Greece Said to Have Arranged Swaps With 15 Banks (Update1)

By Elisa Martinuzzi
Feb. 22 (Bloomberg) -- Greece arranged swap agreements with about 15 securities firms, including some payments from banks that may have helped hide the country’s true deficit, according to a person with direct knowledge of the contracts.
The swaps that allowed Greece to receive payments upfront date from before 2008, when European Union regulators changed rules to limit the use of the contracts, said the person, who spoke on condition of anonymity. Goldman Sachs Group Inc., which provided Greece with about $1 billion in funding in a 2002 swap, may have arranged the biggest of the contracts, the person said.
The EU accounting watchdog ordered Greece last week to provide information on its swaps as it probes whether the country used derivatives to hide the extent of its budget deficit, and if other countries used them. Swaps are typically designed to help countries to manage their debt rather than generate cash, according to Cesare Conti, a business professor at Italy’s Bocconi University.
"Upfront payments don’t necessarily lead to hidden debt,"
Conti said in a telephone interview from Milan. "If swaps are used to manage obligations, rather than increase them, they’re beneficial."
Concern about Greece’s ability to finance its deficit and debt have roiled financial markets since the government revealed the country had a budget shortfall of 12.7 percent last year, more than four times limit allowed for those countries using the euro, and the highest ratio in the 27-nation European Union.

Primary Dealers

The spread, the premium investors demand to hold Greek 10- year notes instead of German bunds, Europe’s benchmark government securities, reached 396 basis points last month, the most since the year before the euro’s debut in 1999. That compared with an average of 57 basis points in the past decade.
A basis point is 0.01 percentage point.
The 15 banks that have swap agreements with Greece are among the country’s so-called primary dealers, said the person.
Greece had 21 dealers last year, including Citigroup Inc., Barclays Plc and Morgan Stanley, according to the country’s central bank.
Spokesmen for Goldman Sachs in New York and Morgan Stanley in London declined to comment. Officials at Barclays and Citigroup in London didn’t have an immediate comment.
"Governments seek a large number of swap counterparties to reduce the exposure to any one bank," Conti said.
An official for the Greek government didn’t have an immediate comment. The swaps used by Greece were "at the time legal," Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.

Government Inquiry

A Greek government inquiry uncovered this month a series of swaps agreements that have allowed the government to defer interest payments to a later date, causing "long-term damage"
to the country. Greece’s central government debt totaled 298.5 billion euros ($406.8 billion) at the end of 2009, according to the Finance Ministry.
German Chancellor Angela Merkel said on Feb. 18 it would be a "scandal" if banks helped Greece massage its budget. French Finance Minister Christine Lagarde, speaking on France Inter radio the same day, said that even if the swaps were legal, they probably contributed to instability.
Greek government bonds tumbled last week amid concern the country may not deliver measures to trim its budget deficit, and as the EU promised assistance without specifying what form it would take. The yield on the benchmark 10-year Greek government bonds rose 32 basis points to 6.46 percent last week.

Via FT Alphaville:


Goodbye to the risk-free rate
Posted by Izabella Kaminska on Feb 22 16:48. 4 comments.

Morgan Stanley’s European Strategy team, headed by Graham Secker, put out an interesting note on the rising cost of capital on Monday.
And it’s not a cheery read if you happen to be a sovereign issuer, given the shift of private-sector debt into the public sector.

According to the MOST analysts, the most important macro theme for the next few years will likely be the ease (or difficulty) at which sovereigns pay down the deficits they’ve incurred during the course of the financial crisis.

Greece, unfortunately in that case, may only be a taster of what’s to come. As the analysts note:

Greece may well prove to be a taste of things to come, in our view. However, the speed and extent of any contagion are hard to predict . We think that the 50-year+ low in government bond yields (real and nominal) seen in this cycle will not been seen again for many years to come. In effect, the size of the public debt burden means that the ‘risk-free rate’ has become more risky.
And here’s a rather enlightening chart produced by the bank to illustrate which countries are likely to come under more pressure than others in this regard:


Collectively in Europe, Morgan Stanley notes EU banks have something in the region of $1,000bn in debt to rollover in the next two years. Due to the contagion factor from Greece, this will have to take place at a much higher cost of capital.

In the irony of the day, however, the analysts forecast it will be the banks that have substantial scope to buy much of that government paper.

Not that they won’t be inclined to charge for it (emphasis FT Alphaville’s):

Many investors look to the banks as a natural source of demand for sovereign debt going forward, but we think this is likely to come at a cost in terms of less credit availability in the wider economy and lower ROEs for the banks themselves.

A fact that Morgan Stanley’s analysts say — irrespective of where rates go — will lead to a higher cost of capital for all.

To recap: That would be banks over-charging sovereigns for the debt they incurred by rescuing the banks.