The bankers destroyed greece...?

http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=1&exprod=myyahoo



Just click on the link its easier to read.

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Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis


By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ

Published: February 13, 2010








Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.
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Chris Ratcliffe/Bloomberg News



Gary D. Cohn, president of Goldman Sachs, went to Athens to pitch
complex products to defer debt. Such deals let Greece continue deficit
spending, like a consumer with a second mortgage.





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As
worries over Greece rattle world markets, records and interviews show
that with Wall Street’s help, the nation engaged in a decade-long
effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels. Even
as the crisis was nearing the flashpoint, banks were searching for ways
to help Greece forestall the day of reckoning. In early November —
three months before Athens became the epicenter of global financial
anxiety — a team from Goldman Sachs arrived in the ancient city with a
very modern proposition for a government struggling to pay its bills,
according to two people who were briefed on the meeting.The
bankers, led by Goldman’s president, Gary D. Cohn, held out a financing
instrument that would have pushed debt from Greece’s health care system
far into the future, much as when strapped homeowners take out second
mortgages to pay off their credit cards. It had worked before.
In 2001, just after Greece was admitted to Europe’s monetary union,
Goldman helped the government quietly borrow billions, people familiar
with the transaction said. That deal, hidden from public view because
it was treated as a currency trade rather than a loan, helped Athens to
meet Europe’s deficit rules while continuing to spend beyond its means.Athens
did not pursue the latest Goldman proposal, but with Greece groaning
under the weight of its debts and with its richer neighbors vowing to
come to its aid, the deals over the last decade are raising questions
about Wall Street’s role in the world’s latest financial drama.As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.In
dozens of deals across the Continent, banks provided cash upfront in
return for government payments in the future, with those liabilities
then left off the books. Greece, for example, traded away the rights to
airport fees and lottery proceeds in years to come. Critics say
that such deals, because they are not recorded as loans, mislead
investors and regulators about the depth of a country’s liabilities.Some
of the Greek deals were named after figures in Greek mythology. One of
them, for instance, was called Aeolos, after the god of the winds. The
crisis in Greece poses the most significant challenge yet to Europe’s
common currency, the euro, and the Continent’s goal of economic unity.
The country is, in the argot of banking, too big to be allowed to fail.
Greece owes the world $300 billion, and major banks are on the hook for
much of that debt. A default would reverberate around the globe. A
spokeswoman for the Greek finance ministry said the government had met
with many banks in recent months and had not committed to any bank’s
offers. All debt financings “are conducted in an effort of
transparency,” she said. Goldman and JPMorgan declined to comment.While
Wall Street’s handiwork in Europe has received little attention on this
side of the Atlantic, it has been sharply criticized in Greece and in
magazines like Der Spiegel in Germany. “Politicians want to
pass the ball forward, and if a banker can show them a way to pass a
problem to the future, they will fall for it,” said Gikas A.
Hardouvelis, an economist and former government official who helped
write a recent report on Greece’s accounting policies.Wall
Street did not create Europe’s debt problem. But bankers enabled Greece
and others to borrow beyond their means, in deals that were perfectly
legal. Few rules govern how nations can borrow the money they need for
expenses like the military and health care. The market for sovereign
debt — the Wall Street term for loans to governments — is as unfettered
as it is vast. “If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.Banks
eagerly exploited what was, for them, a highly lucrative symbiosis with
free-spending governments. While Greece did not take advantage of
Goldman’s proposal in November 2009, it had paid the bank about $300
million in fees for arranging the 2001 transaction, according to
several bankers familiar with the deal.

(Page 2 of 2)Such
derivatives, which are not openly documented or disclosed, add to the
uncertainty over how deep the troubles go in Greece and which other
governments might have used similar off-balance sheet accounting.
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The
tide of fear is now washing over other economically troubled countries
on the periphery of Europe, making it more expensive for Italy, Spain
and Portugal to borrow. For all the benefits of uniting Europe
with one currency, the birth of the euro came with an original sin:
countries like Italy and Greece entered the monetary union with bigger
deficits than the ones permitted under the treaty that created the
currency. Rather than raise taxes or reduce spending, however, these
governments artificially reduced their deficits with derivatives.Derivatives
do not have to be sinister. The 2001 transaction involved a type of
derivative known as a swap. One such instrument, called an
interest-rate swap, can help companies and countries cope with swings
in their borrowing costs by exchanging fixed-rate payments for
floating-rate ones, or vice versa. Another kind, a currency swap, can
minimize the impact of volatile foreign exchange rates. But
with the help of JPMorgan, Italy was able to do more than that. Despite
persistently high deficits, a 1996 derivative helped bring Italy’s
budget into line by swapping currency with JPMorgan at a favorable
exchange rate, effectively putting more money in the government’s
hands. In return, Italy committed to future payments that were not
booked as liabilities.“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”In
Greece, the financial wizardry went even further. In what amounted to a
garage sale on a national scale, Greek officials essentially mortgaged
the country’s airports and highways to raise much-needed money. Aeolos,
a legal entity created in 2001, helped Greece reduce the debt on its
balance sheet that year. As part of the deal, Greece got cash upfront
in return for pledging future landing fees at the country’s airports. A
similar deal in 2000 called Ariadne devoured the revenue that the
government collected from its national lottery. Greece, however,
classified those transactions as sales, not loans, despite doubts by
many critics.These kinds of deals have been controversial within
government circles for years. As far back as 2000, European finance
ministers fiercely debated whether derivative deals used for creative
accounting should be disclosed. The answer was no. But in 2002,
accounting disclosure was required for many entities like Aeolos and
Ariadne that did not appear on nations’ balance sheets, prompting
governments to restate such deals as loans rather than sales.Still, as recently as 2008, Eurostat, the European Union’s
statistics agency, reported that “in a number of instances, the
observed securitization operations seem to have been purportedly
designed to achieve a given accounting result, irrespective of the
economic merit of the operation.”While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous. George
Alogoskoufis, who became Greece’s finance minister in a political party
shift after the Goldman deal, criticized the transaction in the
Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the
government with big payments to Goldman until 2019.Mr.
Alogoskoufis, who stepped down a year ago, said in an e-mail message
last week that Goldman later agreed to reconfigure the deal “to restore
its good will with the republic.” He said the new design was better for
Greece than the old one.In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.In
2008, Goldman helped the bank put the swap into a legal entity called
Titlos. But the bank retained the bonds that Titlos issued, according
to Dealogic, a financial research firm, for use as collateral to borrow
even more from the European Central Bank.Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations. Referring
to the Titlos swap with the government of Greece, he said: “This swap
is always going to be unprofitable for the Greek government.”