Did Goldman Sachs (NYSE:GS) Help Greece Cook its Books?

An article in Der Spiegel asserts Goldman Sachs (NYSE:GS) helped Greece cover up the true depth of its debt situation through creative use of cross currency swaps which allowed Greece to be in much deeper debt than allowed under what is called Maastricht deficit rules, which can fine countries who go beyond the stated parameters they’re allowed to operate under.

What the Maastricht rules require is for members of the European Union to keep their overall government debt at below 60 percent of gross domestic product, while also limiting the budget deficit to three percent of gross domestic product.

As far as what the cross-currency swap currency swap was in this particular case, it allegedly involved the Greek government issuing debt in yen and U.S. dollars which were than swapped for debt in euros over a specified period of time. After a period of years the currencies will be traded back to the original currency.

Der Spiegel claims Goldman Sachs put together a deal where there were “fictional exchange rates,” where Greece was then able to retrieve a much larger amount of money than the $10 billion the euro market valued them at the time. From there it is alleged that “Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.”  

What all of this means is the country is in more debt than the books show, as significant debt liabilities are now out into the future rather than the present with the accounting tricks. How this works out is this is in reality credit under the guise of a swap, which while being legal, is considered a breach of the spirit of the Maastricht rules, and as the case of Greece reveals, is a dangerous game to play that can have a negative impact on the nations around you.

Greek is far from the only country doing this in the region, but their economic weakness underscores the risk taken when they attempt to get around the rules in order to continue receiving the benefits of being part of the European Union.

While Goldman Sachs has long sold the swaps it created for Greece, the bills due from them are very real, with bond maturities reportedly at 10 to 15 years. At that time the Greece situation will grow even worse as their deficits continue to rise.

Greece has had a history of not adhering to the Maastricht rules, and evidently has never been under the required 60 percent limit on national debt. And the 3 percent limit on debt has only managed to be in compliance because of accounting maneuvers by the country.

In 2009 it’s alleged they had a deficit that reached over 12 percent. According to Eurostat, today Greek deficits are at 5.2 percent.