2001 was a year of turmoil: America was attacked on Sept. 11, ushering the U.S. into the War on Terror. Meanwhile, Goldman Sachs lent Greece 2.8 billion euros in a secret, yet legal transaction to disguise the country’s ill financial fitness in order to enter the Eurozone.
Unfortunately for the Greeks, Goldman did not have the Midas touch they anticipated, Bloomberg reports. By 2005, when the Greece’s debt-management agency took over the debt, the disguised derivative had nearly doubled to 5.1 billion euro. This devilish deal, struck so that Greece could enter the Eurozone, later came to profit Goldman Sachs greatly, to the detriment of Greece.
The Goldman–Greece deal worked like this: As required by the Maastrict Treaty, all European countries need a certain debt-to-GDP ratio to join the Eurozone. In order to reduce its ratio, Greece executed swap transactions to show “improvement in their public finances,” said Goldman spokeswoman, Fiona Laffan. “The swaps were one of several techniques that many European governments used to meet the terms of the treaty.”
At the time of the deal, the Euro was valued less than the dollar. Because the interest rate was tied to the actual value of the loan, not the value of the loan at the time it was made, as soon as the Euro become more valuable than the dollar, the interest rate on the exchange shot up dramatically.
“Greece entered into a separate swap contract tied to interest-rate swings” to pay back the borrowed 2.8 billion euros, Bloomberg reports.
It was discovered in 2003 that Goldman Sachs used “a fictitious, historical exchange rate in the swaps to make about 2 percent of Greece’s debt disappear from its national accounts,” for the currency swaps, according Bloomberg reporters Nicholas Dunbar and Elisa Martinuzzi.
Goldman Sachs was so accurate in their prediction of the Euro, they now will likely never see the whole return on their bet.
Bloomberg reports that “Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed,” noting that public entities often find themselves at the losing end of deals pitched by private securities firms.
Risk consultant and author Satyajit Das told Bloomberg, “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised — it’s part of the DNA of that organization.”
The 600 million euros Goldman Sachs instantly made from the deal represents about 12 percent of the total $6.35 billion Goldman reported in revenue for trading and principal in 2001.
Quickly after signed, however, Greece’s bet soured. “Christoforos Sardelis [former debt manager who oversaw the swap as head of Greece’s Public Debt] said he realized three months after the deal was signed that it was more complex than he appreciated,” writes Bloomberg.
Greece initially received a “teaser rate,” which entailed a three-year grace period. Following the three years, Greece would have 15 years to repay Goldman Sachs. But, as bond yields dropped, Greece’s debt rose higher and higher, ballooning to 5.1 billion in 2005.
In 2003, Nicholas Dunbar of BBC reported on Greece’s deal with Goldman Sachs to conceal its debt. Even Eurozone watchdogs claim that they knew nothing until 2010.
Sardelis described the deal as “a very sexy story between two sinners,” but adds that the Euro crisis today is not the love child of the transaction.
The 5.7 billion euros (5.1 billion plus interest) Greece owes Goldman is merely a drop in the bucket of the 350 billion Euros that Greece owes from bailouts. Most of this will never be paid back.
But as Dunbar describes for BBC, “That 5.7 billion symbolizes the twisted incentives at the heart of the Euro: Incentives for Greece to fiddle debts, incentives for bankers to cook up deals and incentives for Brussels institutions to look the other way.”
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