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Greece and Goldman Sachs

Investigative reports by the New York Times and Der Spiegel have left Goldman Sachs and Greece squirming in the limelight. For at least fifteen years, the American investment bank has been helping Greece legally massage its public finances. The arrangement enabled Greece to keep its European partners happy without having to make tough fiscal decisions. Specifically, the bank created currency swaps that enabled debt issued in dollars or yen to be swapped for euro-denominated bonds that would be paid back at a later date. Sound fishy? Those on both sides of the Atlantic think so. From the New York Times:

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.... Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.

Der Spiegel has been following the issue for a longer period of time, and the frustration in Germany over Greece's behavior is particularly acute. The magazine notes that the accounting procedures have only delayed the day of reckoning:

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

The activities of Goldman Sachs in Greece are neither surprising nor novel. Indeed, Der Spiegel notes that Italy has engaged in similar activities with another bank for some time. The controversy highlights how difficult fiscal reform is in modern democracies. Today was Greece's day of reckoning, tomorrow could be America's. Anne Applebaum at Slate writes, "I have seen America's future and it is Greece."

The revelations come at a very inopportune time for Greece, the bank, and the EU. What do these revelations say about the proposed bailout of the country by the EU? Can the Euro survive when its member states can easily fabricate their numbers? (Imagine California making secret purchases in eurobond markets that are swapped out at a later date for dollar-denominated bonds.) Is the Euro feasible without greater political cohesion among the EU's member states? And what does this transaction say about the value-added of investment banks? As Baseline Scenario notes, are investment banks in sovereign markets really producing "productivity-enhancing financial innovation" or just "a sophisticated form of scam?"


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Pat Patterson on :

But California cannot secretly buy any bonds, none, without voter approval. Which probably would have prevented the past and current government of Greece to engage in such actions. The only place bonds or even very shady investment strategies can be used is in the money the state controls for retirement. And even then those issuing agencies are required by law to describe the purchases for the public record.

Marie Claude on :

all the europen main banks are in the swap swimming pool, since the beginning, but our governments lied ! so let's make this cards castle collapse, and devaluate the euro : good for our employment that is mainly related to exportation !

Pamela on :

WSJ has a fascinating piece on how corrupted the entire EU bookkeeping regulations are. "Debt Deals Haunt Europe" Economies across the Continent have used complex financial transactions—sometimes in secret—to hide the true size of their debts and deficits. Investors long turned a blind eye to European governments' aggressive bookkeeping, aimed at meeting the euro zone's fiscal ceilings. Countries using the euro currency have a rich history of exotic maneuvers aimed at meeting rules requiring members to cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%. Despite criticism, European leaders deemed many of these moves acceptable as they sought the long-planned currency union. ---------------- It's a given that 'journalists' (not to mention politicians) are notoriously ignorant about financial/economic issues. However, even those who dare nose around are, in the EU, harassed and prosecuted. Does anyone remember Hans Martin Tillack? He published in Stern magazine some fishy practices in the anti-fraud office of OLAF. Apparently, someone leaked some documents to him. And all hell broke loose. It took 3 years but eventually EU/OLAF was ordered to back off and pay the man for damages and costs. It was ugly.

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