Eurozone crisis: stained hands of banker tasked with cleaning up the Greek mess

 

By Damien McElroy, Foreign Affairs Correspondent

10:03PM GMT 10 Nov 2011

Greece installed a former central bank chief as its new prime minister on Thursday night, despite criticism that he was one of those responsible for getting the country into its current mess.

Lucas Papademos appointment as prime minister was seen as an attempt to restore confidence in Greece's ability to deliver austerity measures, cement a European debt deal and stave off national bankruptcy Photo: REX

Lucas Papademos, who was governor of the Bank of Greece for eight years, was appointed leader of an interim government, backed by the four largest parties, following the resignation of George Papandreou.

However, there was an angry reaction on the streets to the choice of Mr Papademos, who was one of the key players in Greece's entry into the eurozone a decade ago – a process allegedly underpinned by statistical fraud about the real state of the country's economy.

He also went on to serve as vice-president of the European Central Bank. Banners at a Communist Party-led demonstration denounced Mr Papademos as puppet of the big banks.

His appointment as prime minister was seen as an attempt to restore confidence in Greece's ability to deliver austerity measures, cement a European debt deal and stave off national bankruptcy.

Speaking after accepting the role, Mr Papademos, 64, said membership of the euro would eventually deliver monetary stability and ensure Greece made the adjustments needed to restore economic growth. He warned that hard choices would have to be made by his government in the coming weeks. "I am not a politician but I have dedicated most of my professional life to exercising financial policy both in Greece and in Europe," he said.

 

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"Greece is at a crucial crossroads – the course will not be easy. But the problems, I'm convinced, will be solved.

"They will be solved faster, with a smaller cost and in an efficient way, if there is unity, agreement and prudence."

The Greek stock market jumped sharply when Mr Papademos arrived at the presidential palace to begin talks with the head of state and political leaders. But his appointment was only settled at the last minute after five days of political wrangling in which his name was proposed then withdrawn several times.

"On Tuesday morning he thought he had a deal," a Greek official said. "But by Tuesday afternoon it appeared it fell through and he didn't know why. Papademos wanted to be in control, not a figurehead."

Mr Papademos will lead a government backed by both the governing socialists and the opposition conservatives that will operate until early elections, tentatively set for February.

Commentators were quick to point out the irony in placing Greece's eurozone survival in the hands of a man who helped ease the country into the single currency in the first place.

As head of Greece's central bank from 1994 to 2002, the sober banker reduced inflation and presented figures showing the budget deficit had been brought down to European limits. However, it has been alleged that secret deficits were being run up and that Athens had hidden the extra borrowing through money market manipulation.

Greece used a form of currency swaps to raise the equivalent of €2.4 billion in the run-up to joining the currency in 2001 and bring its budget deficit down to the annual limit of three per cent. But the arrangements reduced government revenue over time, as airport taxes and lottery proceeds were secured against the debt.

Nicolas Sarkozy, the French president, acknowledged last week that the original cover-up had led to the current crisis. He said: "It was an error because Greece entered with false figures; it was not ready."

Panagiotis Gennimatas, a leading banker, called for Mr Papademos to answer questions about his role in the falsified statistics.

"Over a decade and in full agreement with governments he was supplying false information to the European institutions, so that Greece could enter the monetary union," he claimed.

The European Commission, the European Central Bank and the International Monetary Fund had issued an ultimatum to Greek politicians to back a technocrat-led national government last week.

That demand came after Mr Papandreou shocked the institutions underwriting his debt-ridden government by proposing a referendum on a €130 billion European debt deal that took months to work out. The interim government's mandate should see it pass the bail-out deal to ensure the country receives its next, critical instalment of loans. Under the new deal, private bondholders will forgo 50 per cent of their Greek debt holdings so the country can bring its massive debts under control.

Eurozone officials were withholding the next instalment of loans, without which Greece faces default in a matter of weeks, until Athens formally approves the new debt deal.

"Although this will be a transitional government, its workload will be extremely intense. A second programme of financial assistance must be rapidly concluded," a joint statement from the EU presidents José Manuel Barroso and Herman Van Rompuy said.

Many Greeks view austerity as a double-edged sword that has triggered a collapse in living standards. Shuttered shops and the emergence of soup kitchens on the streets of Athens provide unmistakable evidence of the collapse of the domestic economy. The political crisis has been a further blow to Greek self-confidence.

Eurozone crisis: stained hands of banker tasked with cleaning up the Greek mess - Telegraph