Its been like a tango dance: two steps forwards, one backwards. For weeks, Brussels and Athens have been dancing this dance, trying to convince the markets that Greece will get the support of the Eurozone in its attempts to get out of the swamp.
The first step was made by the Eurozone, last Monday its finance ministers announced that they had devised a mechanism of direct bilateral loans which the Eurozone countries could give to Greece in case of a dire need. Its been described as a "last resort", and involves huge punitive interest. In fact its purpose is not to be applied, but rather to convince the investors that Greece is having a guaranteed firm backing. Like the Greek minister of finance said, "We asked the Eurozone to put a loaded gun on the table - not because they were going to use it, but to calm down the markets and traders".
But just a day later, Germany (EU's economic engine) made a step back and chancellor Merkel said the mechanism still lacked political backing, and despite all expectations the political decision wasnt going to be made on the next EC meeting on 25/26 March. Papandreu (Greece's PM) says his country prefers to get political guarantees originating from EU, although Greece is free to turn to the IMF - but the European option is far more preferable, as it'd calm down the investors.
But obviously, the Eurozone is not ready for that, at least thats evident from Germany's reactions. Merkel is still too reluctant to make this step. And thats understandable - she's under a huge public pressure to refrain from spending the money of the taxpayers for bailing out a country which has been systematically breaching the EU financial rules, and hiding the true magnitude of its budget deficit and external debt for ages, which was the main reason why Greece failed. In fewer words, Greece cheated. And they cheated big time.
But there's something more. Greece didnt do all that on their own. They were "aided" in their self-destruction from outside. By who, you'd ask? You guessed right...
Enter Goldman Sachs, the largest investment conglomerate in the world. Sure, its been a pretty easy target for critics these days, in a time when Wall Street bankers are at the bottom of the public trust list. Goldman has been labeled with all possible insults: a vampire, the sole factor behind every major financial crisis for the last decades, etc. And the group itself aint trying too hard to clean its own image: we all remember the public outcry from a few weeks ago when they handed out $ 16 bn of bonuses to their top employees, at a time of a financial storm, while unemployment in the US has reached two-digit. And on top of all that, last month Goldman admitted they had aided Greece in concealing the size of their debts in the beginning of the century.
Gerald Corrigan, the CEO of GS-USA (which is the mother company) and former Fed-NY president, testified at the British parliament and admitted GS had allowed the Greek politicians to conceal a huge amount of debts through an elaborate currency transaction in 2001. In the so-called "swap deals" from December 2000 to January 2001, Goldman had exchanged debts which had been denominated in Yen and Dollars into Euro. So far, so good, you'd say. Lots of EU countries use the international debt markets to re-finance their budgets, thus ending up with heaps of foreign obligations denominated in various currencies. Moreover, after Greece's decision to join the European currency union (Eurozone), cutting those debts became a priority for the Greeks. According to the Maastricht standards, all Eurozone members should maintain a debt/GDP ratio below 60%, and their budget deficit shouldnt surpass 3% of their GDP. So, Greece's moves made a lot of sense...
But there's a "small" detail in these Goldman dealings. The swap wasnt done on the current exchange rates, it was done on some weirdly defined "historical exchange rate". In other words, an arbitrarily defined, fake rate, which was designed to ultimately make Greece's debts look significantly smaller than they actually were. And what would Goldman get out of this? In practice, the bank was giving Greece a hidden loan, masked as a currency transaction, getting in return a promise to retrieve its money in the future, along with the interest of course (the transaction fees alone would reach $ 300 mn). In result, Greece's debt was "shrunk" by Eu 2.3 bn, which in per cents of their GDP was 1.6% down, ie reaching 103.7%. Lots of experts dubbed these Greece-Goldman swap deals "a secondary mortgage on the house". In essence, the Greek government mortgaged the state airports and lottery to receive a loan from a private bank, which loan was thus guaranteed with state assets. The curious thing is, this loan did not reflect on the Greek national debt stats in any way! According to the Eurostat rules (the EU statistical service), the countries were not obliged to mark such transactions with financial derivatives. A German friend of mine, who's a stock trader mostly dealing with derivatives, told me back then that "You could totally get round the Maastricht rules, it's absolutely legal if you do it through swap deals". So, you see now why Goldman still insists they did not do anything illegal at the time. And surely they didnt.
Further, Corrigan told the British MPs, "These transactions achieved a small, but not so insignificant a decrease in Greece's debt, without breaching the European legislation" (Corrigan has been the first top manager at Goldman who has gone through a public testimony because of the controversial deals with the derivatives). Well, at least he admits (albeit using a rather vague professional slang) that looking back now, its clear that "higher transparency standards had been necessary". When asked by an MP whether Goldman had actually helped Greece to "forge" their budget, you know what he said? Instead of searching for excuses, he said it outright: "After all, Goldman was not the only bank to participate in such transactions". Thats his explanation. The Greek finance minister Papakonstantinou also emphasised that the derivative instruments had been completely legal at the time, and his country wasnt the only one to use them. The media claim that Italy had also made such deals with another financial giant, JP Morgan (coincidence?)
The Greeks are well known in the Eurozone as the "masters of budget equilibristics". They never really managed to cut their real debt below 60% of their GDP, but, with some skill and changing success, they had managed to keep tricking Brussels that their budget deficit was always below 3%. Whether they'd "forget" to include their huge military spending in the stats, or next time they'd hide the debts of their state hospitals (amounting to billions of Euro), they always cheated. Several inspections by Eurostat revealed a far greater budget deficit than the official one, but somehow it never resulted in sanctions for Athens (allegedly, because of their powerful lobby in Brussels). In 2009, that deficit reached 12% of the GDP, and the state debt went well beyond 110%. The former finance minister Alogoskoufis had been crying against the Goldman transactions for ages, but he wasnt heard. In a speech at their parliament in 2005 he said the huge loans and swap deals would be a monstrous burden to the budget until 2019 (fr) and beyond.
Havent we connected the dots yet? Need some more? Okay, lets spell things out more clearly...
A NYT investigation revealed that shortly before Greece's budget problems hit the headlines, Goldman Sachs had again offered Athens to renew its derivative instruments and thus postpone the paying off of the huge debts which had piled mostly due to the country's ineffective health care system - while at the same time betting against Greece paying off its debts! Essentially, Goldman was offering a carrot with one hand while hiding a knife in the other, and digging Greece's grave. Apparently, a mission from the bank headed by its president Gary Cohn himself, had visited Athens last November, just 3 months before the shit hit the fan and Greece became the Eurozone's financial ulcer. Obviously the local politicians were prone to postponing the shitstorm so that it wouldnt happen within their tenure, and this way they easily fell into the trap of whichever bank offered them to save them from their troubles. And Goldman came handy and timely as their "saviour".
Last month, the European Commission (EU's "government") requested an official explanation of the situation from Greece until Feb 19th, but somehow, that deadline was later postponed, because of the government's rant that they couldnt come up with a response in time because of the continuing strikes all across the country (which are still going on today).
In any case, Greece's actions from the last decade are considered a cruel insult to the EU. Even more than insult - they're fundamentally destabilising the Eurozone. Its no surprise that Merkel considers an option of expelling Greece from the Eurozone and cutting off the "ulcer" - which would be cruel at first sight, but on second thoughts, Greece was looking for it for decades.
And all said and done, Corrigan's and Goldman's confession shows one thing: No-one could possibly divert the banks from their main purpose - making shitloads of cash and little else beyond that. Wall Street's explanation was more than simple: if it werent Goldman, some other bank would've done it. Thats just how the system was (is?) On the opposite side of the barricade are the critics of the "big vampires", who believe that cases like Greece only add one more argument to the thesis that imposing as stricter a control as possible on the rampaging bankers is a must.
Otherwise the gun may misfire and hurt more people.