By David Caploe PhD, Chief Political Economist, EconomyWatch.com, 16 February 2010
The Parthenon. Goldman Sachs Latest Purchase? Credit: Roblisameehan.
Parthenon - Goldman Sachs Latest Purchase?
By David Caploe PhD, Chief Political Economist, EconomyWatch.com, 16 February 2010
Chinese New Year / President’s Day / Carneval – no matter where you were in the world this weekend, it was likely a celebration of some sort, where people focused on family / fun / festivities.
Which means, as followers of economedia © and Economy Watch well know, it was the perfect time to bury any kind of bad or controversial news.
And when the subject is Goldman Sachs, that’s usually when the New York Times drops another powerhouse article – playing the “double game” of credibility / “but we didn’t really hurt you” in which mainstream media organizations attempting to make any claim to legitimacy so often engage.
So it’s hardly surprising that – at a time when even a lot of “slow growth” Europe is getting ready to celebrate, despite the on-going economic stagnation – this Friday night in the US / Saturday morning in Europe was when the Times decided to release an explosive piece on how good old Goldman Sachs has been deeply involved in covering up what it now turns out has been the Greek government’s chronic mis-management of its state budget and finances.
What – you mean GS has not only a) been betting against the mortgage-based securities it was selling its own clients; b) deeply implicated in the almost- and still-pending collapse of AIG, the largest insurance company in the world; but also c) helping to worsen the already bad crisis in the Eurozone ???
But if the Times has anything to say about it – and apparently they do, since the story was reported by not just the indefatigable Louise Story, co-author of the OTHER “hidden in plain sight” Goldman scandal stories cited above, as well as two other reporters – you’ll probably never know about it.
But that’s what Economy Watch is all about – to make sure you DO find out about these things, both here and on our increasingly-popular FaceBook Fan page:
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 Street’s 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.
As usual, the guys from GS waste no time and do work in ingenious ways – and eerily parallel to the tricks they and their buddies on Wall Street used to help get the US in the great shape it’s in today.
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 …
The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
And apparently, the same sort of sordid maneuvers that worked so well in the US also go over just as easily in Europe.
It had worked before.
In 2001, just after Greece was admitted to Europe’s 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 Europe’s deficit rules, while continuing to spend beyond its means.
Hmmmm … does that sound familiar ???
Using accounting sleight-of-hand to help people spend beyond their means – at least for a while, until the whole house of cards comes tumbling down – where HAVE we heard this before ???
Once again, the main culprits are what St. Warren of Buffet has called “economic weapons of mass destruction” – DERIVATIVES.
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. …
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.
So how did it work ???
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 country’s liabilities.
Now here’s where the parallels become even more disturbing – with the European equivalent of the phrase that has become all too familiar of late in the American context: Too Big To Fail [TBTF].
The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s 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.
So how did this whole relationship between Wall Street sharpies and – relatively – poor countries develop ???
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 …
Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments …
The 2001 deal between Greece and Goldman, for example, netted GS more than $300 million.
Which is why Goldman and its fellow Wall Streeters were so anxious to help countries like Italy and Greece get around the – allegedly – strict rules governing membership in the Eurozone.
But how did this become an issue for those countries in the first place ???
For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin.
Which is precisely the argument used by Paul Krugman in his despairing analysis of the Eurozone crisis in general, and the Greek tragedy in particular.
So what was that “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.
And that, of course, is where the boys from the Street came in:
Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.
In Greece, the bookkeeping was even more creative than with Italy:
In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s 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 country’s 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.
But however beneficial in the short-term, the long-range implications can be disastrous – as the current Greek crisis now sadly illustrates.
George Alogoskoufis, who became Greece’s 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.
And referring to yet another such swap,
Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations … “This swap is always going to be unprofitable for the Greek government.”
Which kind of sums up why both the US and now, it seems, Europe as well are going to face a combined financial / economic crisis for the foreseeable future.
So enjoy Carneval / the Presidents’ Day weekend sales / & Gong Xi Fa Cai – because it looks like the hangover is going to be brutal.
David Caploe PhD
Chief Political Economist
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