The Hoi Poloi v Goldman Sachs

Numerian (Feb 15)  Posted by Michael Collins with permission of the author

Ask yourself who knows how much has really been borrowed by various governments around the world?

Greece is turning into a battle royal between the global financial elites and the average worker in the industrial West. This started out as a more limited struggle, pitting the finance ministers and central banks of the European Union against the Greek unions, but the fight has unexpectedly broadened with news of the surreptitious involvement of Goldman Sachs in helping Greece avoid borrowing constraints.

The picture painted in the Western financial press makes the unions the villain in this play. The unions are described as greedy, lazy, too quick to strike, and insensitive to the burdens they were imposing on the Greek economy. To cope with union threats and extortion, various Greek governments had no choice but to borrow excessively, and well beyond the European Union target range that allowed domestic budget deficits to be no higher than 3% of GDP. As of last year, Greece’s budget deficit was 12.7% of GDP.

The sheer level of these deficits – the highest in the European community – has spooked international investors and the ratings agencies like Moody’s, which have dropped the Greek sovereign credit rating and threatened further demotions if nothing is done. This, along with the prospect of default on their government debt, has thrown Greece into a crisis and into the hands of the EU commissioners and finance officials who are contemplating a bailout.

The EU is demanding that the Greek government commit to shock therapy, beginning this year, as a way of earning any bailout money from their neighbors. The therapy agreed to so far by the Greek government includes worker layoffs, salary freezes, service cutbacks, higher taxes, and a campaign against tax cheating. The prime minister has pledged to reduce the deficit to 8.7% of GDP by the end of this year, but this isn’t good enough for some EU commissioners, who expect the deficit to be within the 3% limit by next year at the latest.

The “villains” are not accepting either this situation or the blame. They have instituted widespread strikes of public services. The public is being seriously discommoded by these strikes but has so far not taken to blaming the unions for Greece’s crisis. There is widespread disdain in Greece, as in many other countries, for the global financial elites responsible for the international credit crisis.

Not helping the bankers were revelations this week that previous Greek governments have entered into secret deals with Goldman Sachs and other investment banks that allowed the government to borrow quietly and evade EU regulations in doing so. The deals involved currency swap derivatives that under normal circumstances would consist of a swap of assets, not a loan. But Goldman Sachs structured these deals so that Greece was given an upfront foreign exchange deal priced way off market and favorably to Greece. The contract generated at least a billion dollars of instantaneous foreign exchange profit for Greece. A reverse foreign exchange contract was also done for a far maturity date, and this off-market contract created a huge loss down the road. The net effect of these two contracts was that Greece received a billion dollars, and paid this amount back with interest far into the future. As collateral for the deal, Greece pledged certain assets, such as all of its proceeds for the next 20 years from the government-run lottery.

Off market currency swaps have long been used by the financial industry, and for at least ten years consensus among banks has been that these transactions should be booked as loans. It would be interesting to find out if Goldman Sachs took any of the usual precautions for the credit risk associated with these deals, such as assigning the risk to a credit limit for Greece, and monitoring the collateral against the loan.

What has become clear, though, is that the Greek government did not treat these deals as a borrowing. In fact, the transaction was kept secret from the EU statistical office, and therefore not counted against the government’s borrowing limit. Now that it has been revealed, the Greek Minister of Finance, Georges Papaconstantinou has defended the transaction on the lame grounds that “everyone else was doing this.” This would include Italy and probably Spain or Portugal. Also, it appears as if over ten other investment banks entered into transactions like this with the Greek government. The EU is attempting to find out the true depth of Greek borrowing.

The people, or hoi polloi to use the ancient Greek term, are anxious to find out just how much of their future has been mortgaged to Wall Street. Apparently Goldman Sachs earned $300 million in fees on the first currency swap, done in 2001, and was back recently proposing that Greece sell off its revenues from its health care system. No one knows what else has been sold off and for how long, but what started out as a government financing problem has turned into a government bankruptcy problem, The government may not have the cash flow to pay off its debt, and may not have any more national assets to hock in order to borrow more, even from the EU.

Mr. Papaconstantinou spoke today against the strikes that are now being held across the country by civil servants. He said the nation’s “public sector is out of control” and he compared fixing the deficit to changing “the course of the Titanic.” That’s just what investors want to hear – they’re along for a ride on the Titanic. As for the hoi polloi, the average Greek citizen probably agrees that something was out of control, but it may not have been the unions. It appears to have been the Greek government, conniving with Wall Street banksters, that led to things getting out of control.

Another way to look at this is to ask yourself who knows how much has really been borrowed by various governments around the world? You would think this would be vital information available to citizens from their government economic bureaus, but clearly the Greek citizens didn’t know what was going on, and the EU statistics office in Brussels didn’t know either. But Goldman Sachs did. What sort of international financial system is it that allows a private sector firm to have such information when it is not even available to the citizens who are responsible for repaying the debt?

The answer to that is a corrupt, broken, secretive, and exploitative international financial system – one that grants enormous power and wealth to a handful of private sector firms. This is the reality the citizens of Greece – not just the unions – are now facing. It is a reality that justifiably will create disgust and anger among the people of Greece, who may well reject the shock therapy being offered by the EU finance officials, thereby calling their bluff. If so, it will be second rebuff of the international financial elites, following the rejection of austerity measures by Iceland to repay its debt.

EU officials are still talking and acting as if they have matters under control, and their pronouncements carry the weight of law. They may be about to find out otherwise, and if so, the global financial system and global markets are in for an economic version of shock and awe.

Originally published in The Agonist Feb 15. Reprinted with permission of the author.

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