Lies, damned lies and Greek Sachs statistics

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Gary D. Cohn, president of Goldman Sachs, went to Athens to pitch
complex products to defer debt. Such deals let Greece continue deficit
spending, like a consumer with a second mortgage.

Oplossing: Een enkelband voor bankiers?
Maar dan ook een enkelband voor degenen die dit lieten voortduren.
Immers het EU-statistiek kantoor stopte met het opnemen van de Griekse
cijfers, omdat overduidelijk was dat er mee was geknoeid.
Geen EU-politicus die er over viel ;)

Groet / Cees
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February 14, 2010
Wall St. Helped to Mask Debt Fueling Europe’s Crisis
http://www.nytimes.com/2010/02/14/business/global/14debt.html
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ

Wall Street tactics akin to the ones that fostered subprime mortgages in
America have worsened the financial crisis shaking Greece and
undermining the euro by enabling European governments to hide their
mounting debts.

As worries over Greece rattle world markets, records and interviews show
that with Wall Street’s help, the nation engaged in a decade-long effort
to skirt European debt limits. One deal created by Goldman Sachs helped
obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for
ways to help Greece forestall the day of reckoning. In early November —
three months before Athens became the epicenter of global financial
anxiety — a team from Goldman Sachs arrived in the ancient city with a
very modern proposition for a government struggling to pay its bills,
according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a
financing instrument that would have pushed debt from Greece’s health
care system far into the future, much as when strapped homeowners take
out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to
Europe’s monetary union, Goldman helped the government quietly borrow
billions, people familiar with the transaction said. That deal, hidden
from public view because it was treated as a currency trade rather than
a loan, helped Athens to meet Europe’s deficit rules while continuing to
spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece
groaning under the weight of its debts and with its richer neighbors
vowing to come to its aid, the deals over the last decade are raising
questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American
International Group, financial derivatives played a role in the run-up
of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase
and a wide range of other banks enabled politicians to mask additional
borrowing in Greece, Italy and possibly elsewhere.

In dozens of deals across the Continent, banks provided cash upfront in
return for government payments in the future, with those liabilities
then left off the books. Greece, for example, traded away the rights to
airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans,
mislead investors and regulators about the depth of a country’s liabilities.

Some of the Greek deals were named after figures in Greek mythology. One
of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to
Europe’s common currency, the euro, and the Continent’s goal of economic
unity. The country is, in the argot of banking, too big to be allowed to
fail. Greece owes the world $300 billion, and major banks are on the
hook for much of that debt. A default would reverberate around the globe.

A spokeswoman for the Greek finance ministry said the government had met
with many banks in recent months and had not committed to any bank’s
offers. All debt financings “are conducted in an effort of
transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on
this side of the Atlantic, it has been sharply criticized in Greece and
in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show
them a way to pass a problem to the future, they will fall for it,” said
Gikas A. Hardouvelis, an economist and former government official who
helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled
Greece and others to borrow beyond their means, in deals that were
perfectly legal. Few rules govern how nations can borrow the money they
need for expenses like the military and health care. The market for
sovereign debt — the Wall Street term for loans to governments — is as
unfettered as it is vast.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a
veteran of the International Monetary Fund’s capital markets
surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis
with free-spending governments. While Greece did not take advantage of
Goldman’s proposal in November 2009, it had paid the bank about $300
million in fees for arranging the 2001 transaction, according to several
bankers familiar with the deal.

Such derivatives, which are not openly documented or disclosed, add to
the uncertainty over how deep the troubles go in Greece and which other
governments might have used similar off-balance sheet accounting.

The tide of fear is now washing over other economically troubled
countries on the periphery of Europe, making it more expensive for
Italy, Spain and Portugal to borrow.

For all the benefits of uniting Europe with one currency, the birth of
the euro came with an original sin: countries like Italy and Greece
entered the monetary union with bigger deficits than the ones permitted
under the treaty that created the currency. Rather than raise taxes or
reduce spending, however, these governments artificially reduced their
deficits with derivatives.

Derivatives do not have to be sinister. The 2001 transaction involved a
type of derivative known as a swap. One such instrument, called an
interest-rate swap, can help companies and countries cope with swings in
their borrowing costs by exchanging fixed-rate payments for
floating-rate ones, or vice versa. Another kind, a currency swap, can
minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, Italy was able to do more than that.
Despite persistently high deficits, a 1996 derivative helped bring
Italy’s budget into line by swapping currency with JPMorgan at a
favorable exchange rate, effectively putting more money in the
government’s hands. In return, Italy committed to future payments that
were not booked as liabilities.

“Derivatives are a very useful instrument,” said Gustavo Piga, an
economics professor who wrote a report for the Council on Foreign
Relations on the Italian transaction. “They just become bad if they’re
used to window-dress accounts.”

In Greece, the financial wizardry went even further. In what amounted to
a garage sale on a national scale, Greek officials essentially mortgaged
the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on
its balance sheet that year. As part of the deal, Greece got cash
upfront in return for pledging future landing fees at the country’s
airports. A similar deal in 2000 called Ariadne devoured the revenue
that the government collected from its national lottery. Greece,
however, classified those transactions as sales, not loans, despite
doubts by many critics.

These kinds of deals have been controversial within government circles
for years. As far back as 2000, European finance ministers fiercely
debated whether derivative deals used for creative accounting should be
disclosed.

The answer was no. But in 2002, accounting disclosure was required for
many entities like Aeolos and Ariadne that did not appear on nations’
balance sheets, prompting governments to restate such deals as loans
rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics
agency, reported that “in a number of instances, the observed
securitization operations seem to have been purportedly designed to
achieve a given accounting result, irrespective of the economic merit of
the operation.”

While such accounting gimmicks may be beneficial in the short run, over
time they can prove disastrous.

George Alogoskoufis, who became Greece’s finance minister in a political
party shift after the Goldman deal, criticized the transaction in the
Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the
government with big payments to Goldman until 2019.

Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message
last week that Goldman later agreed to reconfigure the deal “to restore
its good will with the republic.” He said the new design was better for
Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of
Greece, the country’s largest bank, according to two people briefed on
the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called
Titlos. But the bank retained the bonds that Titlos issued, according to
Dealogic, a financial research firm, for use as collateral to borrow
even more from the European Central Bank.

Edward Manchester, a senior vice president at the Moody’s credit rating
agency, said the deal would ultimately be a money-loser for Greece
because of its long-term payment obligations.

Referring to the Titlos swap with the government of Greece, he said:
“This swap is always going to be unprofitable for the Greek government.”
------------------------------------------------
7. Rance Spergl Chicago February 14th, 2010 11:19 am
This becomes more and more unbelievable as details become known. What
are we supposed to do, descend into anarchy, march to Wall Street and
have an undisguised lynching of these people?
I can't find a job. I can't fix my car or afford to see a doctor. Where
does this end?
  Recommend  Recommended by 372 Readers

6. JesterJames Pennsylvania February 14th, 2010 11:19 am
Is anyone suprised that Goldman Sachs is again at the front and center
of this?
  Recommend  Recommended by 333 Readers

9. Winski Chicago February 14th, 2010 11:21 am
So it's the same group of crooks from JP Morgan and Goldman that brought
most of the rest of the world to it's knees over the last two years that
are doing the same thing again but mostly in struggling countries in the
lower-band European economies..I see, and we're suppose to pay them
BILLIONS more in new bonuses to let them get us out of this mess too??
Governments and legislators and regulators that allow this to happen
should all BE IN JAIL with Bernie Madoff not in a BILLION DOLLAR
MANSION!! What are you clown thinking?? So all these prominent 'free
market warriors' are DESTROYING economies world wide. If anyone,
anywhere says the word 'regulation' it's like lunatics start chanting
from the streets "the sky is falling - the sky is falling"....
WHY ARE WE CONTINUING TO LET THIS HAPPEN??
  Recommend  Recommended by 277 Readers

3. times Houston, TX February 14th, 2010 11:18 am
Wall Street fat cats, in the words of Boss Tweed, want to know "What are
you going do about it?" as the stroll into the White House and the hall
of congress where their cronies wield power. How outraged do Americans
have to be before this president and this congress reign in Wall Street
scumbags? Where are the cops?
  Recommend  Recommended by 261 Readers

2. Brandon Ohio February 14th, 2010 11:18 am
I don't think this surprises anyone.
It is clear that Market Fundamentalism is a bankrupt, immoral ideology.
Too bad that taxpayers, worldwide, have experienced double indemnity as
a result of this chimera.
  Recommend  Recommended by 216 Readers

17. the long emergency Iowa February 14th, 2010 11:23 am
why isn't someone in jail for this yet. I am still waiting to for
someone to tell me why we even keep Goldman Sachs around...this seems
like legalized crime to me.
  Recommend  Recommended by 215 Readers

10. fed up Florida February 14th, 2010 11:21 am
What’s the problem? This is just more of Goldman Sachs doing God’s work.
  Recommend  Recommended by 169 Readers

13. bellsmith Canada February 14th, 2010 11:22 am
It may be "perfectly legal" but it's blatantly criminal. Lucky for Wall
Street, the US government has decided to protect their crimes instead of
their victims.
  Recommend  Recommended by 163 Readers

8. JD Kansas City, MO February 14th, 2010 11:19 am
This clearly indicates why there should be closer scrutiny of and
stricter control over the financial institutions, like Goldman Sachs. In
the absence of such oversight we are likely to see more, not less,
financial crises, as we see today.
  Recommend  Recommended by 160 Readers

1. Anne Idaho February 14th, 2010 11:18 am
Does this mean that when European countries finally default that we have
to bail out the banks again? These banks should be finally allowed to
fail - this is ridiculous. Why can't they use their bonuses to bail out
Greece? That would be the right thing to do.
  Recommend  Recommended by 153 Readers

23. CitizenWhy Providence, RI February 14th, 2010 12:39 pm
Sad facts:
Swedish capitalism lets companies fail, economy and social benefits to
thrive. A true free market.
US capitalism will not let Wall St, privileged companies fail while it
lets its economy and social benefits to wilt.
The US stands for perpetual war, a finance based economy, massive debt,
and, on the plus side, a reward system for entrepreneurs of all sizes.
But how long can entrepreneurship last under a debt taht cannot ever be
repaid.
Multiplication of unpayable debt is what Wall street has been all about,
and Obama, the rich man's President, praises Goldman Sachs. Ugh!
Sad story.
  Recommend  Recommended by 145 Readers

43. RAB Michigan February 14th, 2010 12:50 pm
Goldman Sachs is like a crack dealer operating in the shadows and
targeting money addicts. Now their addicts are turning up dead all over
the place. They are dealing some bad stuff out on the streets.
  Recommend  Recommended by 122 Readers
------------------------------------------------
February 14, 2010
Greek Statistician Is Caught in Limelight
http://www.nytimes.com/2010/02/14/world/europe/14greek.html
By DAN BILEFSKY and NIKI KITSANTONIS

ATHENS — As the head of a once obscure Greek agency churning out
government data, Manolis Kontopirakis never sought the limelight that
has suddenly come his way, after his country’s financial woes touched
off a global storm that threatens to tear the euro zone apart.

But the limelight found him because he has been accused of being the
source of faulty figures that more than tripled the country’s budget
deficit overnight. He said he was quickly tiring of the whole thing, the
accusations and the jokes. There is a line making the rounds in Europe:
there are lies, damned lies and Greek statistics.

“I am being targeted for the current economic problems that were
generated by this country’s Finance Ministry,” Mr. Kontopirakis said by
phone on Thursday night from New York, where he said he had gone to
escape from Greece. “I left my job and took a big salary cut to serve my
country, and they have tried to throw things up on me with which I had
nothing to do.”

Mr. Kontopirakis, a political appointee of the former conservative
government who resigned as head of the National Statistical Service
shortly after a Socialist government took power in October, insisted
that his agency was blameless for the financial turbulence engulfing the
country. And he accused the Finance Ministry of seeking to exert undue
political influence over the statistics office.

The Finance Ministry did not respond to e-mail and telephone requests
for comment on Mr. Kontopirakis’s accusations.

Greece shocked its European Union partners and stirred up financial
markets late last year when it revealed that its 2009 deficit would be
12.7 percent of gross domestic product, not the 3.7 percent the previous
government had forecast.

The discovery that the statistics could not be relied upon has
undermined efforts to convince jittery markets of the credibility of the
Greek government’s deficit-cutting plans. Establishing that credibility
is critical if the country is to manage to borrow the $74 billion it
will need this year to cover its budget shortfall and ward off a
potential default.

The Greek government has called for an inquiry and has vowed to overhaul
the statistics agency to ensure its full independence.

Yannis Stournaras, a prominent economist who was a top economic adviser
to a previous Socialist government, agreed with Mr. Kontopirakis that he
had been made a “fall guy,” but suggested he could have been more vigilant.

“It’s fair to say that he was used as a scapegoat because the figures
were given to him by the General Accounting Office,” he said.

But Mr. Stournaras added, “On the other hand, he could have challenged
those figures if he had doubts” and noted that Mr. Kontopirakis was
known for his independent streak.

Others were less charitable.

Mr. Kontopirakis “alone is not guilty, but he should have spotted the
discrepancy and spoken up at the time,” said Simon Tilford, chief
economist at the London-based Center for European Reform.

He continued: “No doubt, there was political interference at the
statistics office, but his argument is indefensible. This is the most
egregious example of budgetary data that we have ever seen in the E.U.,
and his position is extremely weak.”

Mr. Kontopirakis placed blame squarely on the Finance Ministry,
insisting that the deficit projection that his office had submitted to
Eurostat, the European Union statistics agency based in Luxembourg, was
made by the Finance Ministry, not the statistics office.

Greece has been criticized repeatedly for its statistics since it joined
the euro zone in 2001, but never more so than this year. A scathing
report from the European Commission last month accused Greece’s National
Statistical Service, its General Accounting Office and the Finance
Ministry of having “significant weaknesses” related to data gathering.
It noted “severe irregularities in deficit notifications by the Greek
government in April and October 2009” and singled out “the submission of
incorrect data, nonrespect of accounting rules and of the timing of
notification.”

Mr. Kontopirakis said that soon after the government came to power in
early October he was shocked when senior members of the Finance Ministry
— including the finance minister himself — sat in on meetings between
the statistics service and the General Accounting Office.

“It is essential in any country for the statistics office to be
independent of any political interference,” he said. “Ministers should
not have been present at these meetings.”

Mr. Kontopirakis said that in mid-October, he was informed that the new
Socialist government planned to revise the final 2008 deficit figure as
well as the projected deficit figure for 2009. “It seemed they wanted to
discredit the previous government,” he said.

Mr. Kontopirakis said the huge discrepancy between the initial forecast
of 3.7 percent of gross domestic product for the 2009 deficit and the
final figure of 12.7 percent was the product of two factors: the
excessive optimism of the previous conservative government and the new
Socialist government’s desire to put the blame on its predecessor and
make any economic rebound seem more impressive.

But the officials failed to anticipate the impact the new figure would
have on world financial markets. “The new government completely
underestimated the market reaction,” he said. “They just didn’t expect
the turmoil.”

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