Greece’s Finance Minister: The revolving doors’ syndrome on steroids

Hardouvelis phtotNow that the bubble of the Greek success story has, thankfully, burst, it is perhaps apt to take a good look at the track record of Greece’s finance minister: the talented Mr Gikas Hardouvelis. 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.



  • Excellent critic Yanis! I would love to see it published in Protagon, so as many people could read it! Really excellent!

  • My understanding is quite different. In broad strokes, Greece has 350 Bil. euro total sovereign debt the vast majority of which is at below 2% interest and with maturities up to 20 years. Obviously Greece is not interested in replacing such a “sweet debt” deal.

    What Greece is trying to do (under the euphemism of return to markets/end of memorandum era) is to be able to finance an 11-17 Bil. shortfall for 2015 and beyond over which the IMF and ECB have been picketing since a good two years now.

    To break such deadlock, Greece was proposing to return to markets on her own in order to bridge the gap and while we are at it declare a sort of symbolic victory over “no more additional memorandum terms” (which are almost assured if either the IMF or ECB bridge the future deficit gap with loans of their own – meaning, low interest loans but with conditions).

    The reality is that Greece has never been out of the market, so to speak. Greece has been out of the market for longer maturities (5-10 years) where the costs at still high, but Greece has been floating at least 20 Bil. euros of short term paper (3-6 month treasuries) at a cost of about 2% (very reasonable).

    So the whole debate is whether Greece in a market upset by the present German(quasi-no growth) condition could access 5-7 year paper. The answer is no. But Greece can always float short term paper waiting for improved market conditions and could access said market in say 3-6 months from now.

    Therefore the argument that Greece’s effort to return to markets has been a “bubble” is false. The global markets are not collapsing because of Greece, rather they are collapsing on German intransigence punctuated by lack of corrective action in curing the EMU crisis.

    • When did I say that global markets are collapsing because of Greece? What I did say is that Greek spreads rose by a great deal more than other yields because the bubble of the Greek success story burst.

    • Yani:

      There is an intense political debate in Greece of who is responsible for the Greek stockmarket collapse. The short and correct answer is: Berlin.

      However the government accuses Syriza and Syriza accuses the government: both false positions. Your argument is a modified Syriza argument that “the government bubble has burst” and yadayadayada. The truth is Berlin has much more serious issues in its hands and unfortunately Samaras has to wait with his “little plans”. Samaras has been waiting for a Greek debt restructure since last October 2013. One of these days it’s going to dawn on him that alliances with Berlin are worse than alliances with the devil. But that his problem. If that’s what you want to say then it’s fine. But hitting on a “failed success” story sounds like Syriza propaganda and therefore not very serious stuff worth debating.

    • Times change in Greece, but the political elite is the same and their mentality is to return to status quo ante, using the EU/ Eurozone for credit enhancement to continue to borrow to subsidize their version of crony capitalism. In any case, the EU model for Greece is very shallow. Greece is an import dependent vassal state with scorched earth productive base. It is locked into years of depression and high unemployment. EU and Government promote tourism, which is an unstable and socially polluting industry, also generally very heavy on delicate Greek eco-system.

      Of course, Greece is a storm in a teapot given general EU malaise, growing restlessness and revolt in larger countries against Brussels tyranny and recent destabilization by taking on the Ukraine in EU imperialist expansion phase that it cannot reasonably carry financially plus economic drag from trade war with Russia. Greece’s fate depends on the larger EU members and whether they eventually break the tyranny in Brussels and the German hegemony or not. Greece will simply be dragged along.

      The Ukraine is a sort of microcosm caricature of Greece – a broken failed state with very corrupt political elite. Their attraction to EU is the transfer money, bootstrapping theory. They are looking for the EU to pay all their bills, siphon off a share of the transfer money to personal accounts and even have the EU fight their wars with Russia for them.

      The bootstrapping in Greece did not work out very well, although Greek political eltie craves desperately for the status quo ante. The Ukraine is already a tragedy that is rapidly deteriorating, even to the point of permanent breakup.

    • Dean,

      Samaras miscalculated on 1. Continuing with hiring and spending in the public sector as he needs to keep parliamentarians happy and on line 2. Reducing the t ax burden for the 1-2% and looking the other way on tax evasion while 3. Overtaxing the middle class on income and real estate and even heating oil on top of the extraordinary sales tax.

      So it is not just Germany, they have totally made a mess of this and given Syriza a big lead. They might still have time to save some things, if not either 1. The ND and Pasok parties get rid of Samaras and Venizelos and start fresh with new leaders or 2. They make room for Syriza to come and take a pass at improving things.

  • Yanis, I think this is an excellent piece with some minor reservations. I think the entire piece should really have been about the “conflict of interest” issue only. What you are describing is mind-boggling and we are accustomed to quite a bit by now.

    Where I disagree is that you give Hardouvelis some degree (I think a rather large degree) of responsibility for failing to warn the bank’s CEO and CFO of the impending bankruptcy of Eurobank. I disagree with that for two reasons. First, no Chief Economist at any financial institution is to be held accountable for the standing of the institution for which he/she works. This really is primarily the role of the Chief Risk Officer and the CFO. Of course, macroeconomic considerations play a role and to the extent that Hardouvelis read the macro crisis wrong and that, in turn, caused Eurobank’s demise, he is partially responsible.

    The second and equally important factor for systemic failure is groupthink. All senior executives at Eurobank, I am almost certain, told each other that things would be fine. In fact, if you do have a different view and speak out as a senior executive, you are often sidelined, if not worse. This is a cultural phenomenon that effects especially large organizations. Groupthink was found to be the cause of the space shuttle Challenger’s disaster in 1986, the reason for weak Fed supervision during 2008 and the list goes on and on. It is an infinite list. You have to be very strong person to withstand the pressure of groupthink. Resistance can be fatal.

    That being said, it is a disgrace and any self-respecting professional should think twice before lowering their heads to avoid eye contact with the groupthinkers. As my first boss told me after he had made a not necessarily career advancing remark in a large meeting: “Uwe, in the evening I have to go home, look in the mirror and like myself.” This became my career motto. As a result, I do like myself, even if that comes at a price. I am afraid that there are far too many out there, who cannot say that about themselves.

    • Nothing new about conflict of interest in Greece. Consider the Simitis era, all the insider trading on the ASE with public corporations in so-called privatization schemes and musical chairs with pension fund money. Remember all the phony accounting tricks to fudge EU accession. The financial bubbles, etc. This crowd of elite is very hard core.

      Revered and beloved….. Voters largely sheeple. Brussels pulling strings and laughing their heads.

    • Hi Uwe,
      You make an important point in relation to this “Groupthink” phenomena which I have encountered during my personal & working life. Some people have told me that they are unwilling to speak out or speak their mind out of fear of being sidelined. I know a few small to medium organisations that make a special effort to invite “outsiders” to brainstorming sessions and important meetings to play the role of “Devil’s Advocate” and challenge ideas presented by business insiders. Iam pretty sure this phenomena has had a detrimental effect on various decisions in Greece & elsewhere since the birth of the crisis in 2008.

    • Harduvelis is a very minor player. The truth is that Eurobank and National Bank of Greece were about to be merged and Berlin said “Nein” (the 2 banks had even exchanged shares and had pre-announced the merger 8 months in advance – everybody knew and had agreed to this action) . The reason that Berlin said no is that the merger would have resulted in a very large Greek bank which Berlin would be required to save during the next phase of an unpredictable EMU crisis. Instead Berlin opted for a very weak banking system in Greece by design so that Greece remains under Berlin’s control and political manipulation according to the original plan.

      Even last week’s international market upheaval was blamed by Berlin to Athens. Here is how (note that Klaus Regling is a Berlin uber apparatchik):

      “The (Athens) government insist on its monotonous and perhaps tedious announcement that the Memorandum will soon end, but adds that this will happen only if its three institutional partners agree.

      Greece’s EU partners are expected to push for a credit line program, accompanied by a binding legal text Memorandum of Understanding – Enhanced Conditions Credit Line (ECCL). The head of the European Stability Mechanism (ESM) Klaus Regling from Bratislava yesterday stated that the recent turmoil in international markets (and in Greece) was caused by them Greek government’s plan for an early exit from its support program. This announcement was a clear blow to the communication strategy of the government to convince the Greek society that SYRIZA was responsible for the disruption of markets!

      The Prime Minister realizes that the completion of the prerequisites until Christmas is no easy task, since there are several “hot” issues that will again spark reactions in society, such as changes in employment law, with the establishment the lockout and changes in trade union law, the completion of the program for the public sector layoffs and the new payroll to the State, leading to reductions in payroll employees.”

      Berlin is keenly aware of even the remotest possibility of Athens claiming its autonomy and the German game is to deny it at any cost. End of story. The tragedy with the Samaras government is that it considers Berlin a trustworthy ally in its fight against Syriza, yet Berlin is 10 times a bigger threat to Greece than Syriza will ever be. This is not endorsement for Syriza, which is clearly an amateurish and incompetent group; rather it’s a statement of despair of how badly Samaras has effed things up in his attempt to score an ideological victory and at the same time become the pseudo-savior of Greece for posterity.

  • Sympathize greatly with Varoufakis point of view. I have long held the same views on the clique that runs Greece. They promote themselves regularly. Despite the turmoil for the general population, shrinking middle class and increasing impoverishment of general population, the ruling elite is still doing extremely well with new promotions, fat salaries, and perks. They are among the wealthiest Greeks and they run the show with Brussels backing. Brussels generally runs most of the smaller EU countries in the same manner with a proxy local regime that highly rewarded. If they want to bring new countries into the system, they simply purchase the political elite. Declare EU allegiance and get sinecures for life….

  • The sooner people acknowledge that the political class in Greece is NOT working for the interests of the Greek people everything makes much more sense and it becomes possible to appreciate the excellent jobs the people at the top are doing now and have been doing since 1832.

    You are trying to force a square peg into a round hole if you approach Greek government economic policy from the belief that the government is there to help the Greek economy. If you approach things from that perspective you are only going to frustrate yourself thinking about the apparent incompetence when the reality is actually the exact opposite.

    • I must admit you are right. The way I see things, there is no such thing as a political party working in favor of the people, especially in a small country like Greece. However, the moto of Goldman Sachs “if there is no conflict there is no interest”, applies in all kinds of conflicts and interests. Like for example, the conflict between politics and “apolitics”, in which the professor is taking place personally. Because there is no bigger interest, than the one that is earned when governing a bankrupt country.

  • Finally… Since years I say that the Greeks should throw out the rotten political ‘elite’, otherwise nothing will change, never. The Greek society, led by those ‘elites’, threw herself over decades into the situation she is in. So Greece herself has to get the act together to make the change, not Berlin, Brusseles, Paris or the United States of the Moon.

  • Why don’t you write another article about the other Banker – Finance Minister – Governor of the Bank of Greece and his successful (sorry glorious) career in Eboriki Bank : Giannis Stournaras?

  • London calling: so it was Hardouvellis who put the bubble into our ‘bubble & squeak’ rhyming slang! I wonder what Gikas Eurobank rhymes with?

    • According to the bright minds over at zerohedge, a deficit that exists simply because of interest payments is evidence of no austerity.

      They must have graduated from the same high level university as you did.

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