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Professor Gikas Hardouvelis graduates his bachelors and masters degree in the Harvard University in USA and his doctors’ degree he receives in another big American university – the Californian Berkley. From 2000 until 2004 he is the director of the economic office of the former Prime Minister Kostas Simitis. “I am an optimistic for the entrance of Bulgaria in the euro zone”, says Gikas Hardouvelis in an interview with Maria S. Topalova

- About ten days ago the Bloomberg agency published the forecasts of two investment banks – Citygroup and Morgan Stanley that most affected by the Greek economic crisis will be Bulgaria and Romania where the Greek banks hold about 30 per cent of the local market. The two investment banks believe that the Greek banks will decrease even more the granting of credits for those two countries. Do you agree with these forecasts?

-In Greece the public sector is having problems, not the private one. It is exactly on the contrary. Exactly because the public sector is not effective, the private one is more flexible and productive. The international economic crisis surprised the European banks in a very unstable condition while the Greek banks were very profitable and with a lot of liquid capital. This means that the crisis showed the advantages of the Greek banks. Now because the crisis stroke Greece everybody started fearing for the Greek banks. However they are very stable, they have no problems and are even thinking of investing even more abroad.

    - Eurobank is in Bulgaria for over 10 years. What is your experience?

- We have a subsidiary bank in Bulgaria which is independent and is subject to the legislation and the regulations of the Bulgarian government. It is not directly lined to our group. Our group starts from Switzerland (EFG, European Financial Group) and our bank here in Greece is part of it. The bank is making careful movements, wishes to grant credits, however it does not want to grant credits to speculators or to invest in real estate. This is normal and everybody does it. We are a healthy bank in Bulgaria, we progress very well we believe in the future of the country, we believe that the country will manage to enter the euro zone like also managed to enter in the European Union. There is a consensus within the entire Bulgarian society regardless of whether you speak to the government or with the central bank or with private business people, they are all aware of the economic policy of the country which purpose is to enter in the euro zone. No matter who is at the top of the government – the right centrists or the left centrists. This is also happening in other countries like Serbia and Romania for example. The European Union and the euro zone are an anchor for the politics of these countries. The economic policy has to govern and lead the politics of intrigues and this is something very positive. I am an optimist.

    - According to you what are the chances of Bulgaria to enter in the euro zone?

- This is a political decision. Bulgaria has to do its job and it has to do it in this difficult international environment… Because in a difficult international environment everybody could find an argument in order to tell you: “Wait for a while longer”. Your Prime Minister has to lead a very active foreign policy and to speak with each government in Europe by clarifying the specifics of the Bulgarian reality. All the people who have some power in Bulgaria as well as the central bank have a clear vision of the economic policy which the country has to follow and I am an optimist for the final result.

    - What is your forecast for the progress of the euro zone in 2010?
    
    - Definitely in 2010 the euro zone will not register a great economic growth. There will be a positive growth it will exit the recession it already entered in 2009, however the growth will be by about 1 per cent or 1,5 per cent to the maximum. In America the growth will be much faster. In the euro zone not as much. The fact that the euro is losing its value in regards to the dollar is helpful this means that the crisis has one good consequence and in this way the European export could improve. It helps us and it helps Bulgaria and all the countries. Usually the rates of growth in the euro zone are not very big. They are about 2 – 2,5 – 3 percent, not like in America or in Asia. I see a stronger rehabilitation in 2011.

    - If now we look more generally at the Greek economy how do you rate the efforts of the government to put an order in the taxation system, to make reforms in the public insurance and to stop the waste in the public sector?

- The Greek politicians start acting when things have gone hot. And currently things have really gone hot because of the European Union and the euro zone. Now for one year they will have to do what they postponed to do for a very long period of time. It is necessary to focus and rehabilitate the public sector. It has to start functioning like a company would. Just like in one company you manage the human resources you have to do it in the public sector as well. Nobody did it until now. People thought that the public sector exists in order for everybody to receive something from it. Nobody was thinking that the public sector is the people, the citizens. Now this became clear and we are witnessing a clear attempt. First, to reform the central government, so that the ministry of finance can control the finances and the rest of the ministries. Very soon the statistic agency will become independent. A service will be created as part of the Parliament which will govern the budget in order for everybody including the opposition to see the incomes and the expenses each month. Nothing will be kept secret anymore. We will have three years budgets and a single agency for the incomes. Gradually the order will be put in the central government and little by little it will be introduced in the local authorities as well as in the various organizations – hospitals, universities. In other words we have to focus on the government of the public sector which was neglected in the past few years. I am optimistic because the sword of the markets and the sword of the European Union are forcing us to do it.

    - The Greek government is stating very openly that a part of the problems of the Greek economy are created by the international credit rating agencies.

    -The big agencies for credit rating who have recognized authority are three – Moody’s, Standard and Powers and Fitch. During the crisis these agencies were accused by the entire world because they had given very good grades to the toxic banking products which proved to be problematic. Of course 70 percent of their profit for the period between 2002 and 2007 came exactly from those types of products. It was not because of the issuing of bonds by countries or companies. In 2008 they were hurt a lot. As a result they became very cautious in the grades they give to everything in order not to get hurt again. According to me Standard and Powers and Fitch were a bit stricter with Greece than they had to be. However not the agencies for the credit rating are the problem of the Greek economy. They just informed about a problem which we, the economists, were aware of for a very long time. I myself was warning about this problem for many years. They are not agencies which speculate. They just want to keep their good name which was hurt a lot during the financial crisis and are a bit more conservative now.

    - The news that the Greek government has turned to the services of the investment bank Goldman Sachs in order to cover part of its debt caused a lot of fuss. How would you comment on this fact?

As far as it goes to the investment banks, in the whole world the job of the investment banks is to give advises to companies and governments how to issue bonds, how to sell stocks on the stock exchange. In the past 10 years, right after the year 2000 they had contacts with many European governments in order to show them ways in which their balances would look better than they actually are. They were in contact with the Greek government as well in order to make the so called securitizations (the purchasing of bad credits, their packing in offshore companies and their resale in tranches with very high ratings) which were made. It has happened with the blessing of the European Union and it was not anything illegal. Besides Greece this was also done by Italy and other countries. In 20054 this practice was stopped. Why all of a sudden this subject becomes so widely discussed? The subject became known because it is a political problem in the United States. Let me remind you that the international economic crisis started from the financial sector. It was caused by organizations which had granted a lot of credits, it had granted short term credits and had purchased toxic bonds. Most of all the investment banks and most of all Goldman Sachs. At the end of 2008 the American government spent 700 billion dollars in order to save these titanic banks. And it did save them and the plan worked out. However these banks have a much greater political influence. They finance the campaigns of senators and congressmen. They pushed the government to exit the program of the so called TARP (Troubled Asset Relief Program) and they managed to do it. According to me this was the biggest scandal in the United States in 2009. Now in 2010 the supervisors come, the government comes and they say: “What you are doing is a mistake. We saved you with the money of the American tax payers and now you wish to exit the system and with the money we gave you to grant high bonuses and so on”. What the world saw is an article in the “New York Times” who wanted to hit mostly Goldman Sachs because Goldman Sachs were the first ones to ask to exit from the TARP, they pushed a lot and they did and after them the rest of the 19 banks also exited the program. The newspaper used Greece in order to write another article and hit Goldman Sachs. It is not just Goldman Sachs. All the investment banks were doing the same. The reason, mostly in America, but also in Western Europe to get to the crisis was that while on paper these institutions had a lot of capital, they actually didn’t have any. And do you know why? Because they had found a way to get out of the essence of the law for the possession of capital. Legally their papers were in order, they were following the writings of the law, however not the spirit of the law. This did not happen in Greece, nor did it happen in Serbia, in Bulgaria or anywhere in our region. The banking sector is very active, it works in accordance with the writings, but also with the spirit of the law. We have capital. What we currently see when attacking Goldman Sachs and other investment banks have something to do with the past, because they caused the international crisis. It started from the financial sector mostly in America and in western Europe, it led to the collapse of the economies and we imported it in our region because we could no longer sell our products.

    - Let us remain for a while longer at the topic about the international markets. What could Greece do in order to restore the trust of the international markets and investors?

What Greece has to do is to do its job as it is supposed to. Some measures were announced, a three years program was announced which is supposed to decrease the deficit and lead to some growth. This program needs support. Some even further restriction of the expenses and increase in the taxes could be introduced. I has to come out and announce this program as it should be carried out so that no European would have any doubts in it. In this way the markets will be convinced. The markets as we know are sensitive and they over react. The media and most of all the English speaking media are particularly sensitive on the subject of the euro zone and their reactions are excessive as well. This is a reality which the Greek government has to realize. When you have in front of you markets which overreact you have to do something more than under the usual circumstances in order to convince them. It has to come up with a complete plan. It has to say: this is it, our European partners have to agree with it and then the markets will calm down and the spread index will fall down.

    - At the moment in the euro zone there is a great discussion regarding the financial support for Greece. What is your opinion?

    - As you know at the European council the firmer point of view took over the softer one. This means to leave Greece to handle its problem alone because in this way the others are also thought a lesson. Because Greece is not the threat to the euro zone. The threat will come if a much bigger country - whether it is called Spain, whether it is Italy or whichever other country, is left with such big deficit and in this way drags the rest of the countries. However the stricter core got the upper hand. The opinion of the European central bank was also firm as it wants to grant itself independence. It does not want to promise that if anywhere a problem is created it has to provide liquidity. Of course this year the European central bank has no problems. It could have provided liquidity because the inflation is also low and it would have stabilized the common European currency. The Greeks on the other side also didn’t say come and save us. If they had done that it would have sounded as if they admit their intentions to decrease the deficit are not serious. They had to say: “We will do our job”. Then the European Union came out and said: “Well in this case if anything happens we will interfere and save you”. What happened at the European council is the point of equilibrium of the ambitions of all players. And this is not a bad thing in the sense that Europe sent a message that it could help and that a mechanism will be created so that in case of a crisis something will be done, however this won’t happen right now. The markets have no patience. They have to see right now that the European Union is providing some capital. The Europeans however are not in a rush to react. The reaching of a consensus takes time. If you ask the bureaucrats in Brussels what happened at the European council for them is a revolution. The fact that it reached to a consensus about “no bailout” to them is a revolution. The euro zone was lucky that the crisis hit a small country and not a big one and now it has to start thinking in a more creative way how to make a mechanism parallel to the common monetary policy so that the currency union to be lasting and not to be what many people hope it will be – temporary. Because many economists are looking back at the history of economy and are saying that never a currency union has functioned without having a political union. Currently we have here a currency union without necessarily having a political union only by imposing very strict criteria for membership. Well, these criteria have to be reconsidered a little bit better.

    - Why all of a sudden Greece turned out to be in the center of such a serious economic crisis?

    - Since the beginning of December everybody started talking about the Greek economy. At that time the three credit rating agencies decreased the credit ratings of Greece. Many newspapers, mostly foreign ones when they saw that Greece has a big deficit and enormous public debt, as there is no debt in the private sector, decided that Greece is the weakest unit in the European Union and it will drag the entire euro zone down. The old critics of the euro zone raised their heads, the ones who never believed that it will be created and that very soon it will start falling apart and they saw in the Greek crisis the beginning of the end of the euro zone. They saw in Greece the crack of the mirror which will break it all, rather than the breaking of a bone which will soon heal. In this way Greece entered in the radar of the markets and when you do that it is difficult to get out. You have to take quick decisions and to anticipate the markets rather than to follow them. Well it took a while for the politicians to figure this out. Now they did and they understood how the markets work and they will soon influence them. I mean they will present a package of measures which will convince them that Greece will decrease its deficit.

    - Every day we are witnessing strikes in Greece. Do you believe that the Greek society is mature enough to support the painful reforms?

    -The fact that after the announced by the Prime Minister stricter measures two of every three Greeks is saying: “We agree go on” is very favorable. Two of every three means that these are not only the voters who voted for the PASOK government at the past elections, but are many more. There is a consensus in the Greek society that a change is necessary. Everybody has understood that reforms are needed in the pension system, that taxes have to be paid and that the public sector has to be efficient and they say: “Go on!” The government could go on because it has a huge majority in the Parliament and was elected with a difference of over 10 percent against the opposition. This is a great chance which happens very rarely. It happened in 2004, however it was not utilized by the right centrist government. Now the new government could make a change. You could compare what happened last year when the farmers went out on the streets with their tractors and what happened this year. Last year the previous government did not have a full majority in the Parliament and the Prime Minister had no chance to conduct the politics he wanted. Last year he went and gave 500 billion euro to the farmers knowing he has no money. He spent more than he had to. This year the government said that it won’t pay anything. And the strike ended. This is a lesson for everybody who believes that with a single strike the government will step back and pay them money. The society doesn’t want that anymore. The people understood them! And the government will be forced to do what the majority wants. It is politically strong and it will succeed. Now is the big chance because everybody wants a change – the people want it, the Europeans want it, the credit rating agencies want it, the markets want it and we could do it. This is a very good time for a new beginning for Greece so that it could have a growth rate of about 4 – 5 percent which it kept for 15 years and which it could have again in two – three years.