Re: Wall Street masking tactics played a role in the Greece fiasco
- From: "Jerry Okamura" <okamuraj005@xxxxxxxxxxxxx>
- Date: Tue, 23 Feb 2010 08:20:21 -1000
Translation: The Greeks who bought the scam were fools.
"Earl Evleth" <evleth@xxxxxxxxxx> wrote in message news:C79EBD48.19CCB7%evleth@xxxxxxxxxxxxx
Same old story, a subprime redux. No doubt some
got big bonuses for arranging the Greek loans.
The banksters at work.
February 14, 2010
Wall St. Helped to Mask Debt Fueling Europe¹s Crisis
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
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.
As worries over Greece rattle world markets, records and interviews show
that with Wall Street¹s help, the nation engaged in a decade-long effort to
skirt European debt limits. One deal created by Goldman Sachs helped obscure
billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for ways
to help Greece forestall the day of reckoning. In early November < three
months before Athens became the epicenter of global financial anxiety < a
team from Goldman Sachs arrived in the ancient city with a very modern
proposition for a government struggling to pay its bills, according to two
people who were briefed on the meeting.
The bankers, led by Goldman¹s president, Gary D. Cohn, held out a financing
instrument that would have pushed debt from Greece¹s health care system far
into the future, much as when strapped homeowners take out second mortgages
to pay off their credit cards.
It had worked before. In 2001, just after Greece was admitted to Europe¹s
monetary union, Goldman helped the government quietly borrow billions,
people familiar with the transaction said. That deal, hidden from public
view because it was treated as a currency trade rather than a loan, helped
Athens to meet Europe¹s deficit rules while continuing to spend beyond its
Athens did not pursue the latest Goldman proposal, but with Greece groaning
under the weight of its debts and with its richer neighbors vowing to come
to its aid, the deals over the last decade are raising questions about Wall
Street¹s role in the world¹s latest financial drama.
As in the American subprime crisis and the implosion of the American
International Group, financial derivatives played a role in the run-up of
Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a
wide range of other banks enabled politicians to mask additional borrowing
in Greece, Italy and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in
return for government payments in the future, with those liabilities then
left off the books. Greece, for example, traded away the rights to airport
fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead
investors and regulators about the depth of a country¹s liabilities.
Some of the Greek deals were named after figures in Greek mythology. One of
them, for instance, was called Aeolos, after the god of the winds.
The crisis in Greece poses the most significant challenge yet to Europe¹s
common currency, the euro, and the Continent¹s goal of economic unity. The
country is, in the argot of banking, too big to be allowed to fail. Greece
owes the world $300 billion, and major banks are on the hook for much of
that debt. A default would reverberate around the globe.
A spokeswoman for the Greek finance ministry said the government had met
with many banks in recent months and had not committed to any bank¹s offers.
All debt financings ³are conducted in an effort of transparency,² she said.
Goldman and JPMorgan declined to comment.
While Wall Street¹s handiwork in Europe has received little attention on
this side of the Atlantic, it has been sharply criticized in Greece and in
magazines like Der Spiegel in Germany.
³Politicians want to pass the ball forward, and if a banker can show them a
way to pass a problem to the future, they will fall for it,² said Gikas A.
Hardouvelis, an economist and former government official who helped write a
recent report on Greece¹s accounting policies.
Wall Street did not create Europe¹s 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.
³If a government wants to cheat, it can cheat,² said Garry Schinasi, a
veteran of the International Monetary Fund¹s capital markets surveillance
unit, which monitors vulnerability in global capital markets.
Banks eagerly exploited what was, for them, a highly lucrative symbiosis
with free-spending governments. While Greece did not take advantage of
Goldman¹s proposal in November 2009, it had paid the bank about $300 million
in fees for arranging the 2001 transaction, according to several bankers
familiar with the deal.
Such derivatives, which are not openly documented or disclosed, add to the
uncertainty over how deep the troubles go in Greece and which other
governments might have used similar off-balance sheet accounting.
The tide of fear is now washing over other economically troubled countries
on the periphery of Europe, making it more expensive for Italy, Spain and
Portugal to borrow.
For all the benefits of uniting Europe with one currency, the birth of the
euro came with an original sin: countries like Italy and Greece entered the
monetary union with bigger deficits than the ones permitted under the treaty
that created the currency. Rather than raise taxes or reduce spending,
however, these governments artificially reduced their deficits with
Derivatives do not have to be sinister. The 2001 transaction involved a type
of derivative known as a swap. One such instrument, called an interest-rate
swap, can help companies and countries cope with swings in their borrowing
costs by exchanging fixed-rate payments for floating-rate ones, or vice
versa. Another kind, a currency swap, can minimize the impact of volatile
foreign exchange rates.
But with the help of JPMorgan, Italy was able to do more than that. Despite
persistently high deficits, a 1996 derivative helped bring Italy¹s budget
into line by swapping currency with JPMorgan at a favorable exchange rate,
effectively putting more money in the government¹s hands. In return, Italy
committed to future payments that were not booked as liabilities.
³Derivatives are a very useful instrument,² said Gustavo Piga, an economics
professor who wrote a report for the Council on Foreign Relations on the
Italian transaction. ³They just become bad if they¹re used to window-dress
In Greece, the financial wizardry went even further. In what amounted to a
garage sale on a national scale, Greek officials essentially mortgaged the
country¹s airports and highways to raise much-needed money.
Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its
balance sheet that year. As part of the deal, Greece got cash upfront in
return for pledging future landing fees at the country¹s airports. A similar
deal in 2000 called Ariadne devoured the revenue that the government
collected from its national lottery. Greece, however, classified those
transactions as sales, not loans, despite doubts by many critics.
These kinds of deals have been controversial within government circles for
years. As far back as 2000, European finance ministers fiercely debated
whether derivative deals used for creative accounting should be disclosed.
The answer was no. But in 2002, accounting disclosure was required for many
entities like Aeolos and Ariadne that did not appear on nations¹ balance
sheets, prompting governments to restate such deals as loans rather than
Still, as recently as 2008, Eurostat, the European Union¹s statistics
agency, reported that ³in a number of instances, the observed securitization
operations seem to have been purportedly designed to achieve a given
accounting result, irrespective of the economic merit of the operation.²
While such accounting gimmicks may be beneficial in the short run, over time
they can prove disastrous.
George Alogoskoufis, who became Greece¹s finance minister in a political
party shift after the Goldman deal, criticized the transaction in the
Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the
government with big payments to Goldman until 2019.
Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message
last week that Goldman later agreed to reconfigure the deal ³to restore its
good will with the republic.² He said the new design was better for Greece
than the old one.
In 2005, Goldman sold the interest rate swap to the National Bank of Greece,
the country¹s largest bank, according to two people briefed on the
In 2008, Goldman helped the bank put the swap into a legal entity called
Titlos. But the bank retained the bonds that Titlos issued, according to
Dealogic, a financial research firm, for use as collateral to borrow even
more from the European Central Bank.
Edward Manchester, a senior vice president at the Moody¹s credit rating
agency, said the deal would ultimately be a money-loser for Greece because
of its long-term payment obligations.
Referring to the Titlos swap with the government of Greece, he said: ³This
swap is always going to be unprofitable for the Greek government.²
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