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.

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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