Thursday, February 11, 2010

Goldies again in hot Greece?

This post is mainly about the confluence of two separate articles appearing on Guambat's radar screen:

First, from the WSJ: Greece’s Woes Not All Homegrown
Make no mistake about it: the Greeks are principally responsible for their own woes and dodgy finances. Years of widespread tax evasion, a bloated and dysfunctional public sector, corruption in the political ranks—all of those are home grown problems.

But, at the same time, not all of Greece’s current problems are entirely of its own making. It is not responsible for the financial crisis that has swept the world since 2007—Greek banks held no toxic assets and remain among the most robust in Europe; its property market was nowhere near as frothy as those in Spain or Ireland and was starting to deflate normally before the crisis hit.

Nor is the country responsible for the ferocity of the bond markets’ reaction to its deficits—estimated at 12.7% of gross domestic product last year; the highest in the euro zone to be sure, but not far off from levels of its southern European neighbors, not to mention Ireland and the U.K.

Now this, from Germany's Der Speigel (online): How Goldman Sachs Helped Greece to Mask its True Debt
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.

it looks like the Greek figure jugglers have been even more brazen than was previously thought. "Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

Such transactions are part of normal government refinancing.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank.

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