EUROPE’S DEBT NIGHTMARE
By
Spyros Pavlou, PhD
It’s getting worse as Europe’s economies face unsustainable high costs to finance their debts. The debt numbers are staggering ¹: Italy ($ 1.4 trillion), Spain ($ 1.1 trillion), Ireland ($ 867 billion), Portugal ($ 286 billion), Greece ($ 236 billion). Portugal and Greece are already forced to seek bailouts. A November 29, 2011, Associated Press Report estimates that the Greek National Bank will lose $ 1.8 billion from a voluntary bond exchange with the country’s crisis-hit government by the end of this year.
If some member euro-states cannot meet their refinancing needs, i.e., cannot cover their borrowing costs, the euro-zone could breakdown, the pillar of European stability would then disintegrate, and its currency would enter into an unavoidable death spiral, which would result in a world economic catastrophe…
But hold on, why is the euro in such a dire state to start with? Well, it began with the cardinal sin in uniting Europe with one currency. Countries like Italy and Greece entered the monetary union with bigger deficits than permitted by the treaty that created the currency. Let’s take Greece for example. No one dares to give a straight answer as to, how and why the country’s debt is out of control? Who has the “balls” to admit what the real reason is for the dismal economic state that Greece is in? Certainly, not the Greek Government through its Treasury Department or Goldman Sachs who helped the Greek Government to mask the true extent of its deficit with the help of the so-called cross-currency swaps (CCS) ².
In a swap, government debt issued in dollars or yen, can be swapped for euro dept over a certain period of time, and exchanged back into the original currencies at a later date. Such transactions are part of normal government refinancing. In actuality, Europe’s governments obtain funds from investors around the world by issuing bonds in various foreign denominations, e.g., yen, dollars, Swiss francs. Years later the bonds are repaid in the original currencies.
However, to control runaway debt there are strict rules that must be followed. These are the Maastricht ³ rules which postulate that for any euro-country member, the total budget deficit limit of 3% GDP must not be exceeded, and that the total government debt must not exceed 60%. The international banking community knows that well, but it is also tacitly recognizes that the Maastricht rules can be circumvented legally through swaps.
For Greece, the Greek Treasury Department together with the savvy, but tricky bankers of the investment bank Goldman Sachs devised a swap with fictional exchange rates so that Greece would receive a far higher sum than what the actual euro market could afford. Therefore, the Greek Treasury-Goldman Sachs combo, through creative accounting (or “financial engineering”, as it is otherwise known in the economic lingo), ignored the Maastricht rules and artificially reduced the value of the Greek deficit.
In 2005, Goldman Sachs sold the interest rate swap to the National Bank of Greece (NBG), the country’s largest bank, and charged NBG a hefty commission for the deal ²‚⁴.
Although it is widely believed that Greek finances have always been in a mess, it was Goldman Sachs that failed to explain the intricacies of this financing web to the public. Between 2005 and 2009, the deficit each year had been far greater than the 3% Maastricht limit. In 2009 it exploded to over 12%.
Let’s get to the quick. Could greed have crept into the picture? We should not forget Lord Acton’s famous quotation “Absolute Power Corrupts Absolutely”…
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¹ B. Marsh, Europe’s Web of Debt, The New York Times, 5, 2010.
² B. Balzli, How Goldman Sachs Helped Greece to Mask its True Debt, Der Spiegel, 2, 2010.
³ M. Buti and G. Giudice , European Commission, Maastricht’s Fiscal Rules at Ten: An Assessment, 3, 2002.
⁴ M. Mehra, Banks, Bonuses, Goldman Sachs, and Swaps – Institute of Directors. CDS – an insurance contract, http://.iodoline.com/Articles/Banks.doc
