Corruption in Greece

Back in June, the Herald de Paris reported 'Corruption costs Greece billions'. Greece's annual report on 'maladministration, bureaucracy and corruption' has been released a few days ago. It reveals a number of breath-taking cases of Greek officials lining their pockets. There is for instance the case of an employee in the ministry of health care who turned out to be 'hyper-active', earning wages for being a member on 31 different commissions.


The retired 'vice president of the association of culture ministry employees' was found to have 9 million euro parked in his account the source of which he was unable to explain. The man's job was overseeing the payments for over-time at the ministry. Auditor General Leandros Rakintzis, who heads the investigative committee, mentions in his report that evidently no taxes were  paid on these funds.  According to the German-language Greek news service '',


“Einer Instruktion des ehemaligen Staatssekretärs im Finanzministerium, Antónis Bézas, zufolge müssen Gelder, deren Herkunft nicht ausgewiesen wurde, nicht versteuert werden.”

Translation: “According to an instruction issued by former secretary of state in the ministry of finance, Antonis Bezas, no taxes need to be paid on monies the provenance of which has not been revealed”


That sounds extremely convenient.  The report contains more astonishing revelations. As Rakintzis points out, “members of the communal administration regard themselves as barons and feudal lords, taking decisions without any accountability whatsoever”. This is supposed to change with the help of a new law that is currently in the works. According to the report, some employees of the 'school building administration' earn higher salaries than the Greek prime minister.

The tramway corporation of Athens, a government-owned company which groans under a debt load of € 100 million, has seen its employee head count grow by 250% since 2004 – while the tramway network remains at exactly the same size as before.

Last year Transparency International reported that


“More than 13% of Greeks resorted to giving “fakelakia” (or little envelopes) in 2008, paying an estimated €750 million [US $950 million] in bribes to public and private officials in 2008, €110 million [US $140 million] more than the previous year, according to the survey (Associated Press, AP). Yiannis Mavris, head of the Public Issue, the polling firm commissioned by TI Greece to undertake the survey, noted that the amount equates to an “average of 1,450 euros [US $1,850] in bribes per family.”


According to Kathimerini, Rakintzi's investigation involved


“4,440 checks carried out by state inspectors last year on the declarations of source of wealth (“pothen esches”) forms submitted by officials in central and local government. These inspections resulted in a total of 909 officials being indicted to appear before a prosecutor on a range of charges.”


We note that's a hit rate of just over 20%. Naturally, not everybody is happy that the Auditor General is uncovering massive corruption and trying to put a stop to it. Chief complainant is 'KEDKE' – the union representing local governments (where the bulk of the corruption cases were uncovered).

The Straits Times reports that


“Tempers flared in debt-ridden Greece on Friday as the union representing local governments accused a senior official of 'cheap populism' after he criticized the quality of administration.”

[…] “The comments came as the watchdog published its sixth annual report on public sector finances, in which local governments were described as a sanctuary for wasting public funds and corruption. The comments drew an angry response on Friday from the local government union KEDKE, which accused Mr Rakintzis of 'generalisation and simplification'.”


You can always rely on public employee unions to defend the waste of tax payer funds, apparently even when it's clearly criminal. We on the other hand wish Mr. Rakintzis continued success in his endeavors to bring corrupt officials to account. While the extent of public corruption in Greece is quite shocking, it is a good sign that it is coming out into the open and that someone is actually doing something about it.





Greek auditor general Leandros Rakintzis – has corrupt local councilors in his sights

(Photo credit: Source unknown)



Meanwhile, a recent general strike in Greece, which unfortunately once again included demonstrations that degenerated into violence, appears to thankfully have very little economic effect. 

As the chief economist at Eurobank EFG Group, Gikas Hardouvelis  dryly noted:


“My sense is that there is so much waste in the public sector, and it's essentially public employees on strike, that I don't see much effect”


We would actually go as far as saying that it would probably be best for Greece if they remained on strike forever.


Spain once again denies it needs to be bailed out

Spain seems to be serious in implementing austerity measures, although there continue to be doubts over how strong the government's resolve will prove to be. After instituting an across-the-board 5% wage cut for public employees, Madrid's metro workers went on strike, paralyzing public transport in the capital for several days. The strike has now been temporarily called off, with the union set to decide what to do next in a week's time.

Unfortunately for the union, and fortunately for the tax paying public, the strike has apparently created a strong backlash in terms of public opinion. Needless to say, Madrid's commuters were none too happy, especially as the union appeared unwilling to countenance any sacrifices in an economy where unemployment has soared above 20% and many private sector workers would probably gladly take a small pay cut rather than losing their job.

Note here that wage cuts definitely make economic sense in Spain – the collapse of the inflationary bubble means that prices are now falling in Spain, due to the previous credit expansion having reversed. An artificial propping up of wages will only serve to increase unemployment further. Spain's government plans to reduce the public sector workforce headcount by around 10,600 over the next three years, mainly by attrition.

This is part of  the € 15 billion in spending cuts recently announced by Spain's government. Removing some of the burden of government spending on the economy is bound to have salutary effects and help the economy to recover sooner than it otherwise would. However, in the wake of Moody's recent announcement that it plans to belatedly cut Spain's credit rating from its current 'AAA' perch, deputy prime minister Maria Teresa Fernandez de la Vega was once again forced to publicly deny that Spain is seeking help from the IMF and the EU's bailout fund.


“Deputy Prime Minister Maria Teresa Fernandez de la Vega, has assured that the Spanish economy will grow, "but by ourselves with the measures we have taken," and denied that Spain has requested financial assistance to the International Monetary Fund (IMF). During the press conference after the Council of Ministers, De la Vega denied "absolutely" the rumor of a possible IMF support for the Spanish Government.”


Naturally, official denials have a tendency to become more vehement the closer the denied event comes, but in this case we are willing to suspend disbelief for as long as Spain's government 10 year bond yields remain below 5% and its 5 year yields below 4%. The 5% respectively  4% threshold is a simple rule of thumb regarding the cost of funds from the IMF/EU bailout fund (this cost is not fixed as we noted previously, but amounts to approximately 4%-5% depending on maturity and swap rates).

As long as Spain can successfully auction bonds at yields below this threshold level, it simply would not make any economic sense for it to ask for emergency loans. The most recent Spanish auction of 5 year paper last Thursday was widely viewed as fairly successful, although the bid-to-cover at 1,7 was below the previously recorded 2,35.

However, given that the threat of the Moody's downgrade is hanging over Spain, the auction result was greeted with great relief. Details on the bond auction are available from the FT, which sounds a bit of an overoptimistic note in its report. While the benchmark 10 year yield fell by 6 basis points on Thursday to 4,55%, it is already back at 4,61% as of today. As you can see from the snapshot chart below, yields on Spain's debt remain firmly above the highs recorded prior to the euro-area bailout announcement, so it is way too early to sound the 'all clear'.



A snapshot of the most recent trading activity in the Spanish 10 year benchmark bond. The current yield remains above the highs recorded prior to the euro area bailout announcement.



Even the FT points out that


“The 3.65 per cent yield was lower than the yields for existing five-year bonds, trading around 3.74 per cent, in a sign of the strength of demand. The auction was covered 1.7 times, a high level in these tense times for eurozone debt. However, analysts cautioned against too much optimism as the yields of 3.65 per cent are close to the 4 per cent level that the eurozone emergency stability fund would charge troubled nations to borrow.  This means yields are getting close to the point where it would become more sensible economically for Spain to use emergency loans rather than borrow from the private markets.”


Spain has little choice but to implement austerity measures, but it is impossible to tell whether this will suffice to restore confidence, especially considering the situation the banks find themselves in. Spain's banks keep borrowing enormous amounts from the ECB in order to remain liquid (note here that 'liquidity' and 'solvency' are not the same thing).

The economy meanwhile continues to be weighed down by the aftershocks of the burst inflationary bubble. Housing bubbles are historically especially harmful, as the amounts of malinvested capital and the fall in the value of bank assets are especially large. Meanwhile the banks can not point to an offsetting fall in liabilities, as the deposits created during the boom have long changed ownership, so the claims on the banks are the same as before the bubble burst.

This is a recurring feature of fractionally reserved lending – it creates the boom-bust cycle, and once the bust arrives, it leaves the banking system in dire straits. Note here that without the ECB acting as a lender of last resort with de facto unlimited money creation ability, many euro area banks would be filed under 'history' already.



Spain's deputy prime minister Maria Teresa Fernandez de la Vega

(Photo credit: Source unknown)



According to the Barcelona Reporter “she said that the interview today with the chief executive, José Luis Rodríguez Zapatero at the Moncloa Palace with the IMF's chief economist, Olivier Blanchard, is part of a "courtesy" tour. She explained that Blanchard had gone to Madrid to speak at a seminar on labour market prospects, organized by the Bank of Spain and the IMF, which led to his meeting with Zapatero. The vice president also insisted that there was "no request from Spain to the IMF" and reiterated a message of confidence about the solvency of the economic system.”


Chart by: Bloomberg



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