By NICHOLAS KULISH
Published: February 15, 2010
BERLIN — As European finance ministers refused Monday to name specific measures to rescue Greece and the Continent’s common currency, opposition grew among Germans to bailing out what they call spendthrifts to the south after years of belt-tightening by workers at home.
Finance ministers meeting Monday in Brussels included, clockwise, Christine Lagarde of France, Jyrki Katainen of Finland, Giulio Tremonti of Italy and Wolfgang Schäuble of Germany.
Related
Greece Pressed to Take Action on Economic Woes (February 16, 2010)
Times Topics: European UnionThe fiscal crisis, shaking the Greek government while driving down the value of the euro, is forcing taxpayers and voters across Europe to confront the fact that their fortunes are tied together more closely than their politicians confessed in the late 1990s, in the rush to create the common currency over public objections.
In the process it has revealed how deeply national identity, rather than a common European identity, remains the reality on the Continent. Solidarity, at least in the eyes of most voters, still stops at the border.
Despite popular opposition to helping Greece, analysts expect big countries like France and Germany to reach some kind of deal, since the prospect of economic chaos without an agreement is more frightening than even the wrath of voters.
“Just like Obama is not going to let a systemic bank fail, Europe is not going to kick the wayward out of the system,” said Josef Joffe, the publisher of the weekly newspaper Die Zeit. But he added that the reason for that could not be kept from the voters.
“Europe has become a huge welfare state for everybody, for states as well as individuals,” he said.
Greece’s finance minister, George Papaconstantinou, told his counterparts on Monday that a firmer commitment to helping his country was needed to fend off speculators. Other ministers in the euro zone lectured Greece about using complex financial instruments prepared by Wall Street to hide debt and called for a tighter clampdown on spending, rather than outlining the specifics of an aid package that would calm markets.
European leaders want to extract guarantees from the Greeks to put their finances in order before offering any kind of rescue, but their reticence also stems from the fact that any price tag will have to be defended at home.
Here in Germany, opinion surveys show that two-thirds of the people oppose financial assistance for Greece. More ominously, a survey released Sunday by the newspaper Bild showed that a slight majority of Germans, 53 percent, said they favored expelling Greece from the euro group entirely if its mountain of debt threatened the stability of the currency union.
“Every country has its own debts,” said Kristin Lautenschläger, 70, a retiree in Berlin who said she opposed spending German money to save Greece. “Germany is no longer such a rich country anymore, and has its own problems to deal with before it can take care of Greece’s.”
Germans spent the past decade cutting unemployment benefits and freezing pensions, while grudgingly accepting stagnant wages in order to make their economy more competitive. After those years of sacrifice, it is more than just a matter of money that is driving opposition to the bailout, but also a matter of principle, after politicians promised they would never have to prop up their neighbors.
The crisis could not have come at a worse moment for Chancellor Angela Merkel. At the outset of the financial crisis, Mrs. Merkel confidently called it an American problem, and resisted as much as possible calls from across the Atlantic for even more government spending to kick-start economic growth.
Now with the American economy in the midst of a more robust, if still fragile, recovery, the Germany economy has stalled, with no growth in the fourth quarter, according to an announcement Friday by the government statistics office.
“There was a belief in the beginning that this was an American problem. I don’t think the dots were connected across Europe, that you have the unpredictability within the zone itself,” said Jackson Janes, executive director of the American Institute for Contemporary German Studies at Johns Hopkins University.
“Now they have to pay for Greece and everybody’s trying to figure out how you can do that while staying politically viable at home,” Mr. Janes said.
In Germany, the debate over aid to the Greeks intensified last week when the Constitutional Court in Karlsruhe ruled that unpopular labor-market reforms, known as Hartz IV, may have gone too far in cutting benefits for the country’s unemployed. That set off a political fight within the German government over jobless assistance, one that was inevitably framed as helping Germans or saving Greeks.
“I can’t explain to a Hartz IV recipient that he won’t get another cent but some Greek gets to retire at 63,” said Michael Fuchs, a deputy leader in Parliament of Mrs. Merkel’s Christian Democrats, in Sunday’s issue of the newspaper Die Welt.
The lack of common fiscal policies for the bloc meant built-in instability for the euro, but years without a major recession covered it up.
Now it is clear that unlike the United States, where the federal government has the power to help individual states, Europe lacks the mechanisms to steady its struggling nations, and the uncertainty is causing some critics to call the very future of the currency union into question.
“We’re not worried about the U.S. economy disintegrating as a result of California being temporarily ungovernable and needing an austerity plan,” said Adam Posen, a senior fellow at the Peterson Institute for International Economics in Washington.
A bailout for Greece would not be as expensive as the fraught public debate might suggest, Mr. Posen said.
“The amount of additional fiscal aid needed for Greece is not that great,” he said. “Politically it’s sensitive, but economically the costs are vastly overrated versus the benefits accrued to date and to come.”
But voters in Germany see the decision to bail out Greece as just the first step in what will be a long line of countries seeking handouts. “After Greece it will just be other countries like Portugal,” said Patrick Klomfas, 28, an unemployed automotive engineer, who on Monday was visiting the employment office in the Berlin neighborhood of Lichtenberg.
“But you know, the politicians are just going to do what they want to do anyway,” said Mr. Klomfas, who has been out of work since October, but expects to start a new job next month. “No one wanted the euro, but the euro came anyway.”
2/17/2010
Pressure Rises on Greece to Explain and Fix Crisis
Pressure Rises on Greece to Explain and Fix Crisis By STEPHEN CASTLE
Published: February 16, 2010
BRUSSELS — European officials told Greece on Tuesday that it must immediately explain how the government used complex financial tactics engineered by Wall Street to mask its rising debt, and warned that they might widen their inquiry to other countries that use the euro.
Elena Salgado, the finance minister of Spain, with, from left, Olli Rehn, Michel Barnier, and Algirdas Semeta of the European Commission at a news conference in Brussels on Tuesday.
Finance ministers gathered here also gave Greece one month to prove it could cut its deficit this year to 8.7 percent of the nation’s economic output, from 12.7 percent. If a review finds that Greece’s blueprint for deficit reduction is too weak, officials will demand deeper spending cuts.
Greece’s huge public deficit and high debt levels have prompted a crisis of confidence in the financial markets, and the European single currency is facing its biggest test since its inception.
Meanwhile, Greek civil servants took to the streets on Tuesday to protest government austerity measures. Customs inspectors, tax collectors, trade unions and other unions have gone on strike in recent weeks, and each new wave of strikes appears to be more strident. On Tuesday, a bomb exploded at JPMorgan Chase’s offices in Athens, The Associated Press reported. No one was injured.
Though European leaders promised last week to take determined and coordinated action to defend the euro if necessary, there was no public discussion Tuesday on what form that could take.
Ireland’s finance minister, Brian Lenihan, said that the 16 euro zone finance ministers had agreed “that we will not talk about what the instruments are. We believe that would be unwise.”
As politicians sift through the causes of the crisis, Europe’s economic and monetary affairs commissioner, Olli Rehn, turned his attention to the use by Greece and other European countries of sophisticated financial instruments that helped conceal the scale of their deficits.
Mr. Rehn told Athens to explain by the end of the week how it relied on derivatives created by Goldman Sachs to allow the government to quietly spend beyond its means. A day earlier the European Commission had given Greece a month to deliver its explanation.
“It is clear that a profound investigation must be done on this matter,” Mr. Rehn said, “and I will ensure that we conduct the inquiry so we see whether all the rules were respected.”
If the use of the financial tactics was “not in line with the rules of the time, then of course we would need to take action,” including investigating whether states that adopted the euro used similar tactics, he said.
On Monday, the Greek finance minister, George Papaconstantinou, said that such swaps were legal when Greece used them. He added that they were no longer being used.
Asked at a press briefing if Spain, another heavily indebted nation, had been approached by big investment banks with similar ideas about using derivatives, the Spanish economy minister, Elena Salgado, replied: “No, absolutely not, and if such a proposal had been made it would not have been accepted.”
European Union officials suspect that investment banks may have exploited loopholes in procedures for reporting debt and deficit figures, which are central criteria for membership to the euro zone.
“The banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics,” Mr. Rehn said.
It remains unclear what, in addition to the measures already being taken against Greece, Mr. Rehn can do if the answers from Athens are not to his liking.
Published: February 16, 2010
BRUSSELS — European officials told Greece on Tuesday that it must immediately explain how the government used complex financial tactics engineered by Wall Street to mask its rising debt, and warned that they might widen their inquiry to other countries that use the euro.
Elena Salgado, the finance minister of Spain, with, from left, Olli Rehn, Michel Barnier, and Algirdas Semeta of the European Commission at a news conference in Brussels on Tuesday.
Finance ministers gathered here also gave Greece one month to prove it could cut its deficit this year to 8.7 percent of the nation’s economic output, from 12.7 percent. If a review finds that Greece’s blueprint for deficit reduction is too weak, officials will demand deeper spending cuts.
Greece’s huge public deficit and high debt levels have prompted a crisis of confidence in the financial markets, and the European single currency is facing its biggest test since its inception.
Meanwhile, Greek civil servants took to the streets on Tuesday to protest government austerity measures. Customs inspectors, tax collectors, trade unions and other unions have gone on strike in recent weeks, and each new wave of strikes appears to be more strident. On Tuesday, a bomb exploded at JPMorgan Chase’s offices in Athens, The Associated Press reported. No one was injured.
Though European leaders promised last week to take determined and coordinated action to defend the euro if necessary, there was no public discussion Tuesday on what form that could take.
Ireland’s finance minister, Brian Lenihan, said that the 16 euro zone finance ministers had agreed “that we will not talk about what the instruments are. We believe that would be unwise.”
As politicians sift through the causes of the crisis, Europe’s economic and monetary affairs commissioner, Olli Rehn, turned his attention to the use by Greece and other European countries of sophisticated financial instruments that helped conceal the scale of their deficits.
Mr. Rehn told Athens to explain by the end of the week how it relied on derivatives created by Goldman Sachs to allow the government to quietly spend beyond its means. A day earlier the European Commission had given Greece a month to deliver its explanation.
“It is clear that a profound investigation must be done on this matter,” Mr. Rehn said, “and I will ensure that we conduct the inquiry so we see whether all the rules were respected.”
If the use of the financial tactics was “not in line with the rules of the time, then of course we would need to take action,” including investigating whether states that adopted the euro used similar tactics, he said.
On Monday, the Greek finance minister, George Papaconstantinou, said that such swaps were legal when Greece used them. He added that they were no longer being used.
Asked at a press briefing if Spain, another heavily indebted nation, had been approached by big investment banks with similar ideas about using derivatives, the Spanish economy minister, Elena Salgado, replied: “No, absolutely not, and if such a proposal had been made it would not have been accepted.”
European Union officials suspect that investment banks may have exploited loopholes in procedures for reporting debt and deficit figures, which are central criteria for membership to the euro zone.
“The banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics,” Mr. Rehn said.
It remains unclear what, in addition to the measures already being taken against Greece, Mr. Rehn can do if the answers from Athens are not to his liking.
greece
Over the past decade, Greece took full advantage of a strong euro and rock-bottom interest rates to fuel a debt binge by the country's consumers and its government. When the global economy crumpled, the stage was set for a financial crisis.
Its trigger was Greece's admission in late 2009 that its government deficit would be 12.7 percent of its gross domestic product, not the 3.7 percent the previous government had forecast earlier. Investors were stunned. In early 2010, the fears grew into a full-fledged financial panic, as investors questioned whether Greece's Socialist government could push through the tough measures it has promised to reduce its budget deficit. As the fear spread to Portugal and Spain, leaders of Europe's more affluent countries like Germany and France, worried about lasting damage to the euro, stepped in with a pledge to defend the currency but stopped short of an outright bailout for Greece.
For decades, both conservative and socialist governments in Greece have rewarded the demands of public sector unions with higher pay and more jobs. A total of 51 percent of the budget now goes to public sector wages and pensions.
The unions have vowed to defend their compensation with the same sort of strikes they used to win them. Striking is a bit of a national sport in Greece. In January, the country's unionized prostitutes took to the streets, protesting unlicensed competition from Russian and Eastern European immigrants. Farmers who were paid 400 million euros by the government in 2009 have been striking again, and briefly closed Greece's border with Bulgaria. Protesting dockworkers extracted big payouts from the government in November. And the country's tax collectors went on strike in February even though their services are needed more than ever.
With concessions and accessions, the country's budget has become bloated. In Parliament, for example, the administrative staff has increased to 1,500 from 700 in the last few years, even though the number of members of Parliament has remained the same. In 2009 alone, 29,000 public-sector workers were hired to replace 14,000 who retired, according to the finance ministry.
The pressing question is whether the new prime minister, the lifelong Socialist George Papandreou, can break this cycle of appeasing various constituencies. This will determine his success as a reformer, to say nothing of Greece's ability to rein in public expenditures and meet its target of a budget deficit of less than 3 percent of gross domestic product by 2012.
Mr. Papandreou, a political scion whose father and grandfather were also prime ministers, took office in late 2009. Since then, he has been sending mixed signals about his commitment to budget austerity. He and his finance minister, George Papaconstantinou, have called for unpopular sacrifices like a public-sector wage freeze, an increase in the price of gasoline and a crackdown on tax evaders.
But other moves have demonstrated less fiscal restraint. Soon after the election, Mr. Papandreou signed off on a 1.6 billion euro "solidarity handout" to low-income Greek families. He has also said he will hire 2,000 new workers in the country's energy department. His government also approved a measure giving borrowers a 12-month grace period to pay overdue debts and mortgages.
Its trigger was Greece's admission in late 2009 that its government deficit would be 12.7 percent of its gross domestic product, not the 3.7 percent the previous government had forecast earlier. Investors were stunned. In early 2010, the fears grew into a full-fledged financial panic, as investors questioned whether Greece's Socialist government could push through the tough measures it has promised to reduce its budget deficit. As the fear spread to Portugal and Spain, leaders of Europe's more affluent countries like Germany and France, worried about lasting damage to the euro, stepped in with a pledge to defend the currency but stopped short of an outright bailout for Greece.
For decades, both conservative and socialist governments in Greece have rewarded the demands of public sector unions with higher pay and more jobs. A total of 51 percent of the budget now goes to public sector wages and pensions.
The unions have vowed to defend their compensation with the same sort of strikes they used to win them. Striking is a bit of a national sport in Greece. In January, the country's unionized prostitutes took to the streets, protesting unlicensed competition from Russian and Eastern European immigrants. Farmers who were paid 400 million euros by the government in 2009 have been striking again, and briefly closed Greece's border with Bulgaria. Protesting dockworkers extracted big payouts from the government in November. And the country's tax collectors went on strike in February even though their services are needed more than ever.
With concessions and accessions, the country's budget has become bloated. In Parliament, for example, the administrative staff has increased to 1,500 from 700 in the last few years, even though the number of members of Parliament has remained the same. In 2009 alone, 29,000 public-sector workers were hired to replace 14,000 who retired, according to the finance ministry.
The pressing question is whether the new prime minister, the lifelong Socialist George Papandreou, can break this cycle of appeasing various constituencies. This will determine his success as a reformer, to say nothing of Greece's ability to rein in public expenditures and meet its target of a budget deficit of less than 3 percent of gross domestic product by 2012.
Mr. Papandreou, a political scion whose father and grandfather were also prime ministers, took office in late 2009. Since then, he has been sending mixed signals about his commitment to budget austerity. He and his finance minister, George Papaconstantinou, have called for unpopular sacrifices like a public-sector wage freeze, an increase in the price of gasoline and a crackdown on tax evaders.
But other moves have demonstrated less fiscal restraint. Soon after the election, Mr. Papandreou signed off on a 1.6 billion euro "solidarity handout" to low-income Greek families. He has also said he will hire 2,000 new workers in the country's energy department. His government also approved a measure giving borrowers a 12-month grace period to pay overdue debts and mortgages.
Greece and Europe
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Greece and Europe
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CloseLinkedinDiggFacebookMixxMySpaceYahoo! BuzzPermalink Published: February 16, 2010
While Vassilis Vassilikos’s appeal to Hellenic national pride is an understandable response to German haughtiness, there’s no doubt that the current crisis can be traced to Greek profligacy (“Crisis in a stoic land,” Views, Feb. 15).
Indeed, the European Union and the International Monetary Fund ought to think long and hard before going to Greece with a bailout. Unless Athens gets its economic house in order, curbs excessive entitlement programs and slashes public spending, Greece may face expulsion from the European monetary union.
Mr. Vassilikos’s resort to a hallowed classical past obscures the bitter truth: Recklessness has made Greece the moribund man of Europe.
Rosario A. Iaconis, Mineola, New York
Obama lets us down
The front page article “Wall Street gave Greece tools to hide growing debt” (Feb. 15) reveals that the tentacles of American banks and financial institutions have worldwide connections and global ambitions to control the economy of nations everywhere. Does that surprise me as an American citizen? Of course not.
Instead of bringing in a new team, President Obama has placed the financial culprits that caused our financial debacle in the role of setting it on the right course. I voted for President Obama because he declared, again and again, that he was for change. “Throw the bums out” was his message. But once elected president, what did Mr. Obama do? He brought the bums with him. He ushered the foxes into the chicken coop.
President Obama has thus far been a major disappointment. It is not too late for him to change his team. Banks have given themselves billions in bonuses and the voters will not stand for it. Moreover, if he does not change his team, he certainly will be a one-term president.
If Mr. Obama waits for the November elections with no health plan and no change in the credit market, he and Michelle may find themselves back in Chicago in 2012.
Mr. Obama is a brilliant speaker. But he needs to stop talking and throw the bums out.
Bernard Ilson, New York
Greece and Europe
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CloseLinkedinDiggFacebookMixxMySpaceYahoo! BuzzPermalink Published: February 16, 2010
While Vassilis Vassilikos’s appeal to Hellenic national pride is an understandable response to German haughtiness, there’s no doubt that the current crisis can be traced to Greek profligacy (“Crisis in a stoic land,” Views, Feb. 15).
Indeed, the European Union and the International Monetary Fund ought to think long and hard before going to Greece with a bailout. Unless Athens gets its economic house in order, curbs excessive entitlement programs and slashes public spending, Greece may face expulsion from the European monetary union.
Mr. Vassilikos’s resort to a hallowed classical past obscures the bitter truth: Recklessness has made Greece the moribund man of Europe.
Rosario A. Iaconis, Mineola, New York
Obama lets us down
The front page article “Wall Street gave Greece tools to hide growing debt” (Feb. 15) reveals that the tentacles of American banks and financial institutions have worldwide connections and global ambitions to control the economy of nations everywhere. Does that surprise me as an American citizen? Of course not.
Instead of bringing in a new team, President Obama has placed the financial culprits that caused our financial debacle in the role of setting it on the right course. I voted for President Obama because he declared, again and again, that he was for change. “Throw the bums out” was his message. But once elected president, what did Mr. Obama do? He brought the bums with him. He ushered the foxes into the chicken coop.
President Obama has thus far been a major disappointment. It is not too late for him to change his team. Banks have given themselves billions in bonuses and the voters will not stand for it. Moreover, if he does not change his team, he certainly will be a one-term president.
If Mr. Obama waits for the November elections with no health plan and no change in the credit market, he and Michelle may find themselves back in Chicago in 2012.
Mr. Obama is a brilliant speaker. But he needs to stop talking and throw the bums out.
Bernard Ilson, New York
Goldman Sachs, Greece Didn’t Disclose Swap
Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Elisa Martinuzzi
Feb. 17 (Bloomberg) -- Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.
No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.
“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.
Legal ‘At the Time’
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.
The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.
Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.
‘Fear the Worst’
The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.
The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.
“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.
No ‘Smoking Gun’
Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.
“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”
A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.
Cross-Currency Swap
European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.
The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.
That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.
European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.
“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Elisa Martinuzzi
Feb. 17 (Bloomberg) -- Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.
No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.
“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.
Legal ‘At the Time’
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.
The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.
Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.
‘Fear the Worst’
The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.
The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.
“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.
No ‘Smoking Gun’
Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.
“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”
A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.
Cross-Currency Swap
European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.
The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.
That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.
European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.
“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
Let Greece take a holiday from the eurozone
By Martin Feldstein
Published: February 17 2010 02:00 | Last updated: February 17 2010 02:00
L oan guarantees or temporary credits from Germany and France may allow Greece to avoid a refunding crisis later this spring. But temporary financial patches will not deal with the real problem: Greece's budget deficit of 13 per cent of gross domestic product. To prevent an exploding ratio of government debt to GDP, Greece needs to cut future annual spending and increase its future taxes in a com-bination equivalent to at least 10 per cent of GDP.
Unfortunately, such a fiscal contraction would sharply increase unemployment, already at a painful 10 per cent; and political opposition makes such action impossible.
If Greece still had its own currency, it could, in parallel, devalue the drachma to reduce imports and raise exports, cutting the 15 per cent of GDP trade deficit. The level of Greek GDP and employment might then actually increase if the rise in exports and decline in imports added more to domestic employment and output than was lost through raising taxes and cutting government spending. But since Greece no longer has its own currency, it is not free to follow this strategy.
So what can Greece do? It can simply raise taxes and cut spending, asking its population to suffer many years of high unemployment. Or it can seek a real bail-out from its euro partners, in which they give the Greek government enough money year after year to pay its bills without raising taxes. Even if the small size of the Greek economy made that feasible, it would be rejected because Germany and France would correctly fear that doing so would lead to pressure for similar bail-outs from larger eurozone countries. Another option is for Greece to secede from the eurozone, perhaps starting a process in which other eurozone countries with large fiscal and trade deficits also drop out.
None of the above choices appeals to Greece or its eurozone partners. But there is a better idea that could preserve the single currency while helping the beleaguered country to adjust its twin deficits.
The rest of the eurozone could allow Greece to take a temporary leave of absence with the right and the obligation to return at a more competitive exchange rate.
More specifically, Greece would shift its currency from the euro to the drachma, with an initial exchange rate of one euro to one drachma. Bank balances and obligations would remain in euros. Wages and prices would be set in drachma.
If the agreement called for Greece to return at an exchange rate of 1.3 drachmas per euro, the Greek currency would immediately fall by about 30 per cent relative to the euro and other non-euro currencies. If there is little or no induced inflation in Greece, Greek products would be substantially more competitive in both domestic and foreign markets.
In exchange for permission to reset its exchange rate, Greece would have to agree to tough fiscal measures to bring its budget deficit down quickly and keep it down. Although the higher cost of imports would cut local real incomes, damage would be limited by the fact that imports are less than 20 per cent of total Greek GDP.
Other eurozone members might object to giving Greece this improved competitiveness. They might worry that other countries with large trade deficits would press for a similar deal. But allowing Greece to reset its exchange rate might still be better than having the country permanently leave the eurozone. It would certainly be better than condemning the Greek people to a decade of suffering. It would also be better than Germany and other countries providing continual financial assistance to Greece, since such a process might make Germany itself want to quit the eurozone.
The European economic and monetary union is doubly flawed. First, it forces diverse countries to live with a single interest rate and exchange rate that cannot be appropriate for all members. Second, combining a single currency with independent national budget policies encourages fiscal profligacy. The Greek situation is a manifestation of these flaws. If European political leaders nevertheless want to preserve the current system, allowing a temporary exchange rate reset for Greece may be the best option. The writer is professor of economics at Harvard and president emeritus of the National Bureau of Economic Research. He chaired the Council of Economic Advisers under President Reagan and is a member of President Obama's Economic Recovery Advisory Board
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
By Martin Feldstein
Published: February 17 2010 02:00 | Last updated: February 17 2010 02:00
L oan guarantees or temporary credits from Germany and France may allow Greece to avoid a refunding crisis later this spring. But temporary financial patches will not deal with the real problem: Greece's budget deficit of 13 per cent of gross domestic product. To prevent an exploding ratio of government debt to GDP, Greece needs to cut future annual spending and increase its future taxes in a com-bination equivalent to at least 10 per cent of GDP.
Unfortunately, such a fiscal contraction would sharply increase unemployment, already at a painful 10 per cent; and political opposition makes such action impossible.
If Greece still had its own currency, it could, in parallel, devalue the drachma to reduce imports and raise exports, cutting the 15 per cent of GDP trade deficit. The level of Greek GDP and employment might then actually increase if the rise in exports and decline in imports added more to domestic employment and output than was lost through raising taxes and cutting government spending. But since Greece no longer has its own currency, it is not free to follow this strategy.
So what can Greece do? It can simply raise taxes and cut spending, asking its population to suffer many years of high unemployment. Or it can seek a real bail-out from its euro partners, in which they give the Greek government enough money year after year to pay its bills without raising taxes. Even if the small size of the Greek economy made that feasible, it would be rejected because Germany and France would correctly fear that doing so would lead to pressure for similar bail-outs from larger eurozone countries. Another option is for Greece to secede from the eurozone, perhaps starting a process in which other eurozone countries with large fiscal and trade deficits also drop out.
None of the above choices appeals to Greece or its eurozone partners. But there is a better idea that could preserve the single currency while helping the beleaguered country to adjust its twin deficits.
The rest of the eurozone could allow Greece to take a temporary leave of absence with the right and the obligation to return at a more competitive exchange rate.
More specifically, Greece would shift its currency from the euro to the drachma, with an initial exchange rate of one euro to one drachma. Bank balances and obligations would remain in euros. Wages and prices would be set in drachma.
If the agreement called for Greece to return at an exchange rate of 1.3 drachmas per euro, the Greek currency would immediately fall by about 30 per cent relative to the euro and other non-euro currencies. If there is little or no induced inflation in Greece, Greek products would be substantially more competitive in both domestic and foreign markets.
In exchange for permission to reset its exchange rate, Greece would have to agree to tough fiscal measures to bring its budget deficit down quickly and keep it down. Although the higher cost of imports would cut local real incomes, damage would be limited by the fact that imports are less than 20 per cent of total Greek GDP.
Other eurozone members might object to giving Greece this improved competitiveness. They might worry that other countries with large trade deficits would press for a similar deal. But allowing Greece to reset its exchange rate might still be better than having the country permanently leave the eurozone. It would certainly be better than condemning the Greek people to a decade of suffering. It would also be better than Germany and other countries providing continual financial assistance to Greece, since such a process might make Germany itself want to quit the eurozone.
The European economic and monetary union is doubly flawed. First, it forces diverse countries to live with a single interest rate and exchange rate that cannot be appropriate for all members. Second, combining a single currency with independent national budget policies encourages fiscal profligacy. The Greek situation is a manifestation of these flaws. If European political leaders nevertheless want to preserve the current system, allowing a temporary exchange rate reset for Greece may be the best option. The writer is professor of economics at Harvard and president emeritus of the National Bureau of Economic Research. He chaired the Council of Economic Advisers under President Reagan and is a member of President Obama's Economic Recovery Advisory Board
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
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