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[boomerang]

Wall St. Helped to Mask Debt Fueling Europe’s Crisis

Published: February 13, 2010
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.


Gary D. Cohn, president of Goldman Sachs, went to Athens to pitch complex products to defer debt. Such deals let Greece continue deficit spending, like a consumer with a second mortgage.

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.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. 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, according to two people who were briefed on the meeting.

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.

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.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

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.

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.

Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.

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.

A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

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.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.

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.

For all the benefits of uniting Europe with one currency, the birth of the euro came with an 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.

Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, Italy was able to do more than that. 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.

“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”

In Greece, the financial wizardry went even further. 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.

These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed.

The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.

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.

Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.

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.

Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”

http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=1

[boomerang]

Spanish intelligence probing debt "attacks"-report
Sun Feb 14, 2010 8:28am ESTRelated NewsUPDATE 2-Spain to slash spending to meet deficit target
Fri, Jan 29 2010MADRID, Feb 14 (Reuters) - Spain's intelligence services are investigating the role of investors and media in debt market turbulence over the last few weeks, El Pais reported on Sunday.

Citing unnamed sources, El Pais said the National Intelligence Centre (CNI) was looking into "speculative attacks" on Spain following the Greek debt crisis.

"The (CNI's) Economic Intelligence division...is investigating whether investors' attacks and the aggressiveness of some Anglo-Saxon media are driven by market forces and challenges facing the Spanish economy, or whether there is something more behind this campaign," El Pais said.

Officials at the CNI were not available for comment.

The report comes days after Public Works Minister Jose Blanco protested "somewhat murky manoeuvres" were behind financial market pressure on Spain.

"None of what is happening in the world, including the editorials of foreign newspapers, is coincidental or innocent," Blanco said.

Economists have cast doubt on forecasts that Spain's economy will grow by some 3 percent by 2012, on which the government has based predictions it will cut back on its gaping budget deficit.

Some economists have said Spain's deficit could be more of a threat than Greece to the euro, the common currency of 16 European countries.

Spain's deficit has soared to 11.4 percent of its gross domestic product amid its deepest recession in decades, but the government has pledged to cut the gap back to a eurozone limit of 3 percent by 2013 by cutting 50 billion euros in spending.

Markets doubt that Spain will be able to cut back drastically on spending with unemployment running at 20 percent and a big slice of the budget in the hands of fiercely independent regional governments.

Underscoring those doubts, the premium demanded by investors for buying Spanish rather than German government bonds ES10YT=RR has risen in recent weeks and the cost of insuring Spanish bonds against default by the government has also risen. (Reporting by Martin Roberts; Editing by Louise Ireland)

http://www.reuters.com/article/idUSLDE61D04V20100214?type=usDollarRpt

[boomerang]

Germany rejects European fund for Greece
Feb 15 08:13 AM US/Eastern


BERLIN (AP) - Germany has rejected the idea of setting up a special fund to bail out eurozone countries, like Greece, that run into budget trouble.
Finance Ministry spokesman Michael Offer said Monday that a European Monetary Fund would not help a case such as Greece's. He said there was "no way around" painful austerity measures being pushed through by the Greek government.

Offer said Greece must reduce its budget deficit by four percentage points this year and bring it down to 3 percent of gross domestic product by 2012. That is in line with requirements for participation in the common currency.

Greece's debt trouble has shaken confidence in the 16-country currency union and pushed the euro to a nine-month low against the dollar.

http://www.breitbart.com/article.php?id=D9DSKGTO0&show_article=1

[boomerang]

Greece turns on EU critics
By Kerin Hope in Athens, Quentin Peel in Berlin and Tony Barber in Brussels

Published: February 12 2010 20:32 | Last updated: February 12 2010 20:50

Greece on Friday unleashed a fierce attack on its European Union partners, accusing them of creating a “psychology of looming collapse” a day after they pledged support for the country’s crisis-hit government.

George Papandreou, Greek prime minister, said that, in the eurozone’s first big test, Greece had become “a laboratory animal in the battle between Europe and the markets”.


Mr Papandreou blamed the European Commission for failing to crack down on the previous conservative government’s “criminal record” in falsifying statistics. “This has undermined the responsibility of the European institutions with international markets,” he said.

His outburst is likely to infuriate the very leaders whose help Mr Papandreou needs. It came as it emerged there would be no more talk of financial assistance until Athens had persuaded the EU that it had a sustainable austerity programme in place.


Deepening slump

Greece’s recession has been deeper than reported, with the fourth quarter of last year seeing another turn for the worse – raising more doubts over whether it can meet its targets of cutting public-sector deficits. Greek gross domestic product contracted by 0.8 per cent in the final three months of last year, by far the sharpest decline reported so far by a eurozone country.

That followed declines of 1 per cent, 0.3 per cent and 0.5 per cent in the first, second and third quarters of the year.

Previous estimates had shown falls of 0.5 per cent, 0.1 per cent and 0.4 per cent. The pace at which Greek GDP dropped last year could also cast doubt on the government’s prediction that GDP will fall by just 0.3 per cent in 2010.

Germany is insisting Athens bears initial responsibility for restoring confidence in Greece. Angela Merkel, German chancellor, resisted French efforts to come up with an explicit bail-out package at Thursday’s summit of EU leaders in Brussels.

Officials in Paris said Ms Merkel’s insistence on additional efforts by Greece to cut its budget deficit came close to thwarting agreement at the summit. According to sources in Athens, she called for a rise in Greek value-added tax of 1 per cent, in addition to extra spending cuts. Herman Van Rompuy, EU president, drafted a compromise before the summit started.

Ms Merkel’s tough stance has overwhelming political and popular support in Germany.

Government officials say they are also constrained by constitutional court rulings, which insist on strict adherence to fiscal and monetary stability criteria in the eurozone.

Members of both government and opposition parties in the Bundestag said there would be no parliamentary support for any financial rescue package for Greece without clear evidence of drastic cuts in state spending. Eurozone finance ministers are due to meet on Monday, but no detailed rescue plan will be on their agenda.

http://www.ft.com/cms/s/0/3cfeab9e-1813-11df-91d2-00144feab49a.html