In another blow to a quick resolution of the Greek sovereign debt crisis, reports are surfacing that multiple banks may have arranged swap contracts with Greece to hide their fiscal shortfalls. Bloomberg is now reporting that up to fifteen banks may be involved.
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.
Greeks aren’t very welcome in the Rue Alphones Weicker in Luxembourg. It’s home to Eurostat, the European Union’s statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data "cannot be confirmed" or has been requested but "not received."
Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn’t exceed 60 percent.
The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics.
The German press is all over the story become there is a widespread belief in Germany that Germany will be the patsy in a game of bail-me-out for countries perceived by many as profligate. However, now it appears Goldman was not alone in helping to conceal the true fiscal state in Greece. Bloomberg reports:
Greece arranged swap agreements with about 15 securities firms and only some included payments from banks that may have helped hide the country’s true deficit, according to a person with direct knowledge of the contracts.
The swaps that allowed Greece to receive payments upfront date from before 2008, when European Union regulators changed rules to limit the use of the contracts, said the person, who spoke on condition of anonymity. Goldman Sachs Group Inc., which provided Greece with about $1 billion in funding in a 2002 swap, may have arranged the biggest of the contracts, the person said.
The Bloomberg report says the other banks are among the 21 primary dealers of Greek sovereign debt. The Greek government has defended the deals, saying the swaps were “at the time legal,” but adding that they don’t do these kind of things now.
I think this story is the nail in the coffin for the talk about a quick bailout. EU officials are going to have to conduct a thorough investigation into the accounting for prior arrangements of this nature. They will need to impose penalties for lying and for non-adherence to the expected austerity measures upon which any bailiout will be conditioned.
Moreover, rumors that Italy also made similar arrangements will now be investigated. The eurozone is looking rather precarious.
Also see George Soros’ FT commentary “The euro will face bigger tests than Greece.”
Disclosure: No positions