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Most Aid to Athens Circles Back to Europe

Its membership in the euro currency union hanging in the balance, Greece continues to receive billions of euros in emergency assistance from a so-called troika of lenders overseeing its bailout.

European Central Bank
Travelpix Ltd | Photographer's Choice | Getty Images
European Central Bank

But almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets.

The European bailout of 130 billion euros ($163.4 billion) that was supposed to buy time for Greece is mainly servicing only the interest on the country’s debt — while the Greek economy continues to struggle.

If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Commission — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has afflicted Athens and clouded the future of the euro zone.

As they pay themselves, though, the troika members are also withholding other funds intended to keep the Greek government in operation.

Last week, the Athens office that tracks revenue said Greece could run out of money by July. If so, Greece could default on its debts — except those due to the central bank, the monetary fund and the European Union.

“Greece will not default on the troika because the troika is paying themselves,” said Thomas Mayer, a senior adviser at Deutsche Bank in Frankfurt.

In an elaborate payment system that began after the May 6 election that brought down the Greek government and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payments on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

About three-quarters of Greece’s debt, or $229 billion, is now effectively owned by one of the three troika members, according to estimates by the investment bank UBS.

The central bank, in particular, is eager to be paid back, said Mr. Mayer, who has followed the cash.

To help calm volatile financial markets, it bought billions of euros in Greek bonds that come due monthly. “It’s why they want to get paid back every month now,” he said. “The E.C.B. bought at a high price and now insists on being paid in full.”

Some people close to the situation say the troika is also trying to put financial pressure on Greece to do what it can to collect tax revenue from an increasingly devastated economy.

The managing director of the I.M.F., Christine Lagarde, prompted a furor in Greece over the weekend when she chastised Greeks for not paying taxes, in an interview with The Guardian.

A Greek government adviser who spoke on the condition of anonymity, for fear of alienating the European lenders, said of the troika: “They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues.”

On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them.

“You send the money, you call it a ‘loan’ — you get it back and call it an ‘interest rate,’ ” said Stephane Deo, global head of asset allocation in London for UBS. Mr. Deo said such arrangements were common in situations where governments were in danger of defaulting on their debts.

That is because governments do not go bankrupt in the same way that companies do; creditors cannot break them up and sell the assets to recover some of their money. So creditors have an incentive to ensure that distressed governments continue to repay their debts, even if it means lending them the money.

Since May 2010, Greece has been sent about $177 billion in European taxpayer money to keep the country afloat and ward off a bigger crisis that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika.

Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy.

This circular lending is all about risk management. After all, Greece this year negotiated a debt deal in which banks that held its bonds got only about half of their money back.

The troika wants to ensure the same does not happen to its members and the taxpayers. European officials have also pointed to Greece’s track record on finances, including manipulating its budget numbers to qualify to join the euro union in 2001, and government corruption since then.

Another recent development has rung alarm bells. Last month the troika sent Greece $31 billion to help shore up its banks.

On Tuesday, the caretaker Greek government dispensed $23 billion of it to the banks. But some Greek officials have suggested tapping the remainder to keep the government running past June, should the troika continue to wield a tight fist.

The European Central Bank became one of Greece’s biggest creditors after it started buying debt from troubled euro zone countries in 2010 to help stabilize prices. The bank does not disclose how much Greek debt it bought, but estimates are from $44 billion to $69 billion.

Greek bonds are a profitable investment for the bank as long as Greece continues to make interest payments. The bank exempted itself from the debt restructuring deal. And Greek bonds were already trading at a big discount when the central bank started buying them. As a result, the bank is earning an effective interest rate of 10 percent or so, Mr. Deo estimated.

But he added that it was also a risky trade. If Greece defaulted, European taxpayers might ultimately have to pour new money into the bank’s capital reserves.

The European Union’s bailout fund, the European Financial Stability Facility, also became a major Greek creditor as a result of the debt-reduction deal that Greece negotiated with bondholders. All told its contribution amounted to about $88 billion.

However harsh the payback terms might seem, the European authorities have a strong interest in avoiding the even higher costs that would result if Greece left the euro zone or defaulted completely on its debt.

As early as next year, according to optimistic estimates, Greece could reach the point where tax receipts exceed government operating expenses.

At that point, a populist government might be tempted to stop making debt payments altogether. If so, it might then take its chances on its own, outside the euro zone without the burden of interest payments.

To help leaders in Greece resist that temptation, the troika’s reasoning goes, it is better to help them service the debt immediately.

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