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News : EU Economy Last Updated: Feb 23, 2010 - 3:27:33 PM


Goldman Sachs banker says Greek debt hiding schemes "could have and should have” been more transparent
By Finfacts Team
Feb 23, 2010 - 2:50:05 AM

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E. Gerald Corrigan, PhD., managing director, Goldman Sachs
A senior Goldman Sachs banker said in London on Monday that Greek debt hiding schemes the US investment bank had facilitated, "could have and should have” been more transparent. The European Commission is investigating currency swap transactions which enabled Greece massage national debt figures in 2001, just after being admitted to the European Monetary Union.

Gerald Corrigan, a Goldman managing director told a UK parliamentary committee that it had helped to cut Greece's official debt ratios by modest amounts.

The Euro Stability and Growth Pact has a ceiling on annual budget deficits of 3 per cent of GDP (gross domestic product) and a total national debt limit of no more than 60 per cent.

"Governments go to some lengths to try to manage their budgetary deficit and public debt positions," Corrigan told the Treasury Select Committee. "There is nothing new about this, unfortunately, the practices have been around for decades, if not centuries."

In a statement, Goldman said: “In December 2000 and in June 2001, Greece entered into new cross-currency swaps and restructured its cross-currency swap portfolio with Goldman Sachs at a historical implied foreign exchange rate.”

Goldman added:“These transactions reduced Greece’s foreign-denominated debt in euro terms by €2.367bn and, in turn, decreased Greece’s debt as a percentage of [gross domestic product] by just 1.6 per cent, from 105.3 per cent to 103.7 per cent.”

The budget deficit was 4.5 per cent of GDP in 2001 because of the swaps, instead of 4.6 per cent.

Corrigan said Goldman officials discussed the swaps with Eurostat, the EU statistics agency, at the time they were made, but the agency tightened the rules in subsequent years. That fact "suggests they were more liberal than they should have been in 2001," he said. "Goldman was by no means the only bank involved with these types of instruments. These transactions were consistent with standards of behaviour and measurements used by the European community.... It is clear with hindsight that the standards of transparency could have been and probably should have been higher."

"These (debt swaps) were (viewed as) "legal", they were securitizations…The securitization issue was okayed amongst the Europeans. It may appear exposed to something strange, and perhaps it was," Gikas Hardouvelis, former director of economic office for the Greek Prime Minister during 2000-2004 administration, said on Thursday, Feb 18. "It was not something that was done in Greece alone...They tried it in Spain, they tried it in Italy."

 

Bloomberg reported last week that that Goldman 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.

Corrigan, who until 1994, was president of the New York Federal Reserve, also told the Committee that it was a "wrenching human experience" to disagree with the former chairman of the Federal Reserve Paul Volcker, now an adviser to President Barack Obama, who has proposed new rules to curb proprietary trading and hedge fund activities by major banks.

 

Wrenching it may be to disagree with a former boss but rewarding nonetheless.

Another regulator from the Clinton era, Arthur Levitt, a former chairman of the Securities and Exchange Commission (SEC), is not directly on Goldman's payroll but is a paid adviser.

Greece missed a Monday deadline to provide the European Commission with details on the swaps because of a four-day strike at the finance ministry.

Also on Monday, the International Monetary Fund (IMF) said it sent a staff member to Athens to assist a European Union team working to help Greece deal with its debt crisis.

"At the request of the EU Commission and at the invitation of the Greek authorities, a fund staff member is in Athens this week to provide assistance to an EU Commission team," an IMF official said.

Greece has committed to reduce cut its budget deficit from an estimated 12.7 per cent in 2009, by 4 per cent in 2010 and to the EU limit of 3.0 percent by 2012.

Insight on what the Volcker Rule could mean for Goldman Sachs, with Francesco Guerrera, Financial Times U.S. business editor:

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