How Greece hid its borrowing in the swaps market

By Felix Salmon
February 9, 2010
Beat Balzli has an intriguing story at Spiegel saying that Greece has been hiding the true nature of its deficits and its debt using clever derivatives dreamed up by Goldman Sachs. I believe it, although the details are sparse:

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Beat Balzli has an intriguing story at Spiegel saying that Greece has been hiding the true nature of its deficits and its debt using clever derivatives dreamed up by Goldman Sachs. I believe it, although the details are sparse:

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.

According to Balzli, Goldman has no risk on this deal, after selling the swap to a Greek bank in 2005.

How might a deal like this work? Let’s say that Greece issues a bond for $10 billion, which it would then normally swap into euros at the prevailing interest rate, getting $10 billion worth of euros up front. In this case, it seems, the swap was tweaked so that Greece got $11 billion worth of euros up front — and, of course, has to pay just as many euros back when the bond matures. Essentially, it has borrowed $11 billion rather than $10 billion. But for the purposes of Greece’s official debt statistics, it has borrowed only $10 billion: the extra $1 billion is hidden in the swap.

This wouldn’t be the first time that Goldman came up with a clever capital-markets deal to help a European country get around the Maastricht rules: as far back as 2004, Goldman put together something called Aries Vermoegensverwaltungs for Germany, in which Germany essentially borrowed money at much higher than market rates just so that the borrowing wouldn’t show up in the official statistics. And according to Balzli, Italy has been doing something almost identical to the Greek swap operation, using a different, unnamed, bank.

It’s a bit depressing that EU member states are behaving in this silly way, refusing to come clean on their real finances. But so long as they’re providing the demand for clever capital-markets operations like these, you can be sure that the investment bankers at Goldman and many other investment banks will be lining up to show them ways of hiding reality from Eurostat in Luxembourg.


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I think you are misrepresenting the german deal. Germany is entitled to monetize its assets (i.e. soviet/russian loans) and is not paying high interest rates to hide the borrowing, but because the deal is non-recourse to Germany upon default.

Posted by alea | Report as abusive

Your third paragraph might as well read, “How does a deal like this work? By MAGIC!;” as you don’t explain anything other than by using the verb “tweak,” as if a billion Euros could be hidden in a “tweak.”

Posted by johnhhaskell | Report as abusive

While Greece may be hiding some of its overall debt, the cause for Greece’s current fiscal woes is more obvious. It should make every country reconsider hosting the Olympics.

Obviously, Greece overleveraged itself for the Athens Olympics in 2004. It is now paying the price as I am sure the debt it took on to finance the games, is now coming due. Since the Athens games were basically a Europe games, Europe better find a way to cover these debts.

Which brings me to my main point, sorry to threadjack Felix, but maybe cities should reconsider the benefit of hosting the Olympic games. Perhaps countries with poor financial footing should be automatically barred from applying to host the games. As far as I can see, there is little benefit to hosting, except national prestige. And is that prestige worth the limited one time limited tourist cash infusion, only to have to pay the costs back with interest at a later date?

There have already been several exposes on how the Beijing stadiums are unused, Athens is the same way. In a way the Olympics can create debt and real estate bubbles. Ratcheting up demand in a short span of time. By the time the bills come due the Olympics become a long overdue fiscal hangover. Its unfortunate that in order to address this imbalance, services and aid to citizens must be cut.

While Goldman may have hid the real value of some of the debt issued to Greece. I doubt it was at Goldman’s insistence. I instead believe that Greece asked for more funding then they could get from traditional means, and so Goldman did what they could to augment the debt issue. And when it comes to the Olympics, how can anyone say no? The Greek government is to blame, since I can guarantee that they were very insistent.

Posted by LucidOne | Report as abusive

The “tweak” is that they used a fictional FX rate for the swap so instead of pricing the deal off of spot rates they take a fictional right and price the swap off the forward curve.

Posted by greatneb | Report as abusive

2:32 PM EST
I think you are misrepresenting the german deal. Germany is entitled to monetize its assets (i.e. soviet/russian loans) and is not paying high interest rates to hide the borrowing, but because the deal is non-recourse to Germany upon default.”

Whether or not it’s a misrepresentation, your version is not conspiratorial, and, almost by default, if an account lacks conspiracy these days, it is *highly* suspect.

Posted by Uncle_Billy | Report as abusive

300b euros in debt/ roughly 4.5mm labor force/ about 15,000 reported income tax payers/Eur 75b in revenues and 110b in expenses…NO room for debt service ..Greece needs to run surpluses which is impossible with an annual deficit ap of 35b… HOWEVER, an old fashioned debt restructuring a-la-Argentina, even by 50% to Eur 150b could do the trick..Germany would shudder but its better than establishing a stop-gap bail-out precedent for the other PIIGS… besides any bailout would only be a temporary bandaid..

Posted by Bludde | Report as abusive

I contend that sovereign debt are often disguised Ponzi schemes.
We just bailed out the banks and put all the debt on the sovereigns who were already straining under massive debt. Then the sovereign debt (public debt) is being sold back to the banks which sometimes cover it with CDS.
Definitely “market structures helped overcome information asymmetries and sustained the development of sovereign debt”, which is being sold to banks and used by them to create liquidity. What a Ponzi scheme and market for lemons. vereign-debts-markets-for-lemons-and.htm l

Posted by M.G.inProgress | Report as abusive

The FX rate is not hidden – it is a legitimate way to refinance. Companies do it all the time. It is simply a way of paying/reciving an upfront fee. Greece’s error was, like everybody else, tobeliev the cycle was not a cycle- I.e. that it was one way (up) only – Maybe next time people will learn that there’s no such thing as a free lunch.

Posted by schermo | Report as abusive

THOUGHTFUL comments have been made by many – but two of the more ‘in depth” reports come from Marko Papic & Peter Zeihan “Germany’s Choice: The situation in Europe is dire and the report discusses the depth of the crisis the europeans face across the board and that any European Central Bank liquidity measures are only stopgap measures. Likewise, John Mauldin provides an “Outside the box” February Economic report by London based Simon Hunt suggests that whatever global economic recovery will disappoint innthat growth will slow duringthe first half of this year and a “new” global recession – part of the “ongoing depression” – will begin by 2012-3 (the bad news) and will unlikely begin a new period of sustainable growth until 2018 – at the earliest.
Greece is not a “quick fix” “micro” problem as the markets seem to be discounting it today (UP 160 points) vs past 3 weeks (down 600 points).

Posted by RomeoFoxtrot | Report as abusive


Here is my Job creation Computations:

Total USA Imports in 2006:
$ 2,211.7 billion —– Total Imports.
$ 309.4 billion less — (minus spent on Imported Crude Oil)
$ 1,902.3 billion / 30 billion=63.41 million jobs lost from Imports.

Total USA Exports in 2006:
$ 1,451.7 Billion / 30 billion=48.39 million jobs America gained from Exports

If USA Pulls out of NAFTA and WTO right now:
USA would absolutely gain a total of 63.41 million Jobs by Manufacturing all IMPORTS right here in the USA.

So, 63.41 minus 48.39 = 15.02 million NET JOBS GAIN. But, a lot of Exports must be purchased in the USA. That would mean an even more jobs.

My calculation means an ABSOLUTE 15.02 million Jobs gained if the rest of the world did not buy even one penny of USA EXPORTS.


Posted by Harry_Dingey | Report as abusive

So let me get this straight. They book a $10 Billion loan but get $11 Billion. Does anybody here think that the extra billion might have been a fee to the sharks at GS, kind of like the brokers including their fee in the contract?.

Posted by Romeisburning | Report as abusive

If Summers & Geithner were in charge here they would arrange stronger partners. Turkey buys Greece, Germany buys Iceland, France buys Italy, etc..

Posted by Sechel | Report as abusive

I’d like to second alea’s point about Aries. It was a securitisation of money owed to Germany by Russia. From the government’s perspective, it basically brought forward the payments they would otherwise receive over time. By all means criticise it as a short term budget patch, but it wasn’t about hiding borrowing.

Posted by GingerYellow | Report as abusive

Yes but something is missing here…Who is the Swap counter party ?. If it is Goldman then they have exposed themselves to additional risk because they would have provided an extra 1 Billion Euro without the US equivalent collateral.

If Greece fails goldman would have to write off 1 billion ….If Goldman is just the intermediary, then their clients are simply idiots because they have accepted huge risks without the payoff.

Posted by mallani | Report as abusive

Goldman Sachs is a disgrace and an embarrassment to the United States.
I wish to apologize on behalf of Goldman for all the harm they have caused to the world, because Goldman will never apologize. They have apparently very little institutional integrity and follow only the letter of the law. The spirit of the law means nothing to them. How is hiding of a national debt anything but a fraud against the public?

Blankfein and his posse must exit immediately. He built his career on short-term trading, and he sees short term profit as the way, the truth and the light. Goldman was not always that way. There was a time when they had a long-term mindset, a time when they looking to do transactions that were for the long term benefit of everyone involved.

Posted by DanHess | Report as abusive

Goldman would have to write down the $1 Billion? GS took the fee and then insured any risidual exposure through AIG or some other hapless institution (probably betting against the deal that they themselves paid to get rated AAA.)

The Fed comes along and gives the money to AIG who acts as a pass-through to GS. What’s better is that AIG takes the public hit while a revolving door of GS executives get to run the Fed/Treasury that keeps paying out to GS through third parties. Meanwhile back at the ranch, the clown in the Whitehouse attack the rest of Wall Street with elementary school play-yard name calling and the J-school morons report it as BHO getting tough even as he pockets money from GS for his re-election.

Posted by Romeisburning | Report as abusive

Alea, GingerYellow, all borrowing involves bringing forward future payments. Normally it’s general tax revenues, in this case it was specific Paris Club revenues. But it’s still borrowing, and there’s still an interest rate attached, and Germany ended up paying much more interest on Aries than it did on its general obligations, and the reason that made any sense at all was because this kind of borrowing didn’t count towards the Maastricht limits.

Felix, you’re completely missing Alea’s point. What happened there was that Germany owned Russian debt, and then it effectively sold the Russian debt by securitizing it. Of course the Russian debt had a much higher yield than German debt, it’s Russia, not Germany! Those notes pay much higher interest rates than German debt yes, but if Russia defaults on its payments due to the German government, the noteholders lose, not Germany.

Posted by niveditas | Report as abusive

Indeed. Germany didn’t pay more interest because it didn’t pay any interest. Now, as I said, you can perfectly well argue that in the long run they’d have been better off just holding on to the debt and plugging the deficit with direct borrowing, but that’s a different question. And it was hardly done to trick Eurostat – the agency had already revised its rules on accounting for government securitisations, and Aries was structured to comply with the new rules in coordination with Eurostat.

Posted by GingerYellow | Report as abusive

Also, I should add that in theory, the deal also removed the risk to Germany of default by Russia on the Paris Club debt. Given the wobble Russia had during when the credit crisis hit emerging markets, that could have been a very good thing indeed.

Posted by GingerYellow | Report as abusive

GingerYellow, my point is that they couldn‘t just hold on to the debt and plug the deficit with direct borrowing, because they were already up against their Maastricht borrowing limits. And yet they found a way to borrow future revenues all the same — which, yes, it was Eurostat-kosher. And designed by the clever liability-management people at Goldman Sachs. Who got a very large fee.

And my point is that you can only call it Germany’s borrowing in a very, very loose sense. Unlike a lot of the early government securitisations in Europe, it was properly non-recourse. Unlike normal, Maastricht eligible borrowing, Germany would never have to pay the money it raised back in any circumstances. The bonds were rated double-B, for heaven’s sake. That doesn’t exactly suggest even the smallest hint of implicit support. If you don’t have to pay the money back, why should it come under your borrowing limits? Also, the exclusive Goldman focus, while fun, is a tad unfair – Deutsche Bank were just as involved.

Posted by GingerYellow | Report as abusive

So, basically what Felix is saying is that Germany should rather have put on a nice levered emerging markets carry trade, borrowing money under its own name to hang on to juicy Russian debt. This is getting beyond stupid..

Posted by niveditas | Report as abusive