After news came out that Goldman Sachs (NYSE:GS) had made swap arrangements with Greece which allowed them to hide how deeply their budget deficit and debt level were, the European Central Bank has responded by seeking to change the existing rules so that a country can’t use a swap to shrink excessive budget deficits.
I have found it interesting that Goldman has been the entity which has come under fire, when it was the Greek government that entered into the deal, and had to have done it for the purpose stated: that they were trying to hide how bad their economic situation was.
The fact is there were no rules in place which prohibited Goldman from making the swap arrangement, and even though German Chancellor Angela Merkel said if Goldman or others aided Greece in making its budget deficit look better than it was, it was a “scandal.”
Using swaps is also a part of doing business by Euro members for years, with 15 out of the 16 members participating in swap arrangements to help manage their debt.
The only legitimate complaint at this time is the transactions should have been done with more transparency, which Goldman has agreed could have been done more openly. But Greece holds a lot of responsibility in this as well, as they didn’t have to use the swaps for the purposes they did.
Eurostat, the European Union statistics office, said this is how swaps are used: “When countries’ deficits exceed the EU limit of 3 percent of gross domestic product and they enter the European Commission’s so-called excessive deficit procedure, interest payments linked to swaps are included in the deficit calculation. That can result in a smaller gap. Normally, they are recorded as financial transactions and don’t affect a government’s net lending and borrowing.”
The central bank is pushing for the EU to develop tighter control over nations which are breaking the EU fiscal rules.
