Greece, which is in danger of leaving the euro area still receives billions of euros in aid from the foreign creditors: EU, IMF and ECB. The money is going back, almost entirely to the creditors in the form of interest and is not used to pay for vital public services. The second external financial aid package, 130 billion euros, is used primarily to pay the interest, while countries’ economy continues to have difficulties, according to New York Times (NYT). Last week, the Greek office dealing with debt management warned that Greece could run out of money by July. In this case, the country would cease payments on debt, except the EC, IMF and central bank.
“Greece will not default on payments to the Troika (EU, IMF and ECB), Troika is paying itself,” said Thomas Mayer, an analyst at Deutsche Bank. Through an elaborate system of payment that came into effect after May 6 elections, which brought Greece to a political stalemate, the three biggest creditors transfer money into an escrow account in Greece, but the Greek state can not access it. Money stay in this account for two-three days, before returning back to Troika in form of interest on Greek bonds that Europe has accepted in the terms of the agreement for financial aid in February.
Nearly three quarters of Greece’s debt, 185 billion euros, is now owned by one of the three members of the Troika, according to estimates by investment bank UBS. ECB especially wants to be paid, says Deutsche Bank analyst Thomas Mayer. In order to calm financial markets, the bank bought Greek bonds worth billion euros with monthly payment terms. “That’s why they want to get paid every month,” said Mayer. Some sources close to the situation said that the is Troika trying to put pressure on Greece to do more on tax collection. “They made sure that the sum of domestic spending is maintained at a level low enough to force Greece to strongly increase its earnings,” said an adviser to the Greek Government, speaking on condition of anonymity.
At first glance, the situation seems absurd, writes the NYT. Europeans actually lend money to Greece so that Greece can pay back the money it borrowed from Europe. “Send money and call it ‘loan’, then take it back and call it ‘interest’,” said Stephane Deo, chief of a division at UBS group. Such arrangements are common for governments in danger of going into bankruptcy, he said. The reason for this the situation is that governments can not go bankrupt as businesses. Lenders can not sell pieces of the countries in order to recover the money. Thus, creditors have an incentive to ensure that countries continue to pay its debts, even though this means they have to borrow money.
Starting May 2010, Greece received about 140 billion euros of European taxpayers’ money to prevent a collapse of the country and a crisis that threatens the entire euro area. Of this amount, Greek state used two thirds to pay bondholders and the Troika. Only one third was allocated to finance the operation of the state, with a very small amount spent on projects to stimulate the economy, according to American newspaper.
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