Currency Swaps to hide Greek debt?

The general opinion that Goldman Sachs might have helped the Greek government to hide its debt through Currency Swaps, leaves one more than skeptical.....

Article also available in : English EN | français FR

According to most of the media outlets, the largest bank on Wall Street helped Greece to mask the true extent of its deficit by using complex derivative deals. Greece - the new King of "creative accounting? This is the opinion of the European regulators and the Eurostat Institute. According to them, Greece has used underhand accounting techniques to hide its debt. The country would have had assistance, to this end, from Wall Street Bankers , in particular Goldman Sachs.

"Greece has spent the past ten years trying to avoid European rules on debt ceiling" the New York Times wrote. The Maastricht agreement regulations insist upon an annual deficit ceiling of less than 3% of GDP and a total government debt of less than 60% of GDP. Greece’s debt following the revelation of its problems has risen to 12% of its GDP and its government debt is approaching 120%

As early as 2002, the former Greek government was using complex derivatives through Goldman Sachs. These unregistered operations have allowed Greece to receive additional credit from American Banks without the knowledge of the authorities or credit rating agencies.

However,according to reports, it is more than just complex derivatives. It is actually about cross currency credit swaps, one of the oldest and most basic products used in the markets. Countless businesses large and small use them to manage their foreign currency.

How does this principle work? Here is an example!

At the beginning of 2002, Greece finds investors willing to lending it 10 billion dollars for a specified period, let’s say 5 years. The loans are raised by issuing bonds in dollars to the value of 10 billion dollars. Greece will pay interest twice a year, (let’s say 4%) to the investors and reimburse them the 10 billion dollars at the end of 5 years. As the bulk of Greece’s expenditure is in Euros, Greece, hopes to exchange 10 billion dollars for euros. At the same time, not wanting to risk currency fluctuations Greece will "obviously" enter into a cross-currency swap with a bank, such as Goldman Sachs.

When the deal is initiated, the bank, which will receive 10 billion dollars on behalf of Greece will give the Greek government the equivalent amount "X "in Euros at the spot rate or as agreed by the two parties (if the spot rate Eur/$ is 1.30, the bank gives about 7.7 billion euros to Greece, if the two parties agree to a rate of 1.15, Greece receives 8.7 billion euros)

The bank will pay 4% (bi-annually on 10 billion dollars) to Greece who will pay it directly to the investors. Running parallel to this transaction, Greece will then be paying bi-annually a rate r to the banks on the amount "X" in Euros.

At the end of 5 years, the bank reimburses the 10 billion dollars to Greece which then reimburses the bank with "X" amount in euros. Greece wanted to receive "extra" cash in euros at the start of the deal; the deal having been brokered at a rate of 1.15, thus enabling Greece to make a billion euros more than it would have if the deal had been brokered at the spot rate.

This questionable practice was fully approved by credit agencies and regulation organisations which were duly informed of these operations from 2008. As a matter of principle, this product, apparently fairly simple, is supposed to be controlled by credit agencies and regulation bodies, all of which were well informed about the activities.

If questions must be asked, they should also be about the competence of the professionals in the controlling organisations ....

Paul Monthe February 2010

Article also available in : English EN | français FR




In the same section