Tuesday, February 09, 2010
Spiegel Online reports that everybody's favorite investment bank - Goldman Sachs - had a hand in the ongoing Greek debt crisis that has been roiling financial markets for weeks. Of course, no laws were broken and Goldman's customers were quite pleased with how they had been assisted by the Wall Street firm, that is, for a few years, until everything fell apart.
Goldman Sachs Helped Greece Mask its True DebtSomehow this isn't all that surprising and, when you think about the various financial reforms wending their way through the system, pinning hopes on regulation to prevent similar things from happening in the future seems almost childlike in its naivete as long as there are smart (and highly motivated) people at places like Goldman Sachs around who are more than willing to help governments and other institutions hide debt, boost returns, and undertake all sorts of dangerous - but entirely legal - shenanigans.
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. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.
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.