How Goldman Sachs Helped Greece to Mask Its True Debt (2010)

http://www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-mask-its-true-debt-a-676634.html

by Thorondor • 11 years ago

137 86 11 years ago

spiegel.de

hussong• 11 years ago

(2010)

Thorondor• 11 years ago

Edited, thanks.

mmphosis• 11 years ago

http://www.spiegel.de/international/germany/germany-faces-bi...

allendoerfer4• 11 years ago

As described in the different scenarios Germany would face only very few billions of liabilities in any given year. In total the numbers are high, but for the actual yearly budget, these amounts are peanuts. Even small German city-states are used to waste amounts of this size to build shiny concert halls [0] or airports that have crazy ventilation systems hidden below the floors.

[0] https://en.wikipedia.org/wiki/Elbe_Philharmonic_Hall

PythonicAlpha6• 11 years ago

The whole story of Greece is not very nice.

Many sides have had their share in this. The Greek government of this time has made some severe errors. But I see an even bigger share in the EU (also German) politicians of that time (before the Euro was installed). It is a fact, that those politicians sold the Euro to the German population (I guess to others the same way) with the argument, that no country will ever have to pay for an other Euro country. They said, that there are so many security measures installed ...

But the weakest spot in those "security measures" where the politicians themselves. They wanted Greece to be inside the Euro, so they turned a blind eye to any warning signs. Of course they also turned a blind eye to every other country, because according to the "security measures" that where announced, nearly no country would have got the Euro ... (even Germany violated the terms)

So, I see the biggest failure in the politicians, that just wanted to have this adventure -- without really managing the risks ....

It is really an ugly business, and we will see, where all this disaster (the Euro) leads us to. In now 5 years of so-called crisis-management, they even did not manage to "rescue" Greece ... (they just prolonged the pain) and other countries can still become in trouble soon. With a bigger country, the troubles will be proliferated.

For me, the whole case is a (n other) portent of the incapacity of today's politicians.

secfirstmd2• 11 years ago

Also, the fact that France and Germany both broke the 3% deficit rule that they had so strongly insisted on. They never had to pay a penalty for this. So there was one rule for the big countries and another for everyone else.

As I an Irish person, it makes me a bit bitter that ultimately part of whole problem for our economic recession was the Euro interest rates were ultimately too low for the economy we were running in the Celtic Tiger. Around 2003 or so onwards, we needed a higher interest rate to take the steam out of our economy. However, Germany and France had done pretty poorly for so long, we were locked into an interest rate and currency which was being dictated by them.

Ultimately only we are to blame (no one put a gun to our heads and asked us to play real-life Monopoly) and we won't shirk it like other countries (even though we should have thrown a few of the banks and bond-holders to the wall) but it irritates me that these fact is not mentioned more often.

allendoerfer4• 11 years ago

New York has the same currency as Alabama. The US has no and will never have a unified economy and neither will we. We have to learn from our mistakes and install some systems to actually enforce these laws.

Unfortunately those people that invaded your island back in the days hinder us bit :)

iamcurious• 11 years ago

For me, the whole case is a portent of the incapacity of today's politicians.

Yes. Hilbert said "Physics is too hard for physicists.". Politics is many order of magnitude harder. I would give one arm for reducing the difficulty of politics to even chemistry hard.

PythonicAlpha6• 11 years ago

Maybe chemists would be better politicians. Maybe nearly any educated person ...

selimthegrim• 11 years ago

This wasn't Bethe? Source?

stretchwithme3• 11 years ago

If it weren't possible to impose obligations on taxpayers, this adventure would never have happened.

By the way, using a common currency does not require that the debts of those using it should be the responsibility of all who are using that currency. California's debts are California's problem and the problem of those who buy its bonds. Other states aren't obligated to bail it out.

PythonicAlpha6• 11 years ago

I also do not fully understand, why this is so. But before the Euro started our politicians drummed the big drums for it and repeated like machine guns, that such a situation could never, never ever (I swear!) happen ... But after Greece nearly went bankrupt in 2010, I guess, our chancellor said that this would be the "one and only alternative".

The problem is (as much I understood), that when one Euro country is going bankrupt, this will damage the confidence in the currency as such. But I don't fully understand the reasoning, as I said.

It also could be, that it was the "one and only alternative", because some big German banks would have been severely damaged back then (back then, they held a big amount of the Greek debts) ... Today, only the tax payers will be damaged, what is not so bad ...

kansface• 11 years ago

This isn't exactly the case - see Puerto Rico. For that matter, the debt (of Greece/Puerto Rico) is owned by other states/countries either directly or indirectly.

sampo3• 11 years ago

California's debts are California's problem and the problem of those who buy its bonds.

French and German banks had bough Greek bonds. France and Germany didn't want their banks to default, even though the banks had made these bad investments.

johansch• 11 years ago

One actor in this ugly story has demonstrably been repeatedly deceitful. We all know which one I'm talking about, even the leftist who can invent apologies for pretty much anything (I admire that "quality" in a way) do.

fredkbloggs4• 11 years ago

The borrowers were greedy, so they hired sharpers to help them borrow money they knew they couldn't repay.

The lenders were greedy, so they looked the other way and hoped their high-risk bets would pay off before things went south.

Deceit isn't really relevant here. The lenders consisted of hedge funds, major banks, large pension funds, and other financial entities. We're not talking about retail investors here, but people who had plenty of experience in sniffing out this kind of fraud. The bottom line is that they didn't bother: they looked at the eurozone membership and bloated ratings and pulled the trigger for an extra few basis points. After that went to hell, the official-sector lenders, who employ endless ranks of PhDs and ex-bankers to help them set policy and make financing decisions, stepped in and lent the Greeks even more money on ultra-sweetheart terms. Now that money is not going to be repaid, either. Who would have expected that outcome? Oh, right... everyone.

Really, at what point are we supposed to feel sorry for any of these people? I can't. With the exception of whatever tiny number of Greek citizens have steadfastly and publicly refused to support their government's choices, not only today but dating back to the go-go 2000s, every single player in this pathetic drama has gotten what they deserve. You can try to make this into some BS class-warfare thing, you can try to make it about left-right or broken EU politics or any number of other things, but what it really boils down to is persistent, pernicious greed coupled with persistent stupidity of spectacular magnitude. There's nothing else here, nothing to debate or cast aspersions over. Just greed and stupidity. Don't try to make it about anything else.

allendoerfer4• 11 years ago

I think what you said is true. Of course it was a mistake to let Greece in that early. Nevertheless I think that overall they made the right choice.

These decisions ware made immediately after the cold war ended by representatives that were raised by parents that killed each other in a world war. European integration and the Euro are highly connected with the 2 + 4 talks [0] and German unity [1]. Europe would look very different if these politicians had not taken the risk and united it.

[0] https://en.wikipedia.org/wiki/Treaty_on_the_Final_Settlement...

[1] http://www.spiegel.de/international/germany/the-price-of-uni...

PythonicAlpha6• 11 years ago

I am not so optimistic.

Might be, that part of it was because of the will to unite Europe, but it was from the beginning at least "well meant, but very badly executed".

What we have seen in the last five years, was growing resentment between Southern- and Middle-Europe because of the Euro. The "unity" of Europe is more endangered by the Euro, than rescued, as much I see now.

Idealistic goals can not make up for lies (about the security of the Euro, where no measures where really taken serious) and extreme poor execution. Some countries where taken in the Euro, just because some countries wanted to counter the influence of Germany. That is not idealistic, but purely old, dirty power politics.

Maarten885• 11 years ago

I hope that money will never be paid back, just to teach the people who accommodated this a lesson.

Of course Goldman Sachs themselves cashed in on the deal immediately, and they probably used their client's money, so for them this has been a "successful trade". Will they ever stop, will they ever be kept accountable for what they do? I fear nothing will happen to them, again.

PythonicAlpha6• 11 years ago

It will be like it happened to the German banks: When in trouble, tax payers will bail them out.

arbitrage3146• 11 years ago

People like to rip on Goldman, and indeed, they deserve it.

One thing which should be noted, though. There were two banks that didn't need a bailout back in '08-'09: Goldman Sachs and JP Morgan. They were forced to take the money by none other than Goldman's ex-CEO: Hank Paulson.

mafribe• 11 years ago

French banks lent much more heavily to Greece than german banks. So it was really a bailout of french banks.

tedunangst6• 11 years ago

Well, what would GS be held accountable for? What law did they break?

cm21874• 11 years ago

I am pretty sure that providing derivatives to enable a client to hide debt is illegal, particularly since Enron.

Zigurd2• 11 years ago

Last time I checked, fraud is illegal. And if Greece's debt limits were illegal to exceed, there are Logan Act violations.

Maarten885• 11 years ago

I don't know if they broke any law, my problem is with their morality. They understood the (corrupt) needs of the Greek politicians (avoid structural reforms and hide the resulting budget deficit for EU partners) and created a product specifically for that. This product was bad for everyone, especially the Greek people. The only one benefitting was GS themselves.

GS seem to have no problem screwing an entire population to make some profit. They don't care that the Greek or EU people ultimately need to pay for it.

cm21874• 11 years ago

I am not sure of what you mean by "client money". It is not a deposit taking bank. (And even deposit taking banks are wrongly perceived as taking risks with clients deposits when in reality all losses go to the bank shareholders and the deposits are state guaranteed).

pcr0• 11 years ago

They are an investment bank and they manage investments for clients. Clients typically being large corporations but also HNWIs.

fredkbloggs4• 11 years ago

I hope that money will never be paid back, just to teach the people who accommodated this a lesson.

Let's assume the money is never repaid; at this point it seems likely that at least most of it never will be especially given the enormous haircut private lenders already took. How does that teach GS a lesson? The article even quotes a German noting that CCSs are legal (not that following the law has done much for bankers over the last 10 years). More importantly, what makes you think GS has any net exposure to Greece at this time? The swap was sold on. There is very little Greek debt left in private hands and I doubt that GS would be so foolish as to have any material exposure to it, whether in the form of CCS or anything else. And the buyer of the swap, supposedly a Greek bank per the article, is already a total zombie regardless of this particular asset. Whether Greece defaults on it or not will not be material to its fate.

sampo3• 11 years ago

There is very little Greek debt left in private hands

34 billion, or 12%, seems to be private: http://graphics.wsj.com/greece-debt-timeline/

Maarten885• 11 years ago

That's exactly my problem: they screwed their customers, who stand to loose a lot of money (good for them, although this might include my own pension fund, who knows). And they screwed the other EU countries (so I'm already paying for this). And they screwed the Greek people with an expensive financing scheme that was only designed to obfuscate/hide things.

And yet there are no consequences to GS, they are not exposed at all.

ForEnglandJames• 11 years ago

How does that teach GS a lesson?

My earnest hope is that everyone learns not to trust GS at their word, or at all. And then GS can't find buyers.

Hey, I can dream, right?

Shivetya• 11 years ago

sorry, lenders operate under the principal that states do not default and do we really want them to operate otherwise?

If not GS then the IMF or some other organization would have been coerced to loan Greece money. Greece has been betting on the idea that the EU could not afford and would not allow them to implode.

When they got called on it they went into blackmail mode. Worse they set up a force failure by locking down bank transfers for the week. This means no one can do business, you cannot pay for what is being shipped and cannot place orders for more. Why would any EU company trust a Greek purchaser to pay now?

What must really happen is Greece must right size their government, pensions, employees, and military, to what they can afford and quit pretending its evil mean bankers that caused their plight. Oh they might have helped by lending money but Greece never would put forth serious effort to constrain spending.

The austerity the claim to suffer is applied the same way all politicians apply political pressure. By depriving those who already have no voice of essential services while making sure they themselves, their cronies, and supporters, don't suffer or as much.

gonvaled• 11 years ago

GS already sold the instruments - to a greek bank!

lucozade2• 11 years ago

Does anyone know of any reference that covers the actual trade that was done? This implies a seriously off-market x-cry swap. I would be interested in the terms esp notional and rate.

This article doesn't really explain much (other than that GS has savvy bankers which is nice to know)

lucozade2• 11 years ago

@ShinyThings. Thank you. Exactly what I was looking for. BTW your account is coming up as dead. In case you weren't aware.

arbitrage3146• 11 years ago

"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."

Sounds like Eurostat needs to hire some smarter people.

makomk• 11 years ago

They almost certainly knew - it wasn't exactly a secret at the time - they just didn't care for political reasons. All the political momentum was for further European integration.

stefantalpalaru• 11 years ago

All the political momentum was for further European integration.

And for selling military equipment to Greece: http://www.theguardian.com/world/2012/apr/19/greece-military...

mjklin• 11 years ago

I lived in the UK during 1996-97 and there were plenty of stories in the news about the "poorer" countries being allowed to join the EU. Greece being the chief among them.

You're right, they knew but they didn't care.

sizzzzlerz• 11 years ago

Goldman Sachs: the gift that keeps on taking and taking and...

shiven2• 11 years ago

Honest question: Can someone explain, in plain english, why it would be a bad idea to just kick Greece out of the EU? What's wrong with some good old anarchy and lynching a few dozen former politicians who led the Greeks to this abyss in the first place?

As an outsider, I am shocked by the hullaballoo going on to keep Greece in the EU. Why not let them reap what they sowed, as a nation?

marcosdumay• 11 years ago

As far as I know, if Greece does nothing very wrong (and defaulting isn't) there's no rule allowing other countries to kick them.

Anyway, Greece does not want to get out because on the EU they can travel and commercialize. That's the easy one.

Germany and the other creditors, by their side, do not want it because Greece may not pass trough that anarchy you talk about, but instead may get at the other side better than it is now. If that happens, the EU and their own economies are gone.

Lazare2• 11 years ago

First, there's the currency (the euro), and the political and economic union (the EU). There's a lot of overlap, but they're not the same.

There's a lot of debate about Greece and the euro, and while the current Greek government was elected on a platform of staying in the Euro, right now Greece is rapidly heading towards being ejected from it. But there's no real prospect (for now, anyhow) of them leaving the EU.

why it would be a bad idea to just kick Greece out of the EU?

If you mean the EU, well, nobody really wants them to exit the Euro, but nobody wants them to exit the EU. It would also be ridiculously illegal; there's literally no process by which a country might be ejected.

If you mean the Euro, well, that's an interesting question. The general consensus is that Greek exit would hurt the remaining members and Greece fairly severely; a real case of cutting off your nose to spite your face. Some have suggested (and I agree) that a Greek exit would be worse for the remaining Euro-members than it would be for Greece.

What's wrong with some good old anarchy

We're talking about people lives; pensions, savings, jobs, dreams. I don't think your flippancy is really appropriate. In any case the victims of a Greek exit won't be politicians and bankers; it will be ordinary people, in and outside of Greece.

lynching a few dozen former politicians who led the Greeks to this abyss

I don't think you understand politics.

Why not let them reap what they sowed

For EU leaders, this isn't about Greece, it's about the Euro and the greater project of European integration. They don't want Greece out of the Euro, and they sure as hell don't want them out of the EU. What they want is to keep Greece in the EU, without pissing off their voters too much. It looks like, at the moment, Greece will exit the EU despite what people want.

shiven2• 11 years ago

Thanks for the detailed reply! You are quite right about the part where I don't understand politics. I like revolutions better! Especially, where the guilty heads roll, figuratively at least.

However, this looks like a terrible mess that will, more likely than not, result in a humanitarian crisis of mythological scale, visited upon the poorest and weakest members of Greek society. So why don't EU states let Greece have that much needed meltdown, but use their money to aid those most in need during the ensuing crisis? I mean, by your analysis, no one culpable takes the fall. And who is culpable, if not the politicians in power over the past decade?

allendoerfer4• 11 years ago

Nobody is talking about kicking Greece out of the EU. The current crisis is about the Euro group within the EU.

Problems with kicking Greek out of the Euro are:

- Greece is reliant on Russian gas. How are they going to pay for that? A weaker currency would make this problem worse. The often told story, that their exports would become cheaper does not apply very much, when your biggest company is a betting office.

- When Greece leaves with the option to get back in, countries like Portugal, Italy, Spain and even France would have much less pressure to consolidate their state finances.

- The Euro is not just a currency - it is a step towards European integration. With Russia biting of parts in the East, we cannot compensate to be set back this much.

And last but not least: I use this currency to pay my rent, do not fuck it up!

aikah• 11 years ago

First , you can just kick a country out of the EU, that's impossible, once they are in they are in forever. Second if somehow you did this it would be the end of the EU politically speaking. It's already dead anyway since the Greek crisis has proven there is no real solidarity between EU states (and no,bailing out banks is no solidarity).

j_lev• 11 years ago

http://faculty.chicagobooth.edu/anil.kashyap/research/papers... this recent summary is the best I have seen in the last couple of days.

harry8• 11 years ago

Where there is unconscionable conduct by a bank, Goldman Sachs are there. Where there is large scale fraud, Goldmans are there. Where politicians buy themselves a year of office at the expense of many years of misery for the people - Goldman's advising.

Why do these guys have a banking license in the EU?

mikhailfranco• 11 years ago

They are not punished, but praised and rewarded. Draghi was head of GS Europe at that time, now he is head of the ECB, with the power of ELA, OMT and Q€ to control the fate of nations.

Ntrails• 11 years ago

When Gordon Brown launched the PPP scheme to essentially finance infrastructure development off the balance sheet, it was not an investment bank to blame - but a politician looking to fiddle the books to look good.

GS are a symptom, not a cause. They have a license is because they did and do what the people in power wanted, and until you can come up with a way to change the people in power and the incentives they have to stay there...

zevkirsh• 11 years ago

it's funny how few people on this comment board fail to realize we in the west are all greece soon.

too much leverage leads to an insolvent society, just as too much debt leads to an insolvent individual.

the history of the world is largely intertwined with stories of debt------who is under the control of whom else?

the answer to too much monetary debt is always monetary debasement. as the money supply is turned to toilet paper, as we have seen in the 20th century with zimbabwe and other countries------------the answer is that societies reform themselves.

the result is other types of debt and relationships arise to fill the gap, while poverty sweeps over the nation.

no financial trickery can solve this problem, at best one can hope to mitigate it.

firms like goldman sachs seek to exaccerbate it as financialization is rooted in crisis capitalism, generating and encouraging crisis in order to take advantage of it.

the entire wall street edifice has transititoned over the years from semi responsible stewards of financial wealth, to a parasitic casino that is built upon the practice of crisis capitalism, bribery and price manipualtion.

fasteo• 11 years ago

Lots of comments trashing GS. I generally agree with all of them, but in an effort to be critical, I end up thinking that GS just executes what their customers don't have the guts/knowledge to do by themselves. Not that they are not legally/morally liable, but GS is not the only one to blame. As with everything in life, nothing is black or white.

anonbanker• 11 years ago

all the guys at the top know that if you want to cook the books, you use Goldman Sachs and PriceWaterhouseCoopers to keep you afloat.

How Goldman Sachs Helped Greece to Mask Its True Debt (2010)

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