Friday, April 30, 2010

Economy: Greek economy shot dead in American money-commodity roulette

By Badriya Khan*
Republished courtesy of
IDN-InDepth NewsAnalysis

BARCELONA (IDN) – Greek economy seems to have been shot dead in the American money-commodity roulette. No wonder – in addition to reported persistent mismanagement and widespread corruption, its former neo-liberal government bet public funds mostly in U.S. -based private financial speculative markets.

Private banks and financial corporations, such as Goldman Sachs -- which the U.S. administration has charged this month with alleged fraudulent transactions -- was reported to have helped Athens to mask the true extent of its deficit.

The result of such governmental failure and gambling has been the declaration of Greek state bankruptcy.

In fact, Greek debts are expected to hit 290 billion euros during 2010. According to its current government, the budget deficit reached 12.7% of Gross Domestic Product (GDP) in 2009, that’s more than four folds the 3 per cent limit marked by the European Union (EU) to ensure stability.

Greece is also expected to become the EU's most indebted country this year, with debt rising to 124.9% of GDP, according to the European Union.


The pressing questions now are: Who will do what for Greece? And what will happen to other EU countries – Ireland, Portugal and maybe also Spain, that seem to be agonizing?

On the first question, Athens current socialist government, chaired by George Papandreou, has formally declared that his country is simply unable to pay the huge debts that its predecessors accumulated and desperately needs help

In a rush attempt to face this financial debacle, Papandreou adopted on early March a drastic austerity plan of nearly 5 billion euros, based on raising taxes, cutting civil servants wages and, surprisingly, also targeting high-income population segment and the Greek Orthodox Church.


Not enough, though, and no way that Greece would gain the badly needed trust neither from its European partners nor from the international financial markets.

In fact, the financial markets have raised their interest rates on Greek debts to up to 9 per cent. On April 27, 2010, the U.S. -based rating agency Standard and Poor's cut Greece's credit rating to “junk” status.

This means, basically, higher debt interest rates in the private financial markets, and less readiness of certain financial sectors, such as pension funds and insurance companies, in buying the country's debt.

Consequently, stock and equities market have immediately collapsed. The Paris CAC-40 Index lost 39 billion euros, equivalent to the size of Luxembourg's entire economy.

And the euro currency fell to its lowest level against the dollar for almost a year.


As if it were a poor, failed Third World state, Greece -- one of the oldest EU members having joined it when it was still European Community -- had to ask the International Monetary Fund (IMF) for help.

But such a “humiliating” request was apparently a must as the EU has conditioned its eventual help to the prospect that Greece could not find the needed money in financial institutions.

For now, Athens needs urgently 12 billion euros to meet bond payments that are due on May 19.

In all, Greece had hoped for a total of 52 billions to face its deep crisis. It seems, however, that the IMF would be ready to provide for 10-15 billion in the form of credits, of course, while EU countries will have to come out with 30 billion euro, also as credits.

This would make 45 millions, some 7 billion short of what Greece would have wished to receive. The difference is superior to the total savings in public expenditure that Athens expects from its drastic austerity programme.

In either case, Athens would benefit from lower interest rates than those now imposed by the international financial markets – that is between 3 and 5 per cent.

All this gave place to 'inspection' visits by EU and IMF officials, video-conferences, rush missions and intensive consultations, all needed before concerned parties decide to take any decision to save Greece.


Now the Greeks seem to be sort of a spider hanging from a thread. Its partners in the so-called 'eurozone' that comprises 15 EU members using the single currency have been forced to promise help. But they are indeed unwilling to do so.

And they would have at least two strong reasons. On the one hand, they still have to pay the high price of saving their own banks and corporations from sinking deep into the world financial crisis they themselves helped create.

On the other hand, the credibility of Greece was also shot to death after its former government lied on its European partners, and its own people, about the real magnitude of its giant debts.

Two of the biggest European economies – Germany and France – who are expected to contribute with the largest portion of the much discussed bail-out plan to save Greece (Berlin is called upon to deliver 11,2 billions out of the total of 30 billions needed from Europe), are rather reluctant to do so.


Meanwhile, none of the drastic austerity measures adopted by the current government or the much talked about bailout promises seems to give room to any kind of optimism.

The very fact that U.S. -moved international financial markets – those who have generated the global crisis – have withdrew their confidence in Athens, and the EU has deep doubts that it will be able to honour its new debts, are all elements that only lead to generalized pessimism.

Germany is having internal political frictions and its public opinion shows strong opposition to lend Greece.

Therefore, Chancellor Angela Merkel has opted for freezing any decision to help Athens until May 10 in the course of an EU summit of heads if state, that's after the May 9 decisive regional elections in the country's most populous state – North Rhine-Westphalia, in which the Chancellor's party may risk defeat.

With 18 million inhabitants – that's some 7 millions more than the entire population of Greece, North Rhine-Westphalia contributes about 22 per cent to Germany's Gross Domestic Product and comprises a land area of 34,083 km². This is just to give an idea of the relevance of its vote.

Also first-row figures in the German coalition government added to uncertainty. "We are not ready to write a blank cheque," German Foreign minister Guido Westerwelle said on April 25. "It is not at all agreed that Greece will actually receive aid from Europe. There will only be aid if there is no other way of stabilizing our common currency."


The other point is that the global financial crisis generated in and by the U.S private markets has not only led to sink a EU member state – Greece in deep mud; its is also threatening other EU countries – Ireland, Portugal and maybe also Spain.

In fact, on April 27, private U.S. -based rating companies have also downgraded Portugal's credit ratings, while interest rates on Portuguese debts have reached 5,35 per cent. And only one day after, Standard and Poor's downgraded also Spain's rating.

IMF sources have speculated that, in addition to Portugal, Ireland and Spain may be the next EU countries to knock its doors for help.


In the middle of the storm that the Greek financial collapse has unleashed, media reports began earlier this year to talk about how private banks may have helped former Greek government mask its deficit.

The German newsweekly ‘Der Spiegel’, for instance, reported on February 8, 2010: “Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules.”

At some point, it said, the so-called cross currency swaps will mature, and swell the country's already bloated deficit. “Creative accounting took priority when it came to totting up government debt.”

Greece's debt managers agreed a huge deal with the savvy bankers of U.S. investment bank Goldman Sachs at the start of 2002, according to the Spiegel.

“The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.”

The U.S. bankers devised a special kind of swap with fictional exchange rates, Spiegel reported.

“That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.”


This credit disguised as a swap didn't show up in the Greek debt statistics, wrote Spiegel. In previous years, Italy used a similar trick to mask its true debt with the help of a different U.S. bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP, it added.

“At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.”


This led German Chancellor Merkel to state on February 17, 2010: "It would be a disgrace if it turned out to be true that banks that already pushed us to the edge of the abyss were also party to falsifying Greek statistics."

The New York-based Goldman Sachs Group, Inc, which was founded in 1869, is a global investment banking and securities firm which engages in investment banking, securities services, investment management and other financial services primarily with institutional clients.

Other reports on such financial speculation refer to a deal between Greek government and Goldman Sachs in 2001, involving the exchange into euros of some 13,7 billion dollars in dollar and yen-denominated Greek government bonds. The deal used artificial exchange rate.

The U.S. Securities and Exchange Commission filed a civil fraud case against Goldman on April 16, alleging that Goldman sold mortgage investments without telling buyers they had been put together with help from a hedge fund client that was betting on the investments to fail.

The Greek case may be just the tip of an iceberg of other huge speculative operations between some EU countries and Western market-based financial giants, in particular the U.S-based ones. The American roulette seems to keep turning.

*Badriya Khan is a veteran political analyst.

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