and I had lent billions Minister announced that IPSAS would be debt in the first place? If those numbers don’t to Greece, I would say: Look, the first thing implemented. A Greek accountant, who pre- add up, is Greece being kept in a debtors’ I want you to do is adopt IPSAS. And you ferred not to be named, says that an ad hoc prison or kidnapped by her own creditors? don’t have to take our accountants; we’ll working group has been formed following Jason Manolopoulos, co-founder of bring them from Australia or New Zealand, the announcement to support this reform. investment firm Dromeus Capital and outside guys who don’t have any goal on But implementing and effectively being author of the book Greece’s ‘odious’ debt this. Clearly, the Germans haven’t asked for able to use IPSAS is another matter alto- (published by Anthem Press), takes with a the right reforms,” Soll says. gether. “Let me remind you that several pinch of salt Kazarian’s arguments. Manolo- He continues: “Why doesn’t Europe call government officials have made the same poulos says he used to agree that the coun- on Germany to reform their accounting announcement during the past years,” Sera- try has a very good debt profile, but then he standards? Why are not major leaders of feim recalls. changed his mind. accounting firms saying: We would step in; One of the points Kazarian has made is “It had nothing to do with the debt itself. we would help you referee the debate about that Greece lacks the technical capacity to It’s just that there isn’t any incentive for the debt. We are really stuck.” measure its debt under IPSAS. As part of Greece to access public markets again. The However, Soll is sure that the Greeks a Japonica campaign the investment firm situation is very perverse. As long as Greece wouldn’t like outsiders coming in and med- has published one-page job adverts in main is in the doghouse it would get refinanced at dling in their affairs; third parties such as financial papers to recruit a Greek Finance zero or 1% by the official lenders. So why the troika (the European Commission, the Minister with the right skills: one who should Greece be a good boy and go to the and the Internation- understands accounting, finance and turna- markets, if is going to be penalised?” al Monetary Fund). round. Such adverts suggest that, for Japon- But Greece, while seeming to remain hap- This comes back to the point of Greece’s ica, incumbent and Oxford-educated Euclid pily in such a debtors’ prison, is not the only capability. Soll thinks the country lacks Tsakalotos might not be the right man. one to blame for this ‘Stockholm syndrome’ skilled accountants and proposes the idea of Soll seems to agree on Greece’s inability to that doesn’t encourage the country to under- an international mediator with the relevant use IPSAS: “Greece has adopted IPSAS but go internal reforms. accountancy skills. they can’t apply it. I mean, under Varoufa- It’s worth remembering that Germany, “Why can’t we have an international team kis the Finance Ministry had fewer people one of her biggest lenders, has no interest in of inspectors agreed on by the international than my history department; and Greece has using IPSAS at all. The situation as described and the accounting communities to mediate no accounting tradition, they don’t produce by journalist and author Nick Dunbar is a a solution? We do it for wars, genocides, accountants there.” “marriage of convenience” between the two nuclear power, why not for finance? Jimmy Serafeim dismisses the argument that sides of this story. Carter used to look over elections all over Greece lacks such a technical capacity call- While working for Risk Magazine, Dun- the world. The problem is that we don’t have ing it just an excuse. “If Greece doesn’t have bar brought to light Goldman Sachs and an accounting leader who stands up and gets the capability then it can surely get it from Greek government’s currency swap deals involved,” Solls says. other European countries that have already to reduce national deficit in the run-up to done those reforms. If a medium-sized cor- Greece’s entry in the Eurozone (see box with An ‘odious’ debt? poration can apply international accounting Dunbar’s comment piece). One pressing question which has not been standards, I’m sure the government can do For Dunbar the idea that Greece’s debt is answered so far is whether Greece owes as that as well.” actually lower under IPSAS is “compelling much as her creditors say. Or conversely, Kazarian’s call for IPSAS might be eroded, and politically toxic”. The Eurozone part- how come Greece can receive a third bail- as some commentators have pointed out, by ners would unwillingly have to admit that out from creditors who ignore what the real the fact that he has skin in the game due to they have rescued Greece with the taxpayer’s numbers are, I ask Serafeim. his holdings of Greek debt. money, Dunbar says. “These are political decisions, driven by However, while acknowledging Kazari- “They don’t want to do that, so there is a voters and not by the true numbers. I’m not an’s multibillion dollar interest in Greece, vested interest in denying the economic real- a politician, so I wouldn’t be able to com- Soll says: “The whole story in itself is that ity of the bailout.” At the same time the Syri- ment on that. Yet they seem very poorly the only person asking for transparency is a za government finds politically convenient to advised decisions,” he answers.

12 ❙ September 2015 www.theaccountant-online.com The Accountant GREECE COUNTRY SURVEY

Q&A with Ian Ball: “It is never too late to demonstrate a determination to be accountable”

Ian Ball, chairman of the Char- to adopt IPSAS or accrual account- IPSAS were applied Greece’s debt what is specified in the Maastricht tered Institute of Public Finance ing, the capacity has to be built or would be significantly lower than Treaty). and Accounting (CIPFA) and hired. the conventional figures. What are financial transparency cham- Governments currently using cash Greece’s debt true numbers? TA: Has anybody measured and pion, answers the questions of accounting will never have the audited Greece’s debt? The Accountant on Greece’s capacity to operate a full accrual Ball: The difference between the misleading debt measurement. based system – it would be wasteful IPSAS based number and the Ball: The most detailed measure- for them to do so. So, if they wish “conventional figures” is that the ment of Greece’s debt of which I am The Accountant: The former to move to accrual accounting, they latter is the face value of the debt, aware is that produced by Japonica Greek Deputy Finance Minister will need to develop the capacity. whereas IPSAS takes account of the Partners as at December 2013. It announced in June that Greece length of the maturity of the debt has a Big Four expert opinion to would be implementing IPSAS. Is TA: Germany, Greece’s toughest and concessional interest rates. support their numbers. it too little too late given that the creditor, doesn’t use IPSAS either. Economists also agree, and it is This is reported on the website announcement has not been fol- How can this be interpreted? Does increasingly being recognised by www.mostimportantreform.info lowed by the use of the internation- this situation benefit Germany in informed commentators, that debt al standards yet? TA: In that respect, what could be the consequences of bailing out a Ian Ball: There are two key issues country such as Greece ignoring its concerning the use of IPSAS in real financial position? Greece. First, have they committed to reporting transparently on an Ball: There are many potential con- IPSAS basis and are they actively sequences of using the wrong infor- working to give effect to this com- mation on Greece’s financial posi- mitment? It is never too late to tion. They could be given debt relief demonstrate a determination to be which they do not need, and they transparent, and therefore account- could be held to conditions which able. Second, are they using the are harsher than are required. framework of financial statements Investment into Greece, and con- that are required by IPSAS to assess sequentially economic activity and

major financial decisions? Photo: IFAC job creation, could be stifled both They can do this ahead of full by the misperception of Greece’s implementation of the standards, position and by the conditions and it would reflect an understand- any way? with long maturities and conces- imposed. Perhaps most important- ing of why IPSAS are important sional interest rates should not be ly, the real problems which Greece – that is to have the complete and Ball: Germany’s reluctance to measured at its face value. So we does face, go unaddressed. correct information for financial adopt IPSAS pre-dates the Greek see academic economists like Pro- decision-making. crisis, but signals an unwillingness fessor Paul de Grauwe at London TA: Some argue that in the case of Information on cash flows and to produce financial information School of Economics writing that Greece, it wouldn’t be farfetched to nominal debt is partial, inadequate, that is fully transparent and inter- Greece may have a liquidity prob- talk of an “odious debt”. Would and especially when the debt has nationally comparable. If Germany lem, but does not have a solvency this longstanding disregard for long maturities and concessional used IPSAS, it would need to report problem. IPSAS encourage the idea that the interest charges, misleading. a loss associated with its holdings Accounting and economic debt is illegitimate? of Greek government debt. Under measurement systems both seek to TA: Does Greece have the technical a cash basis of accounting, this is convey economic reality and both Ball: No, as many countries do not capacity to do so? not the case. emphasize the importance of eco- (yet) adopt IPSAS and that is no nomic substance over legal form reason to regard their debt as odi- Ball: Like any government moving TA: Accountants agree that if (the face value of debt – which is ous.

Ball shares a slide of New Zealand’s Government financial statements at Rome’s 2014 World Congress of Accountants

Soll observes that these political decisions the debt but introduces IPSAS. Otherwise we used IPSAS. Yet I’ve had prime ministers go against accounting standards. “That we’ll keep having these violent manipula- in Europe laughed at my face when I say we would not be right in any kind of financial/ tions or misunderstandings, call them what need accountants. That, historically, scares business real world. [This situation] is a fast- you want.” the hell out of me.” growing ulcer that threatens the whole Euro- He continues: “The other problem is ama- As Manolopoulos writes in his book, pean project. I cannot see five years down teur governments. Again, only accountants future generations may challenge whether the road if someone not only restructures would tell you that the numbers are right if they should pay the bill that older ones have www.theaccountant-online.com September 2015 ❙ 13 The Accountant COUTheN AccountantTRY SURVEY GREECE EDITOR’S LETTER

accrued and therefore would look up the definition of ‘odious’ debt. “The other problem is “I put the odious in inverted commas amateur governments. because I knew what was going to hap- Again, only accountants pen: people would say that this debt is not would tell you that the ours, while with my book I just wanted to stimulate discussions about the nature of this numbers are right if we used debt,” he tells The Accountant. IPSAS. Yet I’ve had prime The concept of odious debt was coined by ministers in Europe laughed international law expert Alexander Nahum at my face when I say we Sack in the 1920s. This legal theory allows repudiate the national debt incurred by a need accountants. That, government who is acting against the inter- historically, scares the hell est of its people. This legal construction was Jacob Soll out of me” Soll based upon the US annexation of Cuba after the 1898 Spanish-American war, which did not include the debt incurred by Spanish “The situation is very colonial rulers over centuries. More recently the concept was invoked perverse. As long as Greece by the US ahead of its invasion of Iraq in is in the doghouse it would 2003 and in preparation of the post-war get refinanced at zero or 1% reconstruction. The US called for a meeting by the official lenders. So of G8 finance ministers in which the concept of odiousness was instrumental to repudiate why should Greece be a good the Iraqi regime’s debt. boy and go to the markets, It could easily be argued whether this if is going to be penalised?” could apply to a democratically elected gov- Manolopoulos ernment, ironically in the country credited with the invention of democracy (literally from ancient Greek: demos and kratos, or Jason Manolopoulos the case of those who see features of odious- rule of the people). ness in Greece’s debt. But to what extent Greece’s successive in the long term. And the price Greece paid “Under the strict international laws governments since the early years of the for it was very high: in its attempt to hide Greece’s debt is not odious but if you look at ‘EUphoria’ have unconditionally acted in less than €3bn it ended up owing more than how the debt was formed you have complic- the benefit of its people? €5bn. It wasn’t a good transaction.” it players. Clearly the Greeks have the full A clear example was the secret deal Could the subsequent Greek responsibility but international lenders knew between Goldman Sachs and the Greek gov- be blamed on the Goldman’s deal? I ask what was happening,” Manolopoulos says. ernment that Dunbar unearthed and pub- Dunbar. “Not at all. It wasn’t the cause of Manolopoulos doesn’t spare his fellow lished in July 2003. While being an impor- Greece’s problems but it has a large symbolic countrymen of criticism, his book thor- tant story, Dunbar recollects, at the time was weight: it’s a symbol of those problems.” oughly analyses the structural issues that not as prominent as it should have been. The deal was once eloquently described by have hindered Greece’s reforms: clientelism, “It was ignored by a lot of people. The US senator Mark Kirk in a 2010 parliamen- cronyism, nepotism, corruption, red tape, a ECB and Eurostat claimed not to have tary hearing: bloated public sector. known about the story until Die Spiegel kind “As Greece got on the heroin of borrowed As he writes in Greece’s ‘odious’ debt, the of rediscovered it in 2010 – basically repub- money, Goldman was the crack dealer. And EU was the safe haven, the safety net. Greeks lishing the story, almost without attributing did not disclose these increasing liabilities to felt they were too important to fail, and the source. So for six years and half the story the EU financial system, to the IMF, or to should a crisis come, the Europeans will help was in the public domain but these crucially the Fed.” them. “This is the problem with free riding. important institutions for the governance of As much as the Goldman deal was legal, If you have a trust fund to fall back on, you the Eurozone weren’t aware of it.” the bribes allegedly paid by German com- don’t work so hard at school. [...] Thus, is As Dunbar recalls, the rediscovery of his panies to politicians in exchange of public no coincidence that the pace of reform went scoop came at a time when a new Greek contracts don’t seem to be either lawful or through a major slowdown after Greece government announced a shock revision to legitimate. joined the Euro.” deficit ratios and added momentum to the Those scandals, such as the ‘gifts’ Siemens But as Manolopoulos now tells The suspicion about its accounting. allegedly presented to Greek MPs, reported Accountant, it takes two to tango, in refer- “It was damaging in the sense that Greece by international media in the last decade, ence to the ultimate beneficiaries of bailout tried to hide something and didn’t succeed coupled with the disregard for IPSAS, build funds. “The bailouts made sure that the Ger-

14 ❙ September 2015 www.theaccountant-online.com The Accountant GREECE COUNTRY SURVEY

“If Greece doesn’t have the China, India, South Korea and the United Arab Emirates spent more in arms than capability [for IPSAS] then Greece. However relative to size and wealth it can surely get it from of the population, the adjusted ranking other European countries placed the UAE at the top followed by that have already done Greece. Manolopoulos also quotes SIPRI research- those reforms. If a medium- er Siermon Wezeman in his book: “The sized corporation can apply Greek navy is the same size as the Dutch, international accounting Danish and Norwegian navies combined standards, I’m sure the in terms of the number of ships.” That’s possibly a very telling example as Greece’s government can do that as post-bailout welfare state pales compared to well” Serafeim George Serafeim those enjoyed by her Dutch and Scandina- vian peers. Another pearl from SIPRI’s annual report, “One interesting thing about dated March 2010, is Germany’s credentials as arms exporter: the world’s third largest IPSAS is that, in terms of one, after the US and Russia. And interest- how you would measure ingly enough, its top two buyers were Tur- the debt, you would get the key and Greece with 14% and 13% of sales, same results as under IFRS. respectively. No wonder then, Germany and France are That’s because the standards also Greece’s biggest creditors, with holdings we have for financial of about €57bn and €43bn each. instruments are based on However, asked who benefits more IFRS pretty much word for from the whole situation, Greeks or its creditors, Manolopoulos answers word” Mason that none of them in the long run: Paul Mason “It’s all just damage control. Greece has man and French banks didn’t go bust. It’s a not been thrown to the wolves and credi- merry-go-round: they are lending us to give Greece for €2.5bn, helicopters for more than tors haven’t taken the heat right now. But back to themselves.” €400m, and Rafales at 100m apiece. after six years of depression, reforms and a He says that was Varoufakis’ argument, “My sources don’t allow me to say wheth- growth package are needed so the money someone with whom he doesn’t generally er it’s 10 or 20 of 30 Rafales. That adds up to spent in Greece goes somewhere produc- agree. However Manolopoulos says: “The almost €3bn! Germany has sold 6 submarine tive.” good thing about Varoufakis, amid all the vessels for €1bn over the coming years. We That’s an assertion which seems to be huge damage he did, is that he forced people are really a bunch of hypocrites! We are giv- shared by Serafeim when asked about the to look at ideas and arguments more deeply. ing the Greeks money to buy arms from us!” potential odiousness, or at least sustainabil- Before it was too much of a one-sided discus- In Manolopoulos’ book is well document- ity, of Greece’s debt. sion: Greeks are just lazy. But it’s much more ed Greece’s arm spending, where he explains “Any debt can be a debt that cannot be complicated than that.” how France and Germany, have benefited repaid. This always depends on the under- commercially the most from weapons sales lying productive capacity of the economy.” Spartan austerity in the Aegean region. According to him, if the country gets right Among the austerity measures imposed According to Manolopoulos’ account dur- a number of key reforms (property rights, by the first bailout package of 2010, there ing 2010 talks between the Greek govern- reduction of the cost of capital, stop the seems to have been some exceptions, namely ment and French company DCNS over the brain drain and retaining high quality entre- arm spending. purchase of six frigates were underway, at a preneurs) Greece’s capacity to repay the debt As denounced by Daniel Cohn-Bendit, combined estimated cost of €2.5bn, the same would increase. former Member of the European Parliament figures Cohn-Bendit referred to. Serafeim continues: “Bailout programs are for the Green party, France and Germany He also provides data from the Stock- badly designed because they tend to ask for were quick to remind Greece that austerity holm-based International Peace Research too many things, instead of focusing on the was not an obstacle to keep up their arms Institute (SIPRI). According to this organi- few aspects that really matter – that’s a fun- deals business as usual. sation Greece was among the top five largest damental principle of turnaround. In a famous address of about that time the recipients of major conventional weapons “I think those bailouts programs should MEP said: “This is all gross hypocrisy! In during 2005 to 2009. be about increasing accountability and recent months, France has sold six frigates to During the same five-year period only transparency in the public sector.” www.theaccountant-online.com September 2015 ❙ 15