For the second time in two years US investment bank Goldman Sachs has an image problem. Comments last week, by former executive director Greg Smith on the bank’s “toxic culture”, wiped more than $2 billion (R15bn) off its value the following day.
However, early in 2010, Goldman Sachs stood accused of worse, when the bank was revealed as one of the architects of the emerging Greek disaster. Not only was it blamed for helping conceal the true state of the country’s finances, but it was accused of eventually betting against its sovereign debt, along with other major banks.
Even before Goldman Sachs entered the picture in 2002, Greece was already cooking the books. To qualify for admission to the EU in 2001, the country had to achieve a budget deficit of not more than 3 percent of gross domestic product (GDP) in line with the Maastricht requirements.
According to Spiegel.online, the requirement was met “with the help of blatant balance sheet cosmetics”.
“One time, gigantic military expenditures were left out, and another time billions in hospital debt.”
However the book-cooking didn’t stop there. In February 2010 Spiegel said that Goldman Sachs had devised a derivatives deal that legally circumvented the Maastricht rule. In other words, it masked the extent of the government deficit.
Quoting “an insider”, Spiegel said: “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future.” Among those who accepted were Greece’s debt managers, who “agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002”, said Spiegel.
“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.”
This type of transaction is not uncommon but, according to Spiegel, the US bankers “devised a special kind of swap with fictional exchange rates”.
“This enabled Greece to receive a far higher sum than the actual euro market value of $10bn or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1bn for the Greeks. This credit disguised as a swap didn’t show up in the Greek debt statistics.”
The financial juggling also obscured the extent of the budget deficit.
As a result, in 2002 the Greek deficit was calculated at only 1.2 percent of GDP.
“After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent,” Spiegel said.
However, the deception couldn’t last forever and, by 2010, the truth had started to emerge. The BBC announced that an EU report condemned “severe irregularities in Greek accounting procedures”.
In February that year, the country’s 2009 deficit was revised up from 3.7 percent of GDP to 12.7 percent.
And, in April 2010 when Greek sovereign debt was downgraded three notches to junk status, the figure was revised further to 13.6 percent. Greece has subsequently made savage cuts in spending. But its GDP has simultaneously contracted, making it increasingly difficult to bring the deficit below 3 percent. The government is targeting a 6.7 deficit for the current year.
The unfolding tragedy has crushed Greece, threatened the euro zone’s banking system and its very existence. And it has damaged global growth. If history could be rewound, would Goldman Sachs do things differently? - Ethel Hazelhurst