The negotiations between Greece and its European creditors (and the IMF) seem to have disintegrated into populist name calling. A number of high ranking European officials are trying to suggest that European loans are used to finance pensions and wages and European taxpayers money will not be used to keep the purchasing power of Greek pensioners unchanged.

First of all it should be stated that Greek people have already lost a great deal of ‘purchasing power’ and income, a loss that usually only happens in cases of wars. Real GDP per capita (2014 values) is down 20% since 2009, real compensation per employee 17% and real gross disposable income 25.5%. Suggesting that Europe is not liable in any way to try and maintain at least this low level of income shows how far the EU is from any form of an Optimum Currency Area (which almost by definition requires large fiscal transfers).

Another rather obvious point is that loans to Greece, either in the form of the bilateral Greek Loan Facility (GLF) or EFSF loans do not involve the transfer of taxpayers money but only the increase of contingent liabilities of European countries that provide guarantees for the bilateral loans or for securities issued by the EFSF in order to finance its loans to Greece. As long as Greece does not default, European governments are earning a positive net income from their financing towards the Greek government.

The most important part, which seems to almost always be cast aside, is the fact that Europe can claim to finance Greek pensions only if Greece has a primary budget deficit and this is financed by European loans. Otherwise, Europe is financing Greek government debt, regardless of how favorable the loan terms may be.

Looking into Greek budget execution results for the past years and IMF disbursements we see that the IMF loans were quite enough to finance Greek budget deficits up until 2012 (in 2013 Greece achieved a primary surplus). One should also take into account the fact that the Greek government had around €7bn in cash reserves just before May 2010 and T-Bill issuance increased another €7bn during 2011 (while the remaining budget deficit on a cash base for 2010 was around €7bn). It becomes evident that the total of budget deficits for 2010 – 2012 was around €15.7bn while IMF loans totaled €21.7bn which coupled with cash reserves and T-Bills created a buffer of €35.7bn, more than double the cash needs during that time. Thus the GLF and EFSF loans were used only to repay maturing securities (until the 2012 PSI) and for the PSI/debt repurchase exercises and their aftermath (bank recapitalization).

Greek governmebt deficits and imf loans 2010 - 2012

The hard facts suggest that the Europeans have so far only engaged in a transfer of private into official debt and piggybacks of Greek debt between the ECB SMP and official loans while the IMF did the heavy lifting of financing actual government budget deficits. European politicians did not ‘finance Greek pensions’ but rather increased potential losses for their own citizens by transforming Greek bonds into official claims by the other European countries.