Just as Greece complies at last, Europe pulls the plug

Officials from the EU and the International Monetary Fund made two grave errors when they swooped into Greece in mid-2010 and dictated the now hated "Memorandum".

By Ambrose Evans-Pritchard, International business editor

The regime of drastic cuts has tipped the economy into a violent downward spiral. They thought that private industry would muddle through as the state went through the austerity mincer. What the EU-IMF "Troika" did not fully understand is how many firms were really part of the state in disguise.

"The Greek government outsources everything," said one official with close knowledge of the events.

Faced with the guillotine, the state first slashed procurement contracts and then stopped paying its bills altogether. The government is now €7bn (£5.8bn) in arrears to private companies, including €3bn in unpaid VAT refunds for exporters. It is why business has borne the brunt of the fiscal squeeze, suffering 450,000 job losses, and why Greece's unemployment has soared to 21pc.

At the same time the banking system seized up. More than €60bn of deposits were withdrawn. By November, no Greek bank could issue a letter of credit accepted anywhere in the world, with calamitous implications for trade – and for exporters trying to meet Troika demands for export-led recovery. "Greece became a leper, and is now stuck in Catch-22," said one official.

Hellenic Petroleum was unable to import basic fuel. The reason why Greece's reliance on oil imports from Iran jumped from 15pc to 70pc in a two-week period in November was because Tehran agreed to take on the credit risk.

"They need to find some way to unblock this or the Greek economy is going to suffocate from lack of oxygen: we are reaching the limits," said Dimitris Daskalopoulos, head of the Hellenic Federation of Enterprises. The economy contracted at a rate of 7pc in the fourth quarter of 2011. Manufacturing fell 15.5pc in December from a year before.

Mr Daskalopoulos now seems resigned to a ghastly denouement, fearing that Greece has been turned into a "useful victim" for countries pursuing their own political agenda. "They need to stop pretending that Greece is a special case and decide once and for all what they are going to do with all the culprits or PIGS [Portugal, Italy, Greece and Spain] and what they want Europe itself to be. Are they really going to flush Greece down the toilet and hope it will disappear from planet earth?" he said.

The rhetoric has turned poisonous as Berlin, Helsinki and The Hague show every sign that they intend to eject Greece from the euro whatever it now does, calculating that the eurozone is at last strong enough to withstand contagion.

German finance minister Wolfgang Schaeuble is raising fresh demands, suggesting that Greece should postpone April's elections and appoint a technocrat government for a year without key PASOK and New Democracy parties, prompting the headline "Schaeuble Junta" in newspaper Eleftheros Typos.

The unprecedented meddling in the internal affairs of Greek democracy was angrily rejected by President Karolous Papoulias, the softly spoken elder statesman who fought against the Nazis as a teenager. "Who is Mr Schaeuble to insult Greece? Who are the Dutch? Who are the Finns?" he said.

It has fallen to Italian premier Mario Monti – with support from French socialists – to champion Greece and the eurozone's southern bloc against the austerity doctrines of the German-led group of AAA creditors.

"The very tough approach being taken toward Greece is probably excessive. There are no good guys and bad guys. We are all responsible," he said, noting acidly that Germany and France were among the first to violate the EU's Stability Pact.

The claim that Greece has failed to comply with the Troika demands is exaggerated. The primary budget deficit has fallen from 10.6pc in 2009 to 2.4pc in 2011, eight times the Thatcher squeeze in the early 1980s. Poul Thomsen, head of the IMF's mission, said the refrain that Greeks are recidivist violators "because of something in their DNA" had become insulting.

The Greeks clearly have an allergy to paying taxes. Their slang term for tax is the Turkish word "haradsi", a legacy from the Ottoman Empire which extracted tribute and conscripted Janissaries for the army without offering much in exchange. It is almost a virtue to cheat the tax authorities, a habit that dies hard.

Yet drastic reforms are under way. The Evangelismos public hospital in Athens has cut its operating costs to €112m last year from €149m in 2009, even though the number of patients had risen from 82,000 to 99,700 – due to the reliance of the newly pauperised middle class on public health.

"We have re-engineered the hospital," said Michael Theodorou, the hopital's director. Drug costs have been slashed by 30pc by switching to generics. His audit discovered that the price of one of the drugs used fell from €27to €3.83. "We never used to count the cost."

Greece's privatisation drive has undoubtedly stalled. The Hellenic Republic Assets Development Fund was supposed to raise €5bn last year, payable into a special account for debt repayment. It raised just €1.7bn, all from low-hanging fruit. The Troika has abandoned its target of €50bn by 2015, agreeing to a €19bn. The rest will be stretched out.

Costas Mitropoulos, the official in charge of the project, said is "totally unfair" to describe this as non-compliance. There is no historical precedent in the world for such breakneck privatisation. The closest parallel is the Treuhand disposal in East Germany after reunification, but that took 12 years, and the manager was "shot dead" by the Red Army Faction, Mr Mitropoulos said with a thin smile.

It is a tall order to find buyers when the Greek economy is in free-fall, and there is open talk of a Greek default and euro exit. Not even Anglo-Saxon vulture funds will nibble. "Investors are not prepared to commit funds until uncertainty is down to manageable and hedgeable levels," he said.

Mr Mitroupoulis said half the assets are Greek property. They cannot be dumped at once on the market with causing a further crash in prices. "The Troika fully understand the difficulties," he said.

The leaders of Germany, Finland, and Holland are less amenable, if they are still listening at all.

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