February 15, 2010 11:17 AM EST by Elizabeth MacDonald
Round up the usual suspects.
It's not that the Greek government borrowed money it knew it couldn't pay back, or that it overspent more than its budget allowed.
No, the real reason for Greece's problems"“at least according to The New York Times"“is that Wall Street created financial instruments that, while perfectly legal, "enabled" Greece to get into the trouble it's in.
In truth, the Greek financial crisis is far too complex to pin on banks. Also, this is a decades-old story that's been given ample airing, first by Nick Dunbar at Risk.Net, then by the German publication Der Spiegel, and Bloomberg. The Greece finance ministry's public debt division issued a statement in 2001 noting that it was using derivatives to cut its debt servicing costs.
It's also been reported that the Greek government has been probing the apparent misuse of currency swaps since at least before February 1.
Plus, the dollar amounts involved have not been put into their proper context, so they appear hyped and overblown.
The derivatives sold by Goldman Sachs and JPMorgan Chase to Greece are legal"”the Wall Street firms effectively sold the Greek government illiquid loans with long maturities.
The Goldman Sachs transaction reportedly consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen.
Goldman's $10 billion deal is tiny, equal to about 1/40th of Greece's total debt, which is $398 billion, according to Commerzbank, not $300 billion as the New York Times reports.
And since it's a 15 to 20 year deal, on an annualized basis the deal represents a fraction of the $75 billion in debt that Greece needs to roll over this year.
The way it worked was, the dollar and yen currencies were swapped into euros reportedly using a historical exchange rate, which then purported to show a reduction in Greece's debt. Details are sparse, and the use of that exchange rate hasn't been confirmed by Goldman.
Dunbar of Risk.Net notes these swaps "have a perfectly routine purpose in debt management, namely, to transform the currency of an obligation."
For instance, Dunbar notes that a government with foreign fixed-rate debt can "lock in a favorable exchange rate move" by swapping "a stream of fixed domestic currency payments for a stream of foreign currency ones" where the arbitrage play here is, catching the action in a more powerful currency versus a weaker one.
Meaning, the euro was strengthening at the time versus the dollar and the yen back in 2001, and Goldman helped Greece catch a piece of that action.
Italy has been making similar moves with swaps since the mid-90s.
Currency swaps can mitigate the impact of volatile foreign exchange rates. Greece entered into the deal in 2001, after it was admitted to Europe's monetary union, and the deal let it defer interest payments by a number of years.
Der Spiegel had reported last week that Goldman Sachs had helped Greece cover up part of its whopping deficit via a currency swap deal, which used artificially high exchange rates.
Goldman is not commenting on the story.
Significantly, Bloomberg said rating companies were aware of the plan. Another instrument, called an interest-rate swap, can help companies and countries deal with volatile swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa.
The National Bank of Greece reportedly entered into an interest rate swap in 2005 (the notional value of the derivatives market for interest rate swaps is $342 trillion, says the Bank for International Settlements).
Overall, the derivatives lowered Greece's debt to GDP ratio by just two percentage points, to 105% from 107%, in 2002.
But the problem is, Greece did not book the swaps on the liability side of its balance sheet as a loan. Instead it booked it as a sale, on the asset side of its financials.
Also, Greece's public debt division has noted that that it uses 18 derivatives counterparties, not just Goldman and JPMorgan.
The criticism mirrors that leveled on the banks during the U.S. real estate meltdown: It wasn't reckless, irresponsible borrowing on the part of homeowners.
Rather, reckless banks were solely to blame for lending out the money, and going berserk in minting subprime paper securities later proved to be worthless.
The broad-zoom story is this: For 19 out of past 20 years, Greece has effectively been in violation of the European Union's deficit rules whereby its deficit should not surpass 3% of its GDP.
What's to blame for Greece's debt blowout?
Start with its mismanagement of its economy, and the fact that Greece's government runs everything in sight. If Greece were to privatize its Soviet Union-style governmetn, it could raise as much as 10 percentage points of its gross domestic product, equal to the amount it needs to cut its budget deficit by 2012:
Hospitals
Universities
Churches
Casinos
Lotteries
Hotels
Marinas
Ski resorts
Trade fairs
Exposition centers
Ports Airports
Water
Electricity
Natural gas companies
Oil refineries
Postal services
Transport systems
Banks
Insurance companies
Source: Alpha Bank, Greece's 2d largest bank
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