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01 December 2023

It's all Greek to Goldman Sachs

By James Saft

Goldman Sachs has a lot to be thankful for – huge bonuses, massive taxpayer subsidies, unrivalled political influence – but in Greece they have finally found nirvana: a highly profitable business partner who can also credibly serve as the villain in the piece.

Goldman is widely reported to have arranged a swap transaction for Greece early in the last decade structured in such a way as to provide the country with $1 billion (Dh3.67bn) upfront in exchange for higher payments much later.

That later bit is key – it helped to mask over-borrowing by Greece from the eurozone's budget watchdogs in Brussels, not to mention from Greek taxpayers and the buyers of Greek debt, all of whom have a right to fully understand the risks of a country incurring liabilities which perhaps it may struggle to repay.

Greece's deficit has grown to such a size as compared to its ability to generate revenue that it will now require a rescue package from its eurozone partners, or if not may face the dire possibility of a default or exit from the currency union. Other banks, mind you, are likely to have facilitated similar deals, and if they didn't I'm betting it wasn't for lack of trying.

The New York Times has reported that Goldman arranged other deals for Greece, the common denominator of which seems to have been getting money upfront.

Greece paid Goldman about $300 million in fees for a 2001 deal that helped it borrow "billions", according to the Times, a set of figures that implies this deal was either enormously large, fantastically complex or that Greece was, shall we say, price insensitive.

Shouldering blame

Goldman has been pilloried, often rightly, for its role in the crisis, and its presence at this particular road traffic accident is an invitation to construct a story line in which once again evil bankers loot and pillage their way through society.

That would be wrong. Greece has to shoulder its own blame. It borrowed too much and did some of it in costly ways whose principal benefit seems to have been obscurity. It is one thing for a badly educated Californian to blame a bank for lending her 10 times her income to buy a house, it is quite another when we are talking about a country, not to mention one within the euro.

"We're trying to change the course of the Titanic," Greek Finance Minister George Papaconstantinou said ahead of meeting with eurozone finance ministers in Brussels on Monday. "People think we are in a terrible mess. And we are."

Derivatives contracts

Asked about a European Commission claim that Greece had not told the EU about the deals arranged by Goldman Sachs, Papaconstantinou said: "The kind of derivatives contracts reported by some newspapers were legal at that time. Greece was not the only country to use them."

Get that – "Titanic", "mess", "legal at the time". You really can't make this kind of stuff up.

I'm not saying that someone who structured one of these deals does not deserve to take a loss, or that the derivative market does not need better disclosure. All of this is true.

Greece, though, is a grown-up nation and the way in which it mismanaged its finances is its own responsibility. The primary problem in this particular slice of the ongoing financial scandal is the dysfunctional way in which the eurozone works.

When it comes to sovereign nations, you cannot expect banks to impose fiscal discipline, much less to make nations deal honestly and openly with one another. Nor can you expect a bank to serve as a policeman of a nation on behalf of its taxpayers.

It would be enormously satisfying on one level if banks, which structured or invested in these deals, took losses as a result of a Greek default. Those who did the structuring are likely to have sold off their exposure to others anyway, and a Greek default, though perhaps deserved, is not very likely. The consequences for Greece, for the eurozone and for investors would be too dire.

As for investors in Greek debt, again the Greek government has the primary responsibility for disclosure. Of course, if Goldman or another bank had material information about the state of Greece's finances, it should be obliged to disclose this to buyers of that exposure.

The logic of the eurozone, which has no exit mechanism, is such that many investors quite conceivably would have bought Greek exposure anyway on the expectation of the bailout they are about to benefit from. There is a hierarchy of responsibilities, and countries in the end have to come higher than banks.

James Saft is a Reuters columnist. The opinions expressed are his own


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