GREECE CRISIS- REPORTING ISSUES Sanjay Vani, OPCFM
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% 2007 2008 2009 2010
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, 2005-1,084 companies restated their accounting results in the US
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
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%.
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 2010 - Deficit for 2009 stands at 15.4 %
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!)
Why Greece misreported? To show compliance with the treaty obligations This enabled Greece to spend beyond their means, while hiding the actual deficit
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
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
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.
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
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.
Where were the auditors? GFS data is not audited Delayed audit - Audit of government financial statement is done up to 2008.
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.
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 2007 2008 2009 2010 Working balance in central government accounts -10514-14575 -30870-19292 Basis of the working balance cash cash cash cash Cash deficit Financial transactions included in the working balance 0-478 447-603 Loans, granted (+) 0 0 0 0 Loans, repayments (-) 0 123 58 134 Equities, acquisition (+) 0 0 0 0 Equities, sales (-) 0 0 0 0 Other financial transactions (+/-) 0-601 389-737 of which: transactions in debt liabilities (+/-) 0-210 400-577 Detail 1-210 400-577 swaps cancellations Detail 2 Non-financial transactions not included in the working balance -1558-1466 -696-1390 Detail 1-106 -61-142 -399 Balance of privatization Detail 2-1452 -1405-554 -991 other (Balance sheet corrections, EU disallowances and penalties to ELEGEP, etc) Difference between interest paid (+) and accrued (EDP D.41)(-) -349-495 -623-279 Other accounts receivable (+) 412-1606 233 179 Detail 1 462 58 550-1048 Acrual Tax Revenue Detail 2-50 -1664-317 1227 other (accrual EU revenue, etc) Other accounts payable (-) 914 862 436 770 Detail 1 85 783 911 52 EU revenue advances other (unpaid tax refunds, Vat paid to government enterprises, payables of the Detail 2 829 79-475 718 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 -1798-1665 347 5485 Detail 1 122 146 2020 2348 EBF plus additional units Detail 2-1920 -1811-1673 3137 government enterprises Other adjustments (+/-)(please detail) -1619-3650 -5298-11480 Detail 1-465 -1743-531 -1147 Capital transfers to SSFs and Public Hospitals (through bonds) Detail 2 30 68-58 -256 Net guarantee calls of other sectors Detail 3-120 -241-483 -786 Net guarantee calls of government enterprises and debt assumption Detail 4-1324 -1850-2927 -989 Military expenditure (deliveries) other (capital transfers, Balance of extra budgetary accounts, debt assumption of Detail 5 260 116-1299 -8302 ELGA) Accrual Deficit Net borrowing (-)/lending(+)(edp B.9) of central government (S.1311) -14512-23073 -36024-26610