Readers that harboured hopes of a Greek turn-around (against this blog’s repeated warnings) ought to brace themselves – the finance minister’s story is not recommended reading for the faint hearted…

“We all must be judged by our track record.” Isn’t that the basic principle of the evaluation culture that is nowadays promoted with such enthusiasm by the devotees of reforms, efficiency and accountability? Must this principle not apply also to the ministers of state – especially for the ‘technocrats’ whose job it is to handle delicate and crucial issues, such as, for example, Greece’s national economy and the negotiations with the EU and the IMF on the management and restructuring of Greece’s public debt?

In last June’s cabinet reshuffle the position of finance minister was assigned to Mr Gikas Hardouvelis. Who is Mr Hardouvelis and what is his track record? Other than a long-time professor of finance at the University of Piraeus, two are the professional highlights of his career.

  • Chief Economist at Eurobank, and head of Eurobank’s Department of Economic Research – a position that Mr Harvouvelis held continuously from 2000 until 2014; a long period which coincided with each and every phase of the latest Greek drama: from Greece’s entry into the Eurozone to its 4-year long crisis, ignominy, depression.
  • Adviser to Mr Lucas Papademos during the latter’s tenure as Prime Minister – at the time Bailout Mk2 (incorporating and the now infamous PSI as well as the provisions for bank recapitalisations) was being designed and pushed through Parliament. Mr Hardouvelis, it must be noted, remained in the service of PM Papademos while the recapitalisation of Eurobank (and the rest of the banks) was on the drawing board and being turned into the law of the land but , once that government resigned in May 2012, Mr Hardouvelis returned to Eurobank, as its Chief Economist, where he stayed during the period (20120-3) that its recapilitalisation was effected.

In the following lines I shall say nothing about Mr Hardouvelis’ gross predictive failures in the realm of macroeconomic modelling (since 2010 he has been overly optimistic regarding the oncoming crisis, constantly predicting that Greek-covery was around the corner). Nor will I concentrate on his membership of a cabal of economic advisers (that cut their teeth in the late 1990s and early 2000s around Prime Minister Costas Simitis) who:

  • In 2000, thought that the Eurozone had been properly designed;
  • In 2002 seemed convinced that Greece’s economy was converging with those of Northern Europe
  • In 2008 denied that a Euro Crisis was on the cards, spearheaded by the banking sector implosion
  • In 2010 extolled Greece’s Bailout Mk1 agreement
  • In 2011 predicted the end of the recession by the first quarter of 2012
  • Throughout 2010 and 2011 were arguing that a debt restructure was both unnecessary and undesirable
  • In 2012, when the debt restructure was forced upon Greece by the force of circumstances, they immediately hailed it as a godsend, and were assigned central state positions from which to implement it.

Setting all these ‘interesting’ views aside, below I focus exclusively on the bank which Mr hardouvelis advised until recently as its Chief Economist; a job that, one presumes, had the single goal of advising Eurobank’s Board on how to steer a decent course through Greece’s stormy financial waters.

How well did the current Finance Minister perform in that job entrusted to him by Eurobank’s Board? What we know beyond dispute is that, during his tenure as its Chief Economist, Eurobank not only went bankrupt but that, of the four ‘systemic’ Greek banks, its collapse was the most resounding, impressive and comprehensive.

Question: Did Mr Hardouvelis, as its Chief Economist and Head of the bank’s Economic Research Department, warn Eurobank’s management that they were heading for the rocks at full speed? From his public writings it does not appear so. Indeed quite the opposite: they are filled with overoptimistic forecasts both for the bank’s future and for the banking sector in general.

In his defence, one may argue, the Chief Economist of any bank facing insolvency is ill-disposed to speaking the bitter truth in public, so as not to cause panic, a bank run and assorted secondary effects of the bank’s already difficult position.

Nonetheless, one would certainly expect of Mr Hardouvelis, of any Chief Economist for that matter, to be issuing one warning after the other internally; bombarding the bank’s CEO, CFO etc. with advice, data and missives the purpose of which would be to salvage that which could be salvaged. Did he do so? Did he warn the Eurobank’s Board about the detrimental effects of Bailout Mk1 on the bank’s bottom line, about the impending haircut (that would deplete a large part of the bank’s capital), about the devastating effect of Bailout Mk2 on its non-performing loans?

After Eurobank went bankrupt in 2012, and had to be salvaged by the hapless, exhausted, impecunious Greek taxpayer in 2013, it would be good to have answers to these questions. Especially once Mr Hardouvelis was elevated to the post of… finance minister! While we wait for answers, from Mr Hardouvelis or from Eurobank, lets have a look at what happened to the bank that the current finance minister advised for more than a decade and which benefited from a capital infusion from taxpayers that Mr Hardouvelis helped design as the Economic Advisor of the Prime Minister who passed the recapitalisation plan throught the legislature.

  • In 2013, the Greek state, via the Hellenic Financial Stability Fund (the original European bailout fund’s Greek branch), invested 5.8 billion euros in Eurobank, paying 1.54 euros per share and acquiring 95% of the bank. Additionally, the state bought additional preferential shares worth 1.25 billion euros.
  • The state handed over Hellenic Postbank to Eurobank after first spending 4.06 billion in order to cover the Postbank’s ‘funding gap’, and another 550 million euros for Postbank’s own recapitalisation.
  • The Greek state assisted Eurobank to absorb the corrupt, bankrupted Proton Bank, giving Eurobank 760 million euros to cover Proton’s ‘funding gap’  and another 550 million of new capital . It gave 760 million to Eurobank to cover the ‘funding gap’ of another defunct bank, Aspis, which it took over.

In total, after Mr Hardouvelis left the PM’s office and returned full time to his Eurobank’s Chief Economist post, the insolvent Greek state infused into Eurobank the total amount of 13.3 billion euros which translates to 7.3% of GDP. One might have expected that, having made such a huge investment, footed by taxpayers, the state would attempt to secure its assets. Instead, a few months later new shares of Eurobank were issued. But the state was not allowed to participate (via the HFSF) in the issue of these new shares. Private investors were allowed to buy the new shares at an 80% discount, paying the outrageously low amount of 31 cents per share, when the state had spent 1.54 euros per share only a few short months. This price was not only scandalously lower than the price that the state had paid a few months earlier, but also lower than the actual share price on the Athens Stock Exchange (at the time that the new shares were being issued). And as if to confirm that the government understood that this was scandalous, it passed legislation through Parliament providing immunity in perpetuity for the members of the HFSF’s board from any future (hypothetical) charges that, in accepting the HFSF’s non-participation in the new share issue, they failed to secure the public interest.

As a result of the new issuance, private investors (including a number of hedge funds) paid 2.86 billion euros and acquired 65% of a bank for which the Greek state had just spent 13.3 billion euros. As such, the participation of the state in Eurobank was reduced to 35% of equity, reducing the value of the shares held by the state to only 2 billion. In summary, the state rescued Eurobank at a cost of at least 13.3 billion euros in order to acquire 95% of the bank but, a few months later, turned the keys of the bank over to private investors, sacrificing the 65% stake that it had, reducing the value of its Eurobank assets to 2 billion euros.

The pressing for Mr Hardouvelis, that he ought to feel compelled to answer, is this: As the nation’s finance minister, how does he (now that he is no longer Eurobank’s Chief Economist), assess the (bankrupt) state’s readiness to donate  11.3 billion euros to private investors into his former employer?

Had Mr Hardouvelis stayed in his job as Eurobank’s Chief Economist, I imagine his advice to the Board would have been something like: “We are fortunate that the state, once it acquired a majority stake, did not get rid of the lot of us given that the bank went bust on our watch. We ought to consider ourselves lucky that we are still here, having received a lion’s share of the Greek state’s bailout borrowings and are, once again, in control of the bank. Let us rejoice!”
Of course Mr Hardouvelis is no longer Eurobank’s Chief Economist but the nation’s finance minister. What is his perspective from that role? What does he advise Cabinet regarding the wisdom and propriety of government policy over the banks in general and over Eurobank in particular? He must either believe that the dilution of the state’s share of Eurobank was fine, in which case he is disqualified from being the finance minister of a fiscally stricken and depressed state, or he thinks the recapitalisation and new share issue was unacceptable, improper and bordering on the illegal, in which case he must admit that, as Eurobank’s Chief Economist, he acted against the interests of the state which he now supposedly serves.

One last question that would be wonderful to have an answer to from Mr Hardouvelis is this: How does he reconcile, on a moral but also a legal basis, that he was the Economic Adviser to Prime Minister Papademos during the planning of a banking sector recapitalisation while, at once, serving as the Chief Economist of one of these banks; indeed of the one bank which benefited most handsomely from the said recapitalisation? Does he know the meaning of the words ‘conflict of interest’? (Or does he, Goldman Sachs-style, think that “if there is no conflict there is no interest”?)

We have seen it all before, of course, as Wall Street executives become regulators before returning to Wall Street again. But Greece, being Greece, has managed (with Mr Hardouvelis’ elevation to the office of finance minister) to give another, massive, spin to this revolving door syndrome. To elevate it onto a higher plane of impropriety. I know of no other nation where: (A) a bankrupt bank’s (failed) Chief Economist acted at once as the Prime Minister’s Economic Advisor on matters pertaining to the recapitalisation of the banks and as the Chief Economist of one of these banks; (B) the same Chief Economist, after having seen through the recapitalisation of the bank that employed him (which was planned by… himself while the Economic Adviser to the PM), was rewarded for the serious depletion of the state’s finances (resulting from this shoddy recapitalisation) by being appointed the nation’s finance minister. This would be precious, if it were not so desperately sad.

Editor's note: This post continues TPPi's series of Yanis Varoufakis guest op-eds, originally published on his blog, yanisvaroufakis.eu.