The talented Mr Hardouvelis

Note this article first appeared in Hot Doc. Translation by TPPI.

“We all must be judged by our work and our effectiveness.” Isn’t that the basic principle of the evaluations that are being promoted with such enthusiasm by the devotees of reform in our country? Mustn’t this principle also apply to the newly appointed ministers – especially for the ‘technocrats’ who are handling delicate and crucial issues, such as, for example, the negotiations over Greece’s public debt?

In the recent reshuffle the position of Finance Minister was taken over by  Gikas Hardouvelis. From all of the positions he has held, allow me to focus on two:

A.) That of Economic Adviser, and head of Eurobank’s department of Economic Research, a position that he held continuously from 2000 until 2014 – a long period which covered all of the phases of the Greek tragedy: from our entry into the Eurozone to our 4-year national tribulations in the Memorandum.

B.) Adviser to Lucas Papademos during his tenure as Prime Minister – when the PSI was being designed and particularly during the recapitalisation of Eurobank and the rest of the banks. In the article that follows I won’t deal at all with the other macroeconomic failures of Mr Hardouvelis during this period.

I won’t refer to his joining the team of economic advisers to Mr Simitis who, in 2000, believed that the Eurozone had been set up correctly, who talked about the upcoming ‘convergence’, who denied that 2008 would mark the beginning of the Euro Crisis, who in 2010 maintained that Memorandum 1 was a good deal, who predicted growth from the start of… 2012, who argued that a debt restructuring was undesirable and unnecessary and then who in 2012 were extolling a… restructuring of the debt (maintaining that it would render the debt sustainable) and so forth. No, today I will focus exclusively on the bank which he advised until recently in the important, and well remunerated, position as head of the department of Economic Research, whose goal was to advise the board of Eurobank, in order that its members and CEO avoid pitfalls.

How well did the current Finance Minister do that job entrusted to him by the management of Eurobank? That which is common knowledge is that Eurobank not only went bankrupt but that, of the four ‘systemic’ banks, its collapse was the most resounding, impressive and comprehensive. Question: Did Mr Hardouvelis, as head of Economic Research warn the management of Eurobank that they were heading towards 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.

Of course, one might say – and not entirely illogically, that the Economic Adviser of a big bank in danger of bankruptcy is not in a position to tell the truth publicly, as something like that would sow panic and bring about the immediate collapse of the bank. Correct. In that case, one would expect from Mr Hardouvelis to have sent, confidentially, one warning after the other to the Board and to the CEO of Eurobank, warning them about Memorandum 1, the PSI ‘haircut’ of 2012, about the debt ‘buyback’ which followed, about the real depth of the recession (and the loans in arrears) which would hit the bank etc. Did he do that? Now that Mr Hardouvelis has been promoted to Finance Minister for the country, it would be good if he answered this crucial question. Did we not say that everyone should be evaluated? Can Greece’s new Finance Minister at such a crucial time for the country be an exception? While we wait for answers, from Mr Hardouvelis or Eurobank, lets have a look at all we know about Eurobank, which until recently Mr Hardouvelis was advising:

In 2013, the Greek state, through the Hellenic Financial Stability Fund 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 gave Hellenic Postbank to Eurobank after first spending 4.06 billion in order to cover the ‘funding gap’ of Postbank, and another 550 million euros for its recapitalisation.

It assisted Eurobank to absorb the corrupt, bankrupted Proton Bank, giving Eurobank 760 million euros to cover the ‘funding gap’ of Proton and another 550 million of new capital . It gave 760 million to Eurobank to cover the ‘funding gap’ of Aspis, absorbing it.

In total, while Mr Hardouvelis was Economic Adviser to Eurobank – i.e. a top executive, the bankrupted Greek state gave Eurobank the total amount of 13.3 billion euros which translates to 7.3% of GDP. Why? Because Eurobank went bankrupt and the Greek state was forced to rescue it. One would expect, however, that having made such a huge investment, footed by taxpayers, that the state would attempt to secure its assets. Instead of that, however, 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 new shares.

Private investors were allowed to by these 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 short while afterwards.

This price was not only lower than the price that the state had paid a few months earlier, but also lower than the share price on the Athens Stock Exchange at the time that the new shares were issued. In order to cover its flanks, the government passed legislation providing immunity in perpetuity for the members of the board of the HFSF from charges that they operated against the public interest by abstaining from the specific issue of new shares.

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 share capital, reducing the value of the shares held by the state to only 2 billion.

In short 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 to the bank over to private investors, sacrificing the 65% stake that it had, reducing the value of its Eurobank assets to 2 billion euros.

Two questions arise with regards to the new Finance Minister and, until recently, head of Economic Research of Eurobank: from his position today as Finance Minister, how does he view the ‘ease’ with which the bankrupted state gave private investors 11.3 billion euros in the space of a few weeks?

As a Eurobank executive I imagine his advice to the board would have been: “We are fortunate that the state didn’t fire us, given that the bank went bust under our management and it saved the bank. And we are doubly lucky that, now that it has given use the lion’s share of the rescue funds, it is renouncing its position as majority shareholder.”

But as Finance Minister what is he thinking? He either believes that the giveaway of the bank’s assets was not a problem, in which case he is not qualified to be Finance Minister and charged with protecting the interests of the state. Or he believes that the non-participation of the state in the recent increase in share capital was unacceptable from the perspective of the public good – in which case he must admit that, as Economic Adviser to Eurobank, he acted against the interests of the state which he now supposedly serves. Finally it would be good for Mr Hardouvelis to answer a final question:

How does he reconcile on a moral but also legal level, that he was an adviser to Prime Minister Papademos during the planning of the recapitalisation of the banks while, at exactly the same time, he was an adviser to one of the banks which benefited scandalously from the recapitalisation?

From what I know, in all serious countries in the world such a ‘conflict of interest’ would see a banking executive sitting in the dock, and not in the position of Finance Minister.