As The Sovereign Enron Turns… Again

If Enron had help from Citi and JPMorgan Chase (that’s hideous to type out) in concealing debt off-balance sheet, then I guess Goldman is playing the same role here?

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.

via Greek Debt Crisis: How Goldman Sachs Helped Greece to Mask its True Debt – SPIEGEL ONLINE – News – International.

Welcome to off-balance sheet accounting, sovereign style. The mechanics are explained later on:

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.

Typically, these swaps are just that: swaps/bets on future relative value of the currencies. But this sounds more sinister: like a loan written up to look like a cross-currency swap using fictitious, way out of the money exchange rate quotes as the mechanism to lend with . That’s not right.

I’m not one for throwing gas on fires, but this is something Goldman deserves to get nailed on. I remember years ago there was heartburn at banks for doing structuring leases with municipal infrastructure equipment (water treatment, subways, etc.). Everyone called it a tax dodge, and it was. But at least there, you had tangible economic benefits for both parties. One gets better tax treatment as well as participation in the cash flows from the infrastructure while the local government could liquefy their balance sheet. This, has no such merits. The politicians were breaking their own treaties with Brussels and the only excuse Goldman will be able to offer? “If we didn’t do it, someone else would have.”


And yet you have people clamoring for a Greek bailout. That want to reward the Greeks for their poor governance, lack of fiscal discipline, and overall incompetence in the vein that this is an economic issue. This isn’t an economic issue, it’s a political/governance issue. If the Greeks don’t care enough about their government to demand better government leaders, why should the citizens of other countries care? I realize there are a lot of “one-worlders” out there who don’t believe national borders, sovereignty, etc. matter, but I’ve got a newsflash for you: a lot of folks think they matter. Immensely. There is no political will on the part of politicians and vast swaths of the citizenry in these countries to turn over their sovereignty to someone else.

But more to the point, bailing out the Greeks for this mess is just wrong. Encouraging bad behavior like this can only lead to two things: better run, better governed countries could demand Greece be removed from the EMU. Or the Euro remains, and Germany and other countries around Germany with better control of their debt leave the EMU, turning the Euro into the island of misfit toys in the currency space.

Neither prospect is reassuring…


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Filed under finance, government, International, Way Forward, You're kidding

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