Bailout Money Goes to Greece, Only to Flow Out Again

By JACK EWING and LIZ ALDERMANJULY 30, 2015

The New York Times

FRANKFURT — The Greek businessman was nervous as he carried a suitcase stuffed with cash through passport control at the Athens airport a few months ago. But the distracted and overworked customs officials waved him through.

A few hours later the man touched down in Frankfurt, where he quickly deposited the money in a German bank.

The stash was part of 40 billion euros, or about $44 billion, that businesses and individuals have withdrawn from Greek banks since December, exacerbating the country’s financial woes.

The cash exodus is a small piece of a bigger puzzle over why — despite two major international bailouts — the Greek economy is in worse shape and more deeply in debt. It is a politically charged issue that will color the negotiations on a new financial assistance package worth €86 billion, about $95 billion.

Much of the previous bailout funds have gone to pay off Greek bonds held by private investors and other eurozone governments, rather than stoke growth. Within Greece, the money was supposed to help replenish banks’ capital, to get them lending to revive the moribund economy. Instead, it sat in banks’ coffers as bad debts piled up, and it bought time for Greeks and foreign investors to get their money out.

“I know it’s not patriotic,” said the cash-toting Greek businessman, who spoke on the condition of anonymity to protect his reputation. But the money, about €14,000, represented the life savings of his retired parents, he said, and it was no longer safe in the local bank.

Since 2010 other eurozone countries and the International Monetary Fund have given Greece about €230 billion in bailout funds. In addition, the European Central Bank has lent about €130 billion to Greek banks.

The latest financial aid package is following a similar pattern to the previous ones. Only a fraction of the money, should Greece get it, will go toward healing the economy. Nearly 90 percent would go toward debts, interest and supporting Greece’s ailing banks.

The European Commission has offered to set aside an additional €35 billion development aid package to jump-start the economy. But the funds are difficult to obtain and will become available only in small trickles later in the year.

Greeks understandably feel that the latest bailout package is not likely to benefit them very much.

“The bailout is mostly going to banks and our creditors,” said Nikos Kalaboyias, 54, a grocery store owner in central Athens who said his clients had stopped shopping for all but the most basic goods, putting the business he has run for more than a decade in jeopardy.

“I hope it will help, but the banks are not lending, and I see no sign that any money is going to help this economy,” he said.

In Germany and other northern European countries, the opposite sentiment prevails. The wealthier countries lent huge sums to Greece, the thinking goes, and the Greeks wasted it.

“The country’s economy is destroyed,” Wolfgang Schäuble, the German finance minister, said in an interview published last week in the German magazine Der Spiegel. “The Greek government has to answer for that.”

In the meantime, another bailout complicates one of Greece’s biggest problems: its mountain of debt. The extra aid will only add to that pile, stifling the potential for an economic rebound.

In the talks between Greece and its creditors, there is a growing recognition that Greece’s debt burden must be eased. On Thursday, a senior official at the International Monetary Fund said that European countries needed to come up with a concrete plan for easing Greece’s debt before the fund would participate in any new bailout.

But leaders elsewhere in Europe believe that Greek leaders have not done enough to reduce debt and achieve better growth, by selling state assets, cracking down on tax evasion or reducing red tape.

“Some debt relief will be needed,” said a senior official at the European Central Bank who spoke on condition of anonymity. “But it’s important that it be linked to reforms which ensure that Greece can grow again.”

Growth was never the primary consideration when Greece first started receiving bailouts.

Back in 2010, political leaders in the eurozone as well as top officials of the International Monetary Fund were terrified that Greece would default on its debts, imposing huge losses on banks and other investors and threatening a renewed financial crisis. The debt was largely held by Greek and international banks. And Greece, officials feared, could be another Lehman Brothers, the investment bank that collapsed in 2008, setting off a global panic.

Forcing banks to take losses on Greek debt “would have had immediate and devastating implications for the Greek banking system, not to mention the broader spillover effects,” said John Lipsky, first deputy managing director of the I.M.F. at the time, during a contentious meeting of the organization’s executive board in May 2010, according to recently disclosed minutes.

To prevent Greece from defaulting on debts, creditors granted Athens a €110 billion bailout in May 2010. But that did not calm fears that other heavily indebted countries might also default. The Greek lifeline was soon followed by bailouts for Ireland and Portugal.

When Greece again veered toward a default in summer of 2011, it got a second bailout worth €130 billion, not all of which has been disbursed.

Instead of writing off those countries’ debts — standard practice when a country borrows more than it can pay — other eurozone countries and the I.M.F. effectively lent them more money. One of the main goals was to protect European banks that had bought Greek, Irish and Portuguese bonds in hopes of making a tidy profit.

The banks and investors did not escape the pain. In 2012, when Greece was again at risk of default, investors accepted a deal that paid them only about half the face value of their holdings.

Much of the aid dispensed to Greece has revolved around banks. Since 2010, Greece has received €227 billion from other eurozone countries and the I.M.F. Of that, €48.2 billion went to replenish the capital of Greek banks, according to MacroPolis, an analytics firm based in Athens. More than €120 billion went to pay debt and interest, and around €35 billion went to commercial banks that had taken losses on Greek debt.

In addition, the European Central Bank has provided more than €130 billion in loans to Greek banks, including about €90 billion in the form of short-term emergency cash. The banks are closely intertwined with the government, which owns majority stakes in three of the four largest Greek lenders.

There is a logic to saving the Greek banks. Their collapse would have terrible consequences for the already moribund Greek economy.

“Whenever something happens with the banks, the whole economy stops,” said Nikos Vettas, the director general of IOBE, a prominent economic research organization based in Athens. “So money was given to the banks and the idea was that once they were stabilized, the economy would start running again. At least, that was the plan.”

But the banks never healed enough to start lending more into the economy, and foreign investment barely trickled in. Worse, the money provided to bail out Greek banks was not a gift. It was a loan. So the sums added to Greece’s already huge debt.

In a few years, according to I.M.F. projections, Greece’s debt will be equal to about twice the country’s annual economic output.

Economists say the new bailout package will hardly make things better.

About €25 billion of the latest bailout would finance yet another rescue of Greek banks. They now need even more money to make up for billions of euros in deposits withdrawn by Greeks fearful of political turmoil and restrictions on money transfers. The capital controls now in place are further squeezing business.

The rest of the €86 billion will be used to make debt and interest payments to creditors, particularly the E.C.B. and the I.M.F., according to Oxford Economics, a British analytical firm.

“They are borrowing new money to pay old money. That’s the trap they’re in,” said Ashoka Mody, a former I.M.F. economist who now teaches at Princeton. “The Greek tragedy is that there are no winners.”