Greek Financial Audit, 2004
Encyclopedia
The 2004 Financial Audit
for the Country of Greece
described the state of the Greek economy, but some people and organizations have questioned the accuracy of the resulting numbers.
depends on the deficit and debt, as well as the inflation
and the stability of the national currency exchange rate
of a European Union
member state. Requirements are for instance a deficit below 3% of Gross domestic product
(GDP) and debt below 60% of GDP, or if above, declining.
Up until 1995, Greece
recorded very high deficits, for some years above 10% of GDP. Then it miraculously melted down. In 2000, given a deficit below 3% of GDP, Greece was accepted as the 12th member of the European monetary union.
(NSSG).
In March 2002, Eurostat
refused to validate data transmitted by the Greek government. In reaction, the NSSG revised the debt level by several percentage points. In September 2002, Eurostat again refused to validate the data. The debt was revised upwards once again, and the government balance, which the Greek government had presented as a surplus, became a deficit.
) was inaugurated.
When the conservative party New Democracy won the March 7 elections
in 2004, it said it would start an objective financial audit
of the government accounts. George Papandreou
, president of PASOK
which was the main opposition at that time, and the other 2 smaller parties, initially agreed with the need for an audit. But it lasted a very short time during which neither outside auditing firms nor the central bank were asked to carry out such an audit. Instead, the government produced new estimates while investigating the years 1997 - 2003, and the resulting data was given to Eurostat, which then went on and published a report. The requirement that the 1999 budget deficit should have been below 3% of GDP was one the key criteria for Eurozone entry; thus, its revision to 3.38% lead to a controversy about Greece's admission.
Most of the differences in the revised numbers were due to a temporary change of accounting practices by the new government, i.e., recording expenses when military material was ordered rather than received. However, it was the retroactive application of ESA95 methodology (applied since 2000) for the years 1997-1999 by Eurostat, that finally lead to a reference year budget deficit of 3.38% of GDP in 1999, leading to claims that Greece had not actually met all the accession criteria. In the 2005 OECD report for Greece (p.47) it was clearly stated that “the impact of new accounting rules on the fiscal figures for the years 1997 to 1999 ranged from 0.7 to 1 percentage point of GDP; this retroactive change of methodology was responsible for the revised deficit exceeding 3% in 1999, the year of EMU membership qualification”. The above has lead the Greek minister of finance to clarify that the 1999 budget deficit was below the prescribed 3% limit when calculated with the ESA79 methodology in force at the time of Greece's application, and thus, since the remaining criteria had also been met, was properly accepted into the Eurozone. ESA79 was also the methodology employed to calculate the deficits of all other Eurozone members at the time of their applications.
The original accounting practice for military expenses was later restored in line with Eurostat recommendations, theoretically lowering even the ESA95-calculated 1999 Greek budget deficit to below 3% (an official Eurostat calculation is still pending for 1999).
An error very frequently made in press reports, is the confusion of the discussion regarding Greece’s Eurozone entry with the controversy regarding usage of derivatives’ deals with U.S. Banks by Greece and other Eurozone countries to artificially reduce their reported budget deficits. A currency swap arranged with Goldman Sachs
allowed Greece to “hide” $1 billion of debt, however, this affected deficit values after 2001 (when Greece had already been admitted into the Eurozone) and is not related to Greece’s Eurozone entry.
Several arguments have been expressed about the implications of the audit. Some commentators talked about data falsification. Others, though, held a completely different viewpoint. "Irregularities" (the word falsification never officially used) in deficit reporting were also revealed for other Eurozone members, most notably Italy and Portugal, with significant revisions imposed. Also, there were arguments about massive "creative accounting" employed by many states in order to meet the deficit criterion for entry into the Eurozone. Even the practice of one-off measures by so many states has been criticised, since in several cases their deficits rose back over 3% soon after the reference year, while big economies like Germany and France seem to defy the rules for years. Last but not least, changes in accounting method often seriously affected the deficit numbers (Spain and Portugal had, like Greece, marginally exceeded 3% in their reference year for entry, when their deficit was revised according to ESA95). It was argued that New Democracy government simply miscalculated the consequences of its actions, which brought a strong reaction by Eurostat - stronger than that for other violators.
and PASOK, who was the prime minister and president of PASOK at that time, of having falsified Greece's macroeconomic statistics, on the basis of which the European institutions accepted Greece to join the Eurozone
. All the opposition parties accused New Democracy's government on making an audit that was not a real one. Moreover PASOK said that it never falsified any data, and that New Democracy's government just changed the way costs (mostly military expenses) were accounted for through the years and some other accounting techniques, and that the way PASOK used to do it was known to the Eurostat and Eurostat was never opposed to it.
Costas Simitis wrote in an article in the Financial Times
claiming that Greece's deficit revision damaged Europe. There Simitis states among other things that The Commission must design an auditing system that is the same for all EU countries and guarantees objectivity and impartiality, while ruling out domestic political interference. Some days later FT received a comment by the Director General of Eurostat.
As a result of that financial audit, Greece fell in the list of the loan creditability and now pays more taxes on the loans it has with other countries. EU Commission warned Greece about future problems if Greece, now with the new data, does not comply with the Eurozone requirements.
Recently, (March 2006) Eurostat has made changes to the system of defense expenditure calculation, which seemed to legitimize some of the practices of the previous Costas Simitis
government of PASOK. This caused criticism of the Financial Audit of 2004 and the New Democracy government by PASOK and parts of the press. New Democracy responded that the defense expenditures covered by the 2006 changes constituted only a small part of much more substantial expenditures that were fraudulently concealed by the previous PASOK government.
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
for the Country of Greece
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
described the state of the Greek economy, but some people and organizations have questioned the accuracy of the resulting numbers.
Context
Entry into the Economic and Monetary Union of the European UnionEconomic and Monetary Union of the European Union
The Economic and Monetary Union is an umbrella term for the group of policies aimed at converging the economies of members of the European Union in three stages so as to allow them to adopt a single currency, the euro. As such, it is largely synonymous with the eurozone.All member states of the...
depends on the deficit and debt, as well as the inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
and the stability of the national currency exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
of a European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
member state. Requirements are for instance a deficit below 3% of Gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) and debt below 60% of GDP, or if above, declining.
Up until 1995, Greece
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
recorded very high deficits, for some years above 10% of GDP. Then it miraculously melted down. In 2000, given a deficit below 3% of GDP, Greece was accepted as the 12th member of the European monetary union.
Doubts about quality of numbers and first major revision
The quality of numbers were a source of suspicions among the European statistical community. However, nobody dared to publicly raise doubts about the quality of the numbers compiled by the National Statistical Service of GreeceNational Statistical Service of Greece
The Hellenic Statistical Authority , mostly known by its acronym ELSTAT , is an independent and autonomous authority in Greece that deals with the collection of data on behalf of the state...
(NSSG).
In March 2002, Eurostat
Eurostat
Eurostat is a Directorate-General of the European Commission located in Luxembourg. Its main responsibilities are to provide the European Union with statistical information at European level and to promote the integration of statistical methods across the Member States of the European Union,...
refused to validate data transmitted by the Greek government. In reaction, the NSSG revised the debt level by several percentage points. In September 2002, Eurostat again refused to validate the data. The debt was revised upwards once again, and the government balance, which the Greek government had presented as a surplus, became a deficit.
Most recent revision
In March 2004, Eurostat refused again to validate the Greek numbers. This was shortly before Greek elections and a new government (New DemocracyNew Democracy (Greece)
New Democracy is the main centre-right political party and one of the two major parties in Greece. It was founded in 1974 by Konstantinos Karamanlis and formed the first cabinet of the Third Hellenic Republic...
) was inaugurated.
When the conservative party New Democracy won the March 7 elections
Greek legislative election, 2004
Legislative elections were held in Greece on March 7, 2004. At stake were 300 seats in the Greek Parliament, the Vouli . The New Democracy Party of Kostas Karamanlis won a decisive victory in the elections, ending eleven years of rule by the Panhellenic Socialist Movement .PASOK was led into the...
in 2004, it said it would start an objective financial audit
Financial audit
A financial audit, or more accurately, an audit of financial statements, is the verification of the financial statements of a legal entity, with a view to express an audit opinion...
of the government accounts. George Papandreou
George Andreas Papandreou
Georgios A. Papandreou , commonly anglicised to George and shortened to Γιώργος in Greek, is a Greek politician who served as Prime Minister of Greece following his party's victory in the 2009 legislative election...
, president of PASOK
Panhellenic Socialist Movement
The Panhellenic Socialist Movement , known mostly by its acronym PASOK , is one of the two major political parties in Greece. Founded on 3 September 1974 by Andreas Papandreou, in 1981 PASOK became Greece's first social democratic party to win a majority in parliament.The party is a socialist party...
which was the main opposition at that time, and the other 2 smaller parties, initially agreed with the need for an audit. But it lasted a very short time during which neither outside auditing firms nor the central bank were asked to carry out such an audit. Instead, the government produced new estimates while investigating the years 1997 - 2003, and the resulting data was given to Eurostat, which then went on and published a report. The requirement that the 1999 budget deficit should have been below 3% of GDP was one the key criteria for Eurozone entry; thus, its revision to 3.38% lead to a controversy about Greece's admission.
Most of the differences in the revised numbers were due to a temporary change of accounting practices by the new government, i.e., recording expenses when military material was ordered rather than received. However, it was the retroactive application of ESA95 methodology (applied since 2000) for the years 1997-1999 by Eurostat, that finally lead to a reference year budget deficit of 3.38% of GDP in 1999, leading to claims that Greece had not actually met all the accession criteria. In the 2005 OECD report for Greece (p.47) it was clearly stated that “the impact of new accounting rules on the fiscal figures for the years 1997 to 1999 ranged from 0.7 to 1 percentage point of GDP; this retroactive change of methodology was responsible for the revised deficit exceeding 3% in 1999, the year of EMU membership qualification”. The above has lead the Greek minister of finance to clarify that the 1999 budget deficit was below the prescribed 3% limit when calculated with the ESA79 methodology in force at the time of Greece's application, and thus, since the remaining criteria had also been met, was properly accepted into the Eurozone. ESA79 was also the methodology employed to calculate the deficits of all other Eurozone members at the time of their applications.
The original accounting practice for military expenses was later restored in line with Eurostat recommendations, theoretically lowering even the ESA95-calculated 1999 Greek budget deficit to below 3% (an official Eurostat calculation is still pending for 1999).
An error very frequently made in press reports, is the confusion of the discussion regarding Greece’s Eurozone entry with the controversy regarding usage of derivatives’ deals with U.S. Banks by Greece and other Eurozone countries to artificially reduce their reported budget deficits. A currency swap arranged with Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
allowed Greece to “hide” $1 billion of debt, however, this affected deficit values after 2001 (when Greece had already been admitted into the Eurozone) and is not related to Greece’s Eurozone entry.
Several arguments have been expressed about the implications of the audit. Some commentators talked about data falsification. Others, though, held a completely different viewpoint. "Irregularities" (the word falsification never officially used) in deficit reporting were also revealed for other Eurozone members, most notably Italy and Portugal, with significant revisions imposed. Also, there were arguments about massive "creative accounting" employed by many states in order to meet the deficit criterion for entry into the Eurozone. Even the practice of one-off measures by so many states has been criticised, since in several cases their deficits rose back over 3% soon after the reference year, while big economies like Germany and France seem to defy the rules for years. Last but not least, changes in accounting method often seriously affected the deficit numbers (Spain and Portugal had, like Greece, marginally exceeded 3% in their reference year for entry, when their deficit was revised according to ESA95). It was argued that New Democracy government simply miscalculated the consequences of its actions, which brought a strong reaction by Eurostat - stronger than that for other violators.
Political dispute
New Democracy's government then accused Costas SimitisCostas Simitis
Konstantinos Simitis , usually referred to as Costas Simitis or Kostas Simitis, was Prime Minister of Greece and leader of the Panhellenic Socialist Movement from 1996 to 2004.- Biography :...
and PASOK, who was the prime minister and president of PASOK at that time, of having falsified Greece's macroeconomic statistics, on the basis of which the European institutions accepted Greece to join the Eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
. All the opposition parties accused New Democracy's government on making an audit that was not a real one. Moreover PASOK said that it never falsified any data, and that New Democracy's government just changed the way costs (mostly military expenses) were accounted for through the years and some other accounting techniques, and that the way PASOK used to do it was known to the Eurostat and Eurostat was never opposed to it.
Costas Simitis wrote in an article in the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
claiming that Greece's deficit revision damaged Europe. There Simitis states among other things that The Commission must design an auditing system that is the same for all EU countries and guarantees objectivity and impartiality, while ruling out domestic political interference. Some days later FT received a comment by the Director General of Eurostat.
As a result of that financial audit, Greece fell in the list of the loan creditability and now pays more taxes on the loans it has with other countries. EU Commission warned Greece about future problems if Greece, now with the new data, does not comply with the Eurozone requirements.
Recently, (March 2006) Eurostat has made changes to the system of defense expenditure calculation, which seemed to legitimize some of the practices of the previous Costas Simitis
Costas Simitis
Konstantinos Simitis , usually referred to as Costas Simitis or Kostas Simitis, was Prime Minister of Greece and leader of the Panhellenic Socialist Movement from 1996 to 2004.- Biography :...
government of PASOK. This caused criticism of the Financial Audit of 2004 and the New Democracy government by PASOK and parts of the press. New Democracy responded that the defense expenditures covered by the 2006 changes constituted only a small part of much more substantial expenditures that were fraudulently concealed by the previous PASOK government.