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how some banks and funds have apparently specifically bet on Greek debt (through CDSs) and have a vested interest in things happening with that debt (altough what exactly is not necessarily clear);
Oh, it's apparently worse than that!
According to Eurointelligence's translation of Der Spiegel's story: 'Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.'

...

'But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than  the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion [£642m] for the Greeks.'

This credit disguised as a swap didn't show up in the Greek debt statistics. The reporting rules at Eurostat -- the European Commission agency for statistics -- don't comprehensively record transactioins involving financial derivatives:'The Maastricht rules can be circumvented quite legally through swaps,' says a German derivatives dealer.



En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 12:28:49 PM EST
[ Parent ]
And this debt is not repudiated as being an illegitimate circumvention of the EU accounting rules because?

I mean, clearly Goldman knew what they were doing here: Aiding and abetting a debtor in fooling the rest of the world (read: his other creditors) into thinking that hid debt was smaller than it really was. Why shouldn't they be punished for this disservice?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Feb 11th, 2010 at 02:28:56 PM EST
[ Parent ]
National Review: The Trojan Horse Meets the Vampire Squid
A little background: Governments in the European Union cannot just go borrowing money willy-nilly, at least in theory. Under the terms of the Maastricht treaty, which established the European Union and led to the creation of the euro, EU states are supposed to keep their government deficits below 3 percent of GDP, and total government debt is not to exceed 60 percent of GDP. Greece has never been particularly good about meeting its Maastricht obligations, but even the Mssrs. Magoo in Brussels could not ignore Athens's profligate ways forever. So the Greeks needed a way to borrow some money without having to issue bonds or engage in other conventional debt-financing measures that would put the debt on the national books.

...

As the Spiegel reports, Goldman simply made up exchange rates, which allowed the Greeks to swap an amount of one currency for a different amount of another currency -- taking about $1 billion out of the transaction. This money will have to be paid back, but it did not show up on the books as sovereign debt. There's nothing illegal about that, but there's plenty that's sneaky. The European authorities do not keep a very close eye on financial derivatives of this sort, so this Trojan Horse financing didn't show up for some time.

Greece isn't alone in doing this: Italy apparently has been doing this for years. Felix Salmon reports that Goldman helped create something with the deliciously Wagnerian name of Aries Vermoegensverwaltungs to help Germany hide some sovereign debt. And the guys at Goldman Sachs are no fools: They sold those Greek swaps to a Greek bank back in 2005.

This is fantastic - considering that a cross-currency swap is the same thing as exchanging a bond in one currency for a bond in another currency, the fact that a bond shows up as debt and a swap doesn't is just stupid. But stupid is as regulator does.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 02:53:07 PM EST
[ Parent ]
taking about $1 billion out of the transaction

That's about 1/3 of 1% of Greece's GDP, FWIW.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 03:33:21 PM EST
[ Parent ]

 the fact that a bond shows up as debt and a swap doesn't is just stupid.

Today, banks are still allowed to book the net present value of (plain vanilla interest rate) swap margins going into the future as immediate revenues and profits.

The "DOP" (day one profit) from interest rate swaps are the single biggest source of profits for banks in most of their lending activities. These swaps are very basic exchanges of fixed rate interest payments vs variable rate payments; this is probably the single most liquid market of all and it did not suffer during the crisis; the "swap curve" tells you at any time what's the market rate for a fixed rate loan of a given duration. What banks are booking are the margin on top of the swap rate that they charge to clients; given that in principle the swap rate is neutral, this is indeed a source of income, and profit, for the banks, but it does suppose that the counterparty will not default or the market will not be transformed; more importantly, these profits will only be paid out over time, and are not cashed in today - butt hey are  counted as profit today in the banks' accounts.

On my offshore projects, that margin bears the same risk than the construction financing itself; we certainly do not book the interest we expect to get in one year's time, let alone in 10 years' time, but the swap guys do...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 04:03:22 PM EST
[ Parent ]
given that in principle the swap rate is neutral, this is indeed a source of income, and profit, for the banks, but it does suppose that the counterparty will not default or the market will not be transformed

The swap rate is hedgeable, not neutral. Well, it is "risk-neutral". And the assumption is that the market will evolve towards the forward rates, which is not observed and would lead to absurdly high interest rates if it did happen.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 04:08:48 PM EST
[ Parent ]
Why shouldn't they [Goldman] be punished for this disservice?

Because they are very savvy businessmen.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Feb 12th, 2010 at 01:02:38 PM EST
[ Parent ]

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