What is it about politicians that makes them think we’re all stupid? Is it because we are? I think not, though taken as that pliable mass, “the general public”, we sometimes act as if we were. But the “public” are, hopefully, becoming a lot less lethargic and a lot more interested in holding governments to account.
We see it in green issues, where the threat of a massive increase in cataclysmic weather events energizes public concern and keeps politicians pushing forward to reduce CO2 emissions. Public concern is also plainly visible in the anger expressed towards the banking sector, who are more or less universally held to blame for the financial crash. However, the bankers did not pump up the credit bubble all on their own. Governments and central banks did their bit by holding interest rates artificially low for far too long.
However, this is where it gets difficult for the public to stay focused and to keep holding politicians to account. Everyone can see and get energized about bankers who reward themselves hugely for taking blindingly stupid decisions. But when the talk moves on to central banks manipulating rates and the yield curve, people’s eyes glaze over and they switch to the sports channel. Who these days, for example, cares that Greece swindled its way in to the euro? That story broke in 2004, when the Greek government admitted that it had concealed the true state of its public sector debt.
And, of course, if Greece hadn’t sneaked in, then the Greek government would not have been able to borrow huge amounts of money at the same rate of interest as the Germans, with their vastly more powerful, and considerably healthier economy. Greek politicians would not have been able to bribe their way into office by rolling out massively unaffordable benefits packages for large sections of the Greek public, and the country would not be in the extremely painful mess it is in today.
And even if it had got itself into a similar pickle without entering the euro (which is doubtful since the cost of the debt would have slowed the politicians at a much earlier stage), as a sovereign state with its own currency, Greece would not have been the danger to the euro zone that it now is. Moreover, in such a situation Greece would be able to simply default or inflate away its debts, as it had done a number of times before its ill-judged entry into the euro.
Then, six years later, in February 2010, it emerged that Goldman Sachs had advised Greece on a neat little trick, back in 2002, which once again concealed the true state of its public debt. The story generated a spate of headlines, particularly when the German Chancellor Angela Merkel said in a speech that it would be a scandal if the same banks that brought the world to the edge of financial ruin had helped EU countries to conceal the true state of their finances, and thus to avoid the limitations imposed by the Stability and Growth Pact. However, the headlines quickly faded. The details of the financial chicanery were just too esoteric to retain public attention. (Which goes to show the truth of the old adage that we get the governments we deserve...and possibly the bankers too!)
Bloomberg provides a very readable analysis of the “hide the debt” currency swap that Goldman carried out on behalf of the Greek government, noting too, that the bank then went on to manage the sale of $15 billion worth of Greek government bonds without informing all of the suckers (sorry, investors) of the true position of Greek indebtedness. According to Bloomberg,
“... No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg (Comment by TH: this does not mean that investors were told in the other four transactions – it just means that Bloomberg could not get hold of the prospectuses to verify whether or not they were told)... European Union regulators said they knew nothing about until recent days. Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager. “The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
The transaction with Goldman took place in 2002 and according to media reporting in February 2010, involved a currency swap of about $10 billion of debt issued by Greece in dollars and yen with the Greek government declaring an unrealistically low rate of interest on the forward swap, which meant Goldman paying (lending) $1 billion to Greece in an off-the-books deal. In reality the transaction was neutral to Goldman and increased Greek debt.
In the end both investors and the EU regulators were equally bamboozled. Now all the chickens are coming home to roost and the road ahead for Greece is not going to be a happy one...
Further reading on the euro crisis, government debt and regulation:
- In Praise of Decisive Action, by Justin Fox
- No Quick Fix for the Eurozone, by Joseph Trevisani
- Deleveraging, Deflation, and Rebalancing in the Global Economy, by Paul Brain and Laurie Carroll
Tags: bonds , currency swaps , euro zone , Goldman Sachs , Greece , Greek debt