Earlier we posted derivatives at the heart of the Greek crisis. Now the story widens and the saga continues.
First, Bloomberg reports Goldman Sachs, Greece Didn’t Disclose Swap. In other words Goldman Sachs helped Greece hide it's debt, mortgaging it's future in the process and also didn't tell anyone they had done so.
Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.
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. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which 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.
Yves Smith over at Naked Capitalism asks when is a Fraud not a Fraud? I guess the answer is when Goldman Sachs says it's not.
Now Italy, it comes out, also used Goldman Sachs currency swaps to hide their debt in order to gain entry into the Euro Zone.
Italy used derivatives in the 1990s to lower its deficit to qualify for the membership of the euro. The swaps allowed it to temporarily cut the amount of interest paid and to trim the 1997 deficit. The European Commission reviewed the operation and approved the transaction.
A currency swap is a foreign-exchange agreement between two parties to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency. (wikipedia).
I think we should title the use of derivatives with sovereign national debt, Enron Gone Global.