GREECE CRISIS- REPORTING ISSUES. Sanjay Vani, OPCFM

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1 GREECE CRISIS- REPORTING ISSUES Sanjay Vani, OPCFM

2 Greece Some facts Member of the European Union (27 members), the Eurozone (17 members) 32nd largest in the world by nominal gross domestic product (GDP) - $312 Billion (2011 est) FY 2010 Public Debt 145% of GDP (from 107% in 2007) 160% 140% 120% 100% 80% 60% 40% 20% 0%

3 Misreporting both public sector and private sector do it Misreporting happens both in the private sector and public sector Examples of misreporting in the private sector Olympus (Japan), Enron, AIG, Madoff, Worldcom, Waste Management, MF Global (USA), Parmalat (Italy), Satyam (India),.. Between January 1, 2002 and September 30, ,084 companies restated their accounting results in the US

4 Rules/Standards for Reporting in the EU Government Financial Statistics in EU is produced in accordance with the European System of Accounts 1995 (ESA 95), the EU manual for national accounts

5 Maastricht Treaty Obligations A system of multilateral fiscal surveillance within the European Union. The Treaty obliges Member States to comply with budgetary discipline by respecting two criteria: a max deficit to GDP ratio of 3% and a max debt to GDP ratio 60%.

6 Journey from 3.7% to 15.4% Timeline of developments: Fall 2008 Global financial crisis everybody s business Feb 2009 Greece estimates that its deficit would reach 3.7% in 2009 (just above the Maastricht Treaty obligation). Oct 2009 Greece s new government says previous estimates of its deficits were wrong and that the 2009 deficit will exceed 10% of GDP Nov 2009 Greek government says its 2009 budget deficit will be 12.7% of GDP April 2010 Eurostat says deficit was 13.6% of GDP, not the 12.7% the country reported Nov Deficit for 2009 stands at 15.4 %

7 2009 was not a isolated instance! Reliability of Greek government deficit and debt statistics has been the subject of continuous and unique attention by Eurostat for several years. Greek statistical authorities had misreported figures on deficit and debt since 1997! (Much before Enron!)

8 Why Greece misreported? To show compliance with the treaty obligations This enabled Greece to spend beyond their means, while hiding the actual deficit

9 How Misreporting Took Place? Do not count transfers to social security fund as expenditure - transfer of 710 mn from the State budget to the social security fund was not included in budget expenditure. Leave Extra-budgetary expenditures out - specific operations such as military expenditures that do not transact via the budget were not counted as expenditures Treat balances in extra-budgetary funds as revenue - government decided to abolish some of these accounts and transferred 300 mn into the State budget as revenue

10 How Misreporting Took Place? Forget about accrued interest - accrued interest which constitutes government expenditure was not included to the tune of 450 mn. Ignore debt assumptions by government linked to the call on guarantees misreporting of transactions 200 mn in debt assumptions originating from calls on guarantees

11 How Misreporting Took Place? Ignore the rules on capital injections per ESA rules capital injections in public enterprises should have been considered as capital transfers (increasing the deficit of the Greek government) but instead they were treated as financial transactions with no impact on the deficit. Fictitious surplus in the social security sector use of fragile estimation hypotheses as a result of which surplus of the social security sector was overestimated by 2.8 bn between 2001 and 2003.

12 How Misreporting Took Place? Faulty system for calculation of tax revenue - system based on assessments and declarations, where the amounts recorded are adjusted by a coefficient to reflect uncollectible coefficients were unrealistically low, and as a consequence, the amounts of taxes recorded as revenue had been constantly overestimated

13 How Misreporting Took Place? EU Grants - payments received from the EU treated as revenue for government but outflows were not recorded as expenditure (recorded as financial transactions without any impact on the deficit). Hospital Liabilities Out of about 3.3 bn of unpaid expenditures of hospitals only 2.3 bn were recorded.

14 Where were the auditors? GFS data is not audited Delayed audit - Audit of government financial statement is done up to 2008.

15 Take away GFS and financial statements Statistics for government units and public corporations are often derived directly from the government financial accounting (see next slide) GFS is accrual-based Cash-based government accounts needs to be supplemented/adjusted for accrual-based GFS If underlying accounting data is suspect GFS data, for sure, will also be suspect Fixing accounting and reporting is a priority in many countries.

16 Table 2A: Provision of the data which explain the transition between the public accounts budget balance and the central government deficit/surplus Member state: GREECE Data are in millions EUR Date: 12/10/2011 Year Working balance in central government accounts Basis of the working balance cash cash cash cash Cash deficit Financial transactions included in the working balance Loans, granted (+) Loans, repayments (-) Equities, acquisition (+) Equities, sales (-) Other financial transactions (+/-) of which: transactions in debt liabilities (+/-) Detail swaps cancellations Detail 2 Non-financial transactions not included in the working balance Detail Balance of privatization Detail other (Balance sheet corrections, EU disallowances and penalties to ELEGEP, etc) Difference between interest paid (+) and accrued (EDP D.41)(-) Other accounts receivable (+) Detail Acrual Tax Revenue Detail other (accrual EU revenue, etc) Other accounts payable (-) Detail EU revenue advances other (unpaid tax refunds, Vat paid to government enterprises, payables of the Detail ministries, etc.) Working balance (+/-) of entities not part of central government M M M M Net borrowing (-) or net lending (+) of other central government bodies Detail EBF plus additional units Detail government enterprises Other adjustments (+/-)(please detail) Detail Capital transfers to SSFs and Public Hospitals (through bonds) Detail Net guarantee calls of other sectors Detail Net guarantee calls of government enterprises and debt assumption Detail Military expenditure (deliveries) other (capital transfers, Balance of extra budgetary accounts, debt assumption of Detail ELGA) Accrual Deficit Net borrowing (-)/lending(+)(edp B.9) of central government (S.1311)

Reporting of Government Deficits and Debt Levels

Apr.2015 Reporting of Government Deficits and Debt Levels in accordance with Council Regulation (EC) N 479/2009, as amended and the Statements contained in the Council minutes of 22/11/1993 Set of reporting