Here Comes Yet Another Pan-European 'I Told You So': Greece Busted Fudging Numbers

 |  Includes: CS, EWG, EWI, GS, JPM, VGK
by: Reggie Middleton

I know many of you don’t like to hear, "I told you so," but if you don’t subscribe to the blog you can always take the advice that I proffered last week: “I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!“ Anyone who truly believes that the current pan-European fiasco is not going to end badly will most assuredly get their feelings hurt.

In the following Bloomberg article that ran this morning, titled "Greek Debt Deals Hidden From EU Probed as 400% Yield Gap Shows Bond Doubts," I took the liberty of adding extended analysis, data, and my rather strong opinion. I query, imagine if a media organization with the reach of Bloomberg took advantage of the unbiased Deep Dive analytical ability of an entity such as BoomBustBlog on a regular basis. There would probably not be a recognized need for sell side research. Just a thought to ponder as you read though the article:

Sept. 8 (Bloomberg) — Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt.

“We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February.

Well, 6 months ago in Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!, I illustrated how many all of the countries in the EU played hide the sausage games in order to qualify for what apparently was an unrealistic debt criteria., but since we are picking on Greece right now, let’s refresh our collective memories (just remember, everybody else did the Grease, ummm… I mean Greece as well).

The Greeks (again)…

According to people familiar with the matter interviewed by China Securities Journal, Goldman Sachs Group Inc. (NYSE:GS) did as many as 12 swaps for Greece from 1998 to 2001, while Credit Suisse (NYSE:CS) was also involved with Athens, crafting a currency swap for Greece in the same time frame.

Under its “off-market” swap in 2001, Goldman agreed to convert yen and dollars into euros at an artificially favorable rate in the future. This helped Greece to use that “low favorable rate” when it recorded its debt in the European accounts-pushing down the country’s reported debt load.

Moreover, in exchange for the good deal on rates, Greece had to pay Goldman (the amount wasn’t revealed). And since the payment would count against Greece’s deficit, Goldman and Greece came up with another twist: Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time. And the two sides structured the loan as another kind of swap. So, the deal didn’t add to Greece’s debt under EU rules. Consequently, Greece’s total debt as a percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms, according to people close to Goldman.

Another action that smacks of Hellenic manipulation, at least to the staff of BoomBustBlog: for years it apparently and simply omitted large portions of its military-equipment spending from its deficit calculations. Though, European regulators eventually prevailed on Greece to count everything and as a result, in 2004, there was a massive revision of Greek deficit figures from 2000 (a budget deficit of 2.0% of GDP in 2000 to beyond the 3% deficit limit in 2004), by then Greece had already gained entrance to the euro. As in my trying to prepare for the coming sovereign debt crisis, timing is everything, isn’t it?

Okay, now back to the Bloomberg article:

Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a “solid estimate” of the total value of debt hidden by the opaque contracts. “This is a new era,” he said.

Greece is the only euro country that lied about using these complex swap contracts after Eurostat told countries to report them in 2008, Radermacher, 58, said.

I wouldn’t bet the farm on that statement, sir!

It also likely signed a greater number of individual agreements than any other euro member, based on information it has provided to Eurostat, he said. Greece’s debt was 115.1 percent of its total economic output last year, second among the 16 counties that share the euro, behind Italy’s 115.8 percent.

Hey, it’s not as if I bear any unconditional love for Greece, but if you take an objective, unbiased look at the rest of the EU, Greece doesn’t look as bad – or to put it more aptly, many others may look worse. Again, excerpting from the warning issued on BoomBustBlog six months ago in Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

The Italians

As discussed in a recent ZeroHedge article, a 1996 Italian currency swap, arranged by J.P. Morgan (NYSE:JPM), allowed Italy to receive large payments upfront that helped keep its deficit in line, with the downside of greater payments later.

In addition, to curbing their current deficits, countries are now using these swap agreements to push off their loan liabilities (related to swap agreements) to a later date through securitization, and Greece is one such example.

Under the 2001 deal brokered by Goldman, Greece swapped dollar- and yen-denominated debt for euros at below-market exchange rates. The result was that the country got paid €1 billion ($1.35 billion) upfront on the swap in exchange for an obligation to buy the swaps back later. In 2005, this obligation was in turn securitized as part of a 20-year debt issue, further pushing off the day of reckoning.

Moreover, one of the key reasons why such manipulations continued is the apparent ignorance of the EU’s Eurostat, which knew enough about these deals to tighten the rules governing their accounting-albeit only after they had served their purpose – the Ponzi! When Italy’s then-Prime Minister Romano Prodi miraculously achieved a four-percentage-point improvement in Italy’s budget deficit in time to usher the country into the common currency, Italy’s use of accounting gimmicks was widely discussed, and then promptly ignored. As at that time, everyone was only too eager to look the other way in the drive to get the single currency up and running.

It wasn’t until 2008-a decade after the deals became popular-that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations. Still, till date too little is known about countries’ continued exposure to the deals that are already out there.

Overall, though there is less evidence to support that there are more such swap deals that happened during the late '90s till early part of this decade, the data below showing a sharp decline in interest payments as a percentage of GDP particularly for Belgium (apart from Greece and Italy), hints that there are considerably more of these deals to be discovred. The questions is, will they be discovered before or after the respective sovereign issues record debt to the suckers sovereign fxed income investors.

Click charts below to enlarge


Notice the extremely supercalifragilisticexpealidocious reductions Belgium, Greece and Italy have made in their interest payments from 1993 to 2000 in this graphic made pre-2000. If one didn’t know better, one would have thought theses countries actually used magic to make such reductions. Hell, Italy practicaly cut their debt service (projected, of course) in half. It really makes one wonder. I’m just saying…


The political stakes of the 1997 budget package were enormous. Therefore, it was no surprise that many countries were accused of ‘creative window-dressing’ in their budget through the use of accounting tricks to reach the desired goal. One contentious item was interest expenditure, which is the interest expense that governments sustain to finance their deficit and roll over their debt. Interest expenditure represents a high percentage of public spending and GDP in the European Union. It is highly variable over time, especially when compared to other components of the budget. Because of its relevance and because it is subject only to minimal scrutiny during budget law discussions (and many times even after its realization during the fiscal year), interest expenditure is an ideal target for reaching fiscal stabilization goals without incurring excessive political protest or opposition.

And back to our regularly scheduled Bloomberg programming:

“What the Greeks did was an absolute cardinal sin,” said Ruairi Quinn, former finance minister of Ireland who presided over the 1996 meeting where debt and deficit limits for countries joining the euro were set. “They deserve to be punished for it. I think they have been severely punished for it.”

Doubling Deficit Estimate

Confidence in Greece’s statistics and its ability to repay debt was shattered in October, when the country more than doubled its 2009 deficit estimate. The euro plunged, sparking questions whether the single European currency could survive. It has lost 15 percent of its value against the dollar since Oct. 20.

Investors still don’t trust Greece. They demand yields more than five times that of Germany to hold 10-year Greek debt – a sign that buyers fear the country will have to reorganize its borrowing.

Okay, I get why Greece’s credibility is shot. Now the only question is why the hell is anybody still paying any damn attention to the EC? Let’s review their track record regarding the two countries above (the following is excerpted from the aptly coined “ Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!“)

… take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

image031.pngClick to enlarge


image044.pngClick to enlarge

and the EU on goverment balance? Way, way, way off.

image040.pngClick to enlarge

The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha’s bad, try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!

greek_debt_forecast.pngClick to enlarge

Think about it, with a .5% revisions, the EC was still 3 full points to the optimistic side on GDP, that puts the possibility of Greek government forecasts, which are much more optimistic than both the EU and the slightly more stringent but still mostly erroneous IMF numbers, being anywhere near realistic somewhere between zero and no way in hell (tartarus, hades, purgatory…).

Now, if the Greek government’s macroeconomic assumptions are overstated when compared with EU estimates, and the EU estimates are overstated when compared to the IMF estimates, and the IMF estimates are overstated when compared to reality…. Just who the hell can you trust these days? Never fear, Reggie’s here. Download our “unbiased, non-captured, empirically driven” forecast of the REAL Greek economy – (subscribers only) Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb.

And What About Italy?

Again, we’re glad you inquired. Subscribers should download Italy public finances projection 2010-03-22 10:47:41 588.19 Kb as well as the Italian Banking Macro-Fundamental Discussion Note.

image042.pngClick to enlarge

For those that don’t subscribe, there is still a lot of nitty gritty that I made publicly available on Italy here: Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?

We have provided detailed restructuring and haircut analysis for our professional subscribers who, like us, feel that a restructuring event is but 14 or so fortnights away. And back to our Bloomberg programming:

“I think restructuring will be a necessary part of them pulling out of the predicament they are in,” Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co., which oversees the world’s largest bond fund. He cited the projection of the International Monetary Fund, which foresees Greece’s debt topping out 149 percent of gross domestic product in 2012. Italy in May estimated that its debt would be 117.2 percent of economic output in 2012.

Restructuring…. Guaranteed! And here’s what it’ll probably look like – on the optimistic side:

  1. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates

  2. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

This is an interesting part of the Bloomberg article that begs for elaboration:

Buying Greek Bonds

Banks worldwide increased their total exposure to Greek debt in the first quarter of the year by 7.1 percent, or $20.7 billion, to $297.2 billion, according to a Sept. 6 report by the Basel, Switzerland-based Bank for International Settlements. Norway’s sovereign wealth fund, the world’s second largest, said in August that it had bought Greek bonds, along with those from Spain and Portugal, because of higher yields and as those governments push to reduce their deficits.

The Greek banks themselves bought these bonds as well. Let’s see how well that turned out by revisiting How Greece Killed Its Own Banks! (keep in mind this is from April 2010, things have gotten much worse since then):

Well, the answer is… Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)…

image001Click to enlarge

The same hypothetical leveraged positions expressed as a percentage gain or loss…

image003Click to enlarge

When I first started writing this post this morning, the only other bond markets getting hit were Portugal’s. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:

To date, my work both free and particularly the subscription work, has shown signifcant returns. I am quite confident that the thesis behind the Pan-European Sovereign Debt Crisis research is still quite valid and has a very long run ahead of it. Let’s look at one of the main Greek bank shorts that we went bearish on in January:nbg since researchClick to enlarge

And back to the Bloomberg article:

The fiscal crisis turned attention to currency swaps arranged by Goldman Sachs Group Inc. that helped Greece hide the extent of its debt.

“There are more, or even many, of this kind of swap operation, which we have to clarify,” said Radermacher, the former president of the German Federal Statistics Office who was appointed as the EU’s chief statistician in April 2008. “The Goldman Sachs case was the beginning.”

Greece has told the agency that the other contracts were each significantly smaller than the ones signed with Goldman Sachs, Radermacher said. Signed in 2000 and 2001, the Goldman swaps reduced the country’s foreign denominated debt in euro terms by 2.367 billion euros and lowered debt as a proportion of GDP to 103.7 percent from 105.3 percent, according to a Feb. 21 statement by Goldman.

Goldman Sachs spokewoman Fiona Laffan declined to comment for this article.

Of course, they’re too busy “doing God’s work,”!!! LOL. I’ve got more Goldman Sachs analysis coming up as well, from the only bear that I know of that called their drop while everybody else was decrying how superior and untouchable they were (see Crain’s New York and What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…) The article continues:

In April, Eurostat said it might have to revise Greece’s 2009 debt figure higher by as much as 7 percentage points of GDP, in part because of the use of swap contracts that allowed it to reduce current reported debt in return for greater liabilities in future years.

About a third of Greece’s borrowings have swaps attached to them, according to a person with direct knowledge of the operations. Only a portion of those contracts were set up in a way to reduce current reported debt, the person said. Radermacher said he believed Greece stopped using swaps that included up-front payments in 2008, about the same time that Eurostat questioned the country that year.

Under the rules to join the euro, countries’ debts must not exceed 60 percent of GDP. Interest payments linked to swaps are included in the calculation. That means that until accounting guidance was changed in 2008, upfront payments or lower initial interest payments could initially lower the debt or cause it to rise by a smaller amount than would otherwise be the case, while liabilities could increase down the road.

‘Hope Over Experience’

The problem is that such contracts rely on an estimate that the future debt will be lower or economic activity much greater, allowing a country to meet higher payments, said Yannis Stournaras, director general of the Foundation for Economic and Industrial Research in Athens. He was chairman of Greece’s Council of Economic Advisors from 1994 through 2000.

“You might say this is triumph of hope over experience,” he said, adding that the blame should be shared with the European Commission, which didn’t intervene despite years of warnings by Eurostat of problems with Greek data.

“We addressed the issue several times in meetings of finance ministers and we asked for enhanced powers for Eurostat in 2005, which we didn’t receive at the time,” said Amadeu Altafaj, a spokesman for the Commission.

Upfront Payments

In April 2009, the European Central Bank identified a Greek swap operation of unusual terms, according to a confidential ECB document dated March 3, 2010, obtained by Bloomberg News. The ECB said its executive board prepared internal reports on the swaps. ECB spokesman Niels Buenemann declined to comment on it.

Greece began using this type of contract for the 2001 budget year to avoid recording a spike in debt the first year after it adopted the euro, Stournaras said. It continued to use them after 2001 and increased their use after 2004, he said.

Under guidance set out in 2008 by Eurostat, any upfront payments linked to a swap must be counted as a loan.

Germany, Italy, Poland and Belgium, like Greece, received upfront payments from derivatives, Radermacher said at a hearing at the European Parliament in April. The difference, he said in the September interview, was that when Eurostat asked the other countries about the contracts in 2008, they provided the data and adjusted their debt figures.

A spokeswoman for Italy’s Finance Ministry in Rome said the country had received upfront payments and revised its debt figures accordingly when the accounting guidelines were revised. Officials from the other three countries’ debt agencies did not return calls for comment.

He said he expects to have sufficient details to present an estimate of the off-market swaps’ impact for its semi-annual report on member states’ debts and deficits on October 22.

The EU’s statistics agency for months got partial responses to requests for complete records on the country’s use of swaps. Eurostat still doesn’t know the full number of contracts Greece signed that used historical or other non-market interest or currency rates. Nor does it know the total amount of debt covered by those transactions or the effect on the country’s debt-to-GDP ratio.

Greece’s statistics office blamed the delay in answers on a lack of staff and expertise in the field, said Eurostat officials.

In August, Greece made a proposal for how to estimate the total effect of the off-market swaps without including any of the contracts themselves, Radermacher said.

In the past few months, Greece has told Eurostat of a “big number” of off-market swaps, Radermacher said.

Greek government bonds have lost about 24 percent since October, according to Bloomberg/EFFAS indexes.

To contact the reporters on this story: Alan Katz in Paris at; Elisa Martinuzzi in Milan at

BoomBustBlog subscribers (long/short or long only) not only avoided European pain but benefited from the ability to profit handsomely on the short side since January of this year. Through the next 7 days, I will be reviewing (in detail) the potential numbers behind what we see as the inevitable haircuts to be taken by investors in much of the European debt instruments using our online, live spreadsheets. In the mean time, the links below show some of the most accurate prognostications of the Grecian situation that I know of. If our batting average continues (keeping my fingers crossed, nothing lasts forever), Greece will look to restructuring within fourteen fortnights!

  1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

  2. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!

  3. The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino
  4. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  1. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

  2. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

  3. How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight

  4. Grecian News and its Relevance to My Analysis

  5. A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis

  6. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

  7. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

  8. The Greek Bank Tear Sheet is Now Available to the Public
  9. The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!

Subscription research for those who can benefit from a truly deep dive into the situation:

  1. Sovereign Contagion Model – Pro & Institutional
  2. Euro Bank Soveregn Debt Exposure Final -Retail
  3. Euro Bank Soveregn Debt Exposure Final – Pro & Institutional
  4. Sovereign Debt Exposure of European Insurers and Reinsurers (Empty 2010-05-19 01:56:52)

Disclosure: Author short European banks