This is my response to a few diaries that are fundamentally missing the story on the currency swaps between Greece and Goldman Sachs (GS should change its name to Golden Swaps).
Half of the DKos posters looking at the deal blame GS and half blame Greece for taking the loans in the first place. It sounds to me like an exact rehash of the arguments last year about who was to blame for the mess in the USA, the subprime lenders or the people who took those loans. One poster in another diary on the Greek-Goldman deal even ascribed certain personal characteristics (cultural? genetic?) to Greeks that makes them (as a group) rather likely to engage in such so-called shenanigans.
In general, however, the actual details about the Goldman Sachs-Greece deal are all over the place so I want to clear things up with a diary that tries to straighten out the details and the chronology.
If you want to skip the arguments, I bolded the main thesis well after the fold.
As background, have a look at this article:
http://www.guardian.co.uk/...
For more background on why Greece took on these currency deals, read this article:
http://www.businessweek.com/...
Now, to address what I see as misconceptions, let's get into some of the details.
CLAIM #1. Greece did the deal with Goldman in order to fudge its statistics for Eurozone entry.
FACT 1A. Actually, Greece had a hard time making Eurozone entry as it was outside the debt limit with a debt in the 4.5% region, and it was passed into the Eurozone despite its outlying deficit by its EU core partners. It was passed through. The numbers were outside the limits, not phony at all. So blame the Greeks for joining and the EU for taking them in, but anyone that sees a swindle is practicing revisitionist history. I recall clearly words such as "abrogations to the Maastricht Treaty" being employed at the time to describe Greece's entry.
FACT 1B. The currency swap deal with GS took place in 2002 well after Greece had joined the Eurozone, and Greece's financials at the time were not bad at all.
FACT 1C. The deal was not an off-the-books loan, it was a currency exchange program, whereby the Greek Gov't, acknowledging that the currency conversion was done at a time that the Euro was on par with the dollar, and so it decided to arrange a swap program whereby $1 billion in future loans would be denominated in another currency, and as the Euro strengthened against the dollar, the Greeks benefited hugely from this as they exchanged strong Euros into cheaper dollars in order to make their external debt SMALLER. In exchange, GS took a fee of $300 million, which was less than what Greece saved. One begins to wonder how much of Greece's current deficit in the $300 billion range was impacted by this $1 billion currency swap in which Greece actually benefited by paying less to service its debt than it otherwise would have.
FACT 1D: Greece did not engage in this practice to deceive the EU for entry. They were already in the EU, and the deal benefited Greece's debt outlook. Was the deal hidden from its partners? Well, there are public relations announcements and newspaper articles that are easily found describing this deal. The deal was public. At the time, it was not even illegal in the EU. It was legal. However, the EU did not require that currency swaps be presented as debts in the budget. So yes, it is a matter of getting around accounting methods. But let's put it plainly: every country in the world uses creative accounting. Our debts int he USA are hidden by sweeping in all sorts of programs into the federal budget. The lax regulation at Fannie Mae and Freddie Mac created truly laughable accounting methods. Our best accounting firm (now gone) was partly responsible for Enron. Were the Greeks guilty of doing this as well? Yes. At the time, it didn't look so bad as they were not far outlier from the EU debt limit. They did it at a time when they were 4.5% in yearly deficit. Fast forward several years, and now people look back on the debt deal as something nefarious. In fact, Eurostat--the EU's statistics office--is claiming it did not know about the GS-Greece deal. And that's why people think Greece pulled the wool over the European eyes. But EU's big honcho Junker has come out and said such problems were inevitable because of the lack of teeth at Eurostat (i.e. no regulatory powers). Eurostat, like our SEC, is run by average paid specialists who do not have the capability of validating every country's data. The EU, like the USA, has left regulation to the bankers. The fact that Eurostat was not aware of a deal that was not illegal at the time, a deal announced by the gov't, should not take anyone by surprise.
What, in short, does Claim #1 leave out?
Well, it leaves out the fact that this deal BENEFITED Greece's debt outlook at the time. Greece did not fall into arrears of the EU until years later, partly as a result of going deeply into debt to host the Olympics (an Olympics that were universally reviled prior to their happening as a terrorist's retreat, and in that Olympic period, tourism in Greece went south as people avoided it like the plague). So, because they took one deal off the books, a deal that benefited them at the time, a time when their books were relatively in order, a time when such deals were legal in the EU, a time when several other EU countries did the same exact deal with Goldman Sachs, can this deal be used years later as an example of budgeting gone wrong?
Presumably, the loans that came after the GS swap deal took Greece over the top in terms of budget chaos, as the later bond issues further indebted the country; these were the debt issues that actually sent their deficit skyrocketing, those were the deals that showed that Greece was spinning out of control, not the 2002 deal with GS. In fact, even now, Greece is issuing bonds, and this will further increase its debt, as the current situation has put a huge crimp in the economy, as foreign investment has fled the country. Money is pouring out of Greece. And Greece is looking for loans now to go even further into debt. So how can we look back to 2002 as the source of blame?
SKIP TO CLAIM #4 if you're only interested in the GS part of the story.
CLAIM #2. Greek Gov't bureaucracy, at roughly 30% of the workforce, is beyond huge. It is stifling the country. And the country does not collect taxes fairly. It's an economic basket case.
FACT 2. Agreed. But... Bureaucracy there is not the same as bureaucracy here. In the USA, our gov't is supposed to productively and efficiently provide us services such as education, health care and the like. In Greece, however, this is not the case. The federal bureaucracy is notoriously unproductive. That being said, the Greek gov't accounts are being hurt because of an enormous pension burden to gov't workers. And yet, Greece's social system outside its gov't salary and pensions is paltry. Greece does not spend anywhere near as much on health care, education, etc. Its social security payouts are paltry and not at all social or secure. There is barely any prison population to speak of. Social services are nil. There is hardly any welfare. And, this is the reason that I call a significant % of Greek bureaucracy a form of workfare. Greece, unlike the USA, does not pay huge welfare, health care, social security costs, or as much for prisons and education. It does spend the same amount as the USA on its military (relative to GDP). Greece form of social safety is a gov't job. Either way, doesn't this amount to the same thing?
Unemployment in Greece is below 10% still (a good number these days, but that number is a product of the huge bureaucracy). But then one looks closely at the gov't and realizes something else. Greece, unlike the USA, still has control of state monopolies. Greece owns its national transportation system (airlines, railways, ferries), Greece employs its shippers and longshoresman to service its shipping industry (the largest in the world), Greece has a national health system, it has a national telecommunications system, etc. On and on. In other words, these are public corporations embedded within the the bureaucracy itself. In this light, let's say that Greek bureaucracy may be bankrupt, but it's a whole other kind of fish than what we know of bureaucracy in the USA. It reminds me of what happened in NY State after the hiring freeze. Newspapers reported that despite the freeze, state universities hired 10,000 new workers. Of course, left out of the headline was that the new workers were grad students on teaching assistantships vacated by students who just left. Greece has a lot more institutions embedded within gov't than just state universities.
The fact is, Greece has a vertical economy. It is not diversified. The country's two main industries are shipping and tourism, and they account for more than 50% of GDP. This literally means that most of the wealth comes from two industries that are controlled either through state licensing (tourism) or the shipping plutocrats. It also means that Greeks have a hierarchy for making money, and this hierarchy--because of the lack of diversity--creates corruption. If you want to play, you have to pay for a seat at the table. Think Russia with its resource riches, its nouveau riche culture, and its many impoverished. The Greek bureaucracy can thus be seen as a means of spreading the wealth from the few industries to the rest the country at large.
FACT 2B. The rich in Greece avoid taxes at an immoral rate, mostly by hiding money in tax havens and not reporting income. The amount is huge. Something like 30% of income. And yet we can make a comparison with the USA, as yesterday there was a diary showing that the American rich pay something like 10-15% in income taxes, which by my estimation is about 15-20% less than they should pay. Here again, a huge amount. The burden in both countries is on the middle class.
CLAIM #3: Greeks want a handout.
FACT 3A: Greece has not asked for a handout precisely. They are hoping their European partners back them with credit (ala the USA TARP program) so that they can acquire debt at much more reasonable rates than the speculation in the market has allowed them. Greeks claim that with austerity measures, they can reduce the deficit if only they are capable of financing their debt at rates that don't assume the country is about to fail, and hopefully the deficit will be trimmed not only with cuts but the end of the worldwide recession (on this note, Greece actually has a card up its sleeve since its two main industries do not rely at all on the relative health of the Greek economy or consumer, but instead shipping is increasingly in service of China's resource needs while tourism relies on foreign consumers, and presumably a weaker euro could help a bit there). Credit for Greeks from Eurozone partners is very TARP-ish in the sense that Greeks are simply asking for a letter of credit. This can only be considered a handout if Greece defaults. Then their EU partners are responsible to the investors, to say nothing of the devastation this will cause, and not only in Greece. The argument, from Greek politicians, is that they have been unfairly targeted, and that hedge fund speculation has added millions and billions to their debt servicing.
CLAIM #4. Goldman Sachs is not to blame for Greek budget mendacity.
FACT 4A. I agree it's not to blame for Greek budget woes, but this narrow frame lets GS off the hook too easily. GS did nothing wrong in selling Greeks the original currency swap. But then GS started taking bets on the deal they brokered. They entered into credit default swaps on its outstanding loan to Greece. They took $300 million from Greece in commission, then sold insurance on the billion loan many times over, took commissions each time, and eventually sold those contracts off as well. In other words, they're gaming the loans (good loans and bad loans) that they make. Sound familiar? If you want to think of Greece as a particularly bad bet to make a loan to, then consider that this sort of thing doesn't bother GS. In fact, the worse the debtor, the more money you make from selling insurance on a default.
Consider the Michael Lewis article in Portfolio last year (http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Bo
om/) where he found Wall Street was making such bad loans precisely to enter into lucrative credit default swap deals. In fact, Lewis found that some of the people dealing in such instruments had run out of bad bets, and had to start creating them out of wholecloth by taking money from shorts, and hedging with insurance contracts against those shorting the market in such derivatives. In other words, Goldman Sachs loaned money to Greece in order to then do a lot of double dealing. But to sell derivatives in the first place, you need them to derive from somewhere--you need to make a loan, any loan.
OK, fine, they are bankers, this is what they are supposed to do.
FACT 4B. However, Greece has uncovered that the current speculation in the bond market is primarily being done by Goldman itself and 4 Hedge Funds. Big pocketed banks and funds like these can do significant damage to a small country, especially in collusion. The groups attacking Greece like a pinata have much more economic power than Greece. They are frontrunning trades in order to panic investors in Greek bonds, and thereby profit from it. I somehow doubt that they think they will cause a default and reap profits that way, but GS surely knows exactly what kind of exposure exists in Greece. After all, they sold the credit default contracts on the Greek currency swap deal to the National Bank of Greece. Now, those guys are some Greeks that you can blame. Unfortunately, calls for austerity measures in Greece will surely impact the ability of average Greeks to repay their loans to this huge bank, and that itself may create a run on the bank. If that bank defaults, we have problems everywhere, as the NBG has huge exposure in Eastern Europe, mainly together with Austria in new EU markets. But besides the NBG, who else dealt in insurance against Greek default? The Swiss are hugely exposed. The Germans too. One German Bank, Hypostate--owned by the German State currently--has $100 billion in exposure.
Let's think about this folks: how does any bank have $100 billion in exposure to a foreign country whose total debt is $300 billion? Do you think Hypostate lent Greece 1/3rd of its money? Or is it much likelier that Hypostate got involved with these exotic instruments sold to it by bankers far afield?
In other words, the main thesis of this diary is that Greece is like the people who took subprime loans in the USA and who couldn't meet their debt burden. Fine, in the USA, the subprime mess totaled about $200 to $400 billion. And we blame those people for taking those loans. But the people buying insurance contracts on those loans many times over were in debt in the range of many many trillions--perhaps hundreds of trillions--of dollars. That's the real trouble.
In fact, the original GS-Greece loan matters little when you put it up against the derivatives mess created by a potential Greek default, and none of that is really Greece's fault or business (i.e. Greece has nothing to do with Goldman Sachs selling insurance on its debt). Beyond that, GS's speculative attacks on Greece foster an environment for GS to not only make huge profits on trading in bonds, but it causes panic and drives Greece toward a default that will give GS a huge payday. It will spread like a contagion.
CLAIM #5: The Greeks are mostly to blame. Partly to blame. Or?
ANSWER 5: Well of course they are to blame. They spent beyond their means. Anytime you're in hock to the man, presumably you did something for that to happen. But that doesn't explain why we're talking about Greece right now. The other stuff, the Greek black market, lack of taxes, corruption, is all just fluff to deflect and distract. Greece operates in this manner and it will continue to operate in this way because this form of economic greasing is systemic (not cultural and genetic) in a county with few natural resources, a country that is undiversified. Don't believe me? Well, look at the other Euro countries that have not yet been attacked. Their account deficits are almost as high. If this could all be blamed on Greeks and GS deals, then presumably the same scenario would not exist in countries whose debt has skyrocketed to around the same numbers as Greece's. It doesn't take long for a 4 to 6% deficit to turn into a 12% deficit when your economy is severely contracting. The UK's current year deficit even exceeds Greece's. Even more worrisome, private debt in many EU countries doubles and triples Greece's private debt, as Greeks up until 2003 had almost no private debt exposure. Today, they are at 50% while their more developed EU partners are pushing 100% to 150%. This isn't out of some sort of Greek parsimony or Greek genetic rectitude, etc., but again it's systemic. This is what happens when your country is poor and you never leave your home and your parents bequeath you their home. No big mortgages, no credit cards that force you to pay someone else 20% interest. And this was the case until 2003 when low Euro interest rates flooded the Greek market, caused inflation in the standard of living, "Berlin Prices on Athens Salaries," as the Greeks like to say, and the private debt percentage shot up to where it is today.
Greeks are mainly to blame for being caught with their pants down. Shipping has plunged. Shipping rates for Panamax and Cape Vessels dropped from $125k daily to less than $10k today. Shippers keep their ships in drydock because its cheaper. Some of these ships have been sold off as scrap metal to meet debts. Tourism is down. The current recession in Greece has the economy contracting by 4%, and at least 2.5% of the recession is attributable to shipping, .7% to tourism, and the rest to banking and agricultural exports dropping. In other words, whether Greece was corrupt or not, their budget fiasco would have happened anyway because, like their Euro brethren in Spain and Ireland, their industries and services grew uncompetitive with the advent of the Euro, and the recession sent them over the edge. The Euro was great for infrastructure as Greece was able to finance new roads, a new airport, a new subway, and a huge new signature bridge crossing from the Peloponnese to Central Greece, all done because of the Euro. The only answer for Greece is austerity, and potentially a deflationary spiral because of that austerity, and now Greece is asking for the time to get its ship right. The previous administration, in the midst of an election campaign, ignored the truth and squandered an opportunity to get things straight before it could become the one attacked by speculators.
I read a story a month ago about two pilots who ejected from their distressed airplane and they parachuted into the jungle. They heard a lion's roar, and so one immediately put on his running shoes. The other said to him, "You can't outrun a lion." The former replied, "I don't need to outrun the lion. I need to outrun you."
The lion is Goldman Sachs and the Hedge Funds, while Portugal and Spain are the pilot with running shoes, and Greece is right now running for its life.