Cash that could have softened austerity

In the fall of 2013, an International Monetary Fund official stunned a number of Greek officials from state entities and ministries in central Athens by telling them that, according to his calculations, the general government must have had a liquidity surplus. At the time, nobody suspected it.

The Irish official had done something the Greek civil service had been unable to. He had compiled data from the central government and various public sector entities and concluded the general government should have had a few billion euros in liquidity reserves.

The Greek officials were caught off guard and started asking about each other’s liquidity position in the presence of the IMF official, according to one of the participants. “We were really embarrassed to find out there was a surplus we were unaware of,” he told me a few years later.

The initial estimates put the liquidity reserves below 5 billion euros but it turned out they were modest. That figure grew as more data came in and it now exceeds 20 billion euros. Some reckon Greece could have avoided the May 2010 bailout if the government at the time had been aware of the billions of euros that state entities such as local government, universities, hospitals, social security funds and others had deposited with local banks.

An official who requested anonymity put the liquidity buffer of all general government entities at between 30 and 40 billion euros in the spring of 2010. If he is right, Greece must be the only country that went belly up even though it had enough money to avoid it. It is noted that the country sought the bailout from the European Union and the IMF in early May 2010 because it lacked about 10 billion euros. Greece had only about 3 billion euros in cash and had to pay off 13 billion.

Of course, this does not mean Greece could have avoided the bailout altogether while being cut off from world markets. However, it would certainly have been able to gain some time and cover its borrowing requirements for the rest of 2010 if the state entities’ liquidity reserves exceeded 30 billion euros at the time.

Undoubtedly, Greece has a lot to learn from the crisis. First, it has to adopt the right economic policies. Second, it has to better manage the surplus liquidity of the general government by making the system of treasury accounts at the Bank of Greece fully operational. The latter means that all entities belonging to the general government should transfer their surplus liquidity to the central treasury accounts.

It is estimated that an amount of about 10 billion euros has yet to be transferred to the central treasury accounts by local authorities and others even though the entities can get a much higher deposit rate at more than 3 percent compared to less than 1 percent with commercial banks. In some cases, this reflects the incompetence of some entities – i.e. local government – to calculate and time their cash flows over the next 90 days or so.

It is time everybody put the interests of the country above their own. The Greek taxpayers must pay less to service the huge public debt in coming years and decades. This can be partly achieved by replacing foreign borrowing with loans from the state entities’ liquidity surplus. After all, the intragovernment debt is not included in the general government debt. The past mistakes should not be repeated.

* Dimitris Kontogiannis holds a PhD in macroeconomics and international finance. He has written and reported for Reuters, the Financial Times and Kathimerini English Edition, among others.