Goldman's (GS) Greek Fiasco!

There’s no doubt that Goldman Sachs is the smartest institution in the room. There’s also no doubt that Greece, member of the European Union, is in a lot of trouble. The last thing either of these two parties need at the moment is more public and investor scrutiny. But that’s exactly what’s happening after it was revealed that Goldman Sachs structured off-market swaps for Greece in order to lower the value of that country’s debt.

In 2001, Goldman came up with a novel solution for the Greek government to lower its debt figures and stay within the 30% limit of debt to GDP that the European Union demands of its members. The deal is somewhat complex so stay with me on this one: Goldman agreed in the future to convert yen and dollars into Euros at an artificially favorable rate, allowing the Greek government to borrow in those currencies but pay back in Euros. Greece could use that future rate when it recorded its debt in the European accounts regardless of the actual rates that prevailed at the time or in the present, thereby decreasing the country's debt load by around €2 billion.

Naturally as a service to its client, Goldman billed the Greek government for the transaction. But there’s more! Any payment by the Greeks to Goldman would count against the deficit, which would nullify the benefits of the transaction to some extent. So what happened is Goldman basically loaned the money for the payment to Greece, and Greece paid it back over time, lowering the effect of the deficit. This loan, however, was also treated as a swap and under European Union rules was therefore not added to Greece’s debt figures.

Goldman has come out and claimed the benefits the Greek government accrued were small. According to Goldman, Greece’s debt to GDP, the ratio that is currently causing all the problems fell from 105.3% to 103.7%, while the deficit after the transaction was only reduced by 0.10%. At the end of 2009, Greece's debt to GDP ratio stood at 113%. The US currently sits at 86.1%.

Now the Federal Reserve is getting involved in the furour which has caused widespread uproar all over Europe. Ben Bernanke, chairman of the Federal Reserve, told Congress today that the Fed is “looking into a number of questions relating to Goldman Sachs and other companies related to their derivatives arrangements with Greece”. Bernanke also said that the SEC, that lean mean fraud and corruption fighting machine, is also looking into the matter.

The transaction was classified as a currency trade and not as a loan and as such Greece did not have to report it to the European Union, despite the intention of the trade to allow the Greek government to borrow more money and increase their national debt. The fact that Goldman no longer has the position on it’s books isn’t seen as relative.

There are two camps to this story. The first is adamant that Goldman and the Greek government did nothing wrong, and structured a deal that is perfectly legal and met every European standard on offer. The other is of the opinion the intention was to deceive the public and the European Union in particular, and allow the Greek economy and debt situation to appear better off that it actually was. Personally, I think the intention of the transaction should be the determining factor regardless of the genius behind the financial engineering.

It must also be noted that Goldman is not the only investment bank, nor is Greece the only sovereign nation, to have engaged in similar practices. It just so happens that Goldman is in the spotlight and Greece is, well, insolvent. Goldman is said to have earned $300 million from the trade, while Greece needs to come up with $30 billion in new financing before the end of April.

I think the best explanation of the situation comes from Gikas Hardevoulis, a former advisor to the then-prime minister of Greece, who said “The trade should not have been done”. He then added, "It was done to dress up the debt figures by some smart idiot in the finance ministry".