In October 2009, the then Greek government of the central-right liberal-conservative New Democracy party were ousted in the general election by the Panhellenic Socialist Movement. When the Socialists looked at the treasury finances they found that their liberal-conservative predecessors had hidden the size of the budget deficit in order to disguise the fact that they were failing to comply with their Eurozone obligations. The new Government found out that rather than the 3.7% claimed, the real deficit was more than three times what the conservatives had said it was, at some 12.5% of GDP (this was in the first two weeks after the election, later the deficit was revised upwards again to 14%) This was hardly surprising because during the election year, the government had, as usual, pulled all its tax collectors off the streets which is apparently the norm for Greek elections (this is one of the contributors to Greece having such low rates of tax collection contributing to a shadow (black market) economy equivalent to about 28% of GDP).
What makes it worse however, was that Greece had repeatedly been warned about providing inaccurate economic data, including by Claude Trichet at the ECB as far back as 2004 in response to revelations about past Greek statistical irregularities
When the Greeks were allowed to enter the Eurozone as a late comer in 2001 it was known even then that they were massaging their debt and deficit figures. The German Chancellor at the time Gerhard Schroder has since admitted as much but perhaps he was too pre-occupied with Germany heading towards an economic downturn and itself in danger of missing budgetary targets, and thus didn't ask too many questions.
"Probably the Greeks tricked us, but......I could not say to the Greek Prime Minister, 'you are cheating us'" Schroder, March 2011 as reported by David Marsh (author of "The Euro: the battle for the new global currency") .
But here's the real kicker, I quote a 2010 Vanity Fair article by Michael Lewis, a former broker and author of the best selling "Liar's Poker" about his adventures as a bond trader;
"To remain in the euro zone, they [the Greeks] were meant, in theory, to maintain budget deficits below 3 percent of G.D.P.; in practice, all they had to do was cook the books to show that they were hitting the targets. Here, in 2001, entered Goldman Sachs, which engaged in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government’s true level of indebtedness. For these trades Goldman Sachs—which, in effect, handed Greece a $1 billion loan—carved out a reported $300 million in fees. The machine that enabled Greece to borrow and spend at will was analogous to the machine created to launder the credit of the American subprime borrower—and the role of the American investment banker in the machine was the same. The investment bankers also taught the Greek-government officials how to securitize future receipts from the national lottery, highway tolls, airport landing fees, and even funds granted to the country by the European Union. Any future stream of income that could be identified was sold for cash up front, and spent. As anyone with a brain must have known, the Greeks would be able to disguise their true financial state for only as long as (a) lenders assumed that a loan to Greece was as good as guaranteed by the European Union (read Germany), and (b) no one outside of Greece paid very much attention."
This state of affairs began to unravel when the true extent of the Greek deficit was revealed. And the reverberations are threatening to sound the death knell of the Eurozone, and plunge Europe into a second recession dragging Britain and probably the rest of the world down with it.
As Angela Merkel said in Feburary 2010; "it would be a disgrace if it turned out to be true that banks that had already pushed us to the edge of the abyss were also party to falsifying Greek statistics."
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