Wall Street tactics akin to the ones that fostered subprime mortgages in the US 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 epicentre 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 healthcare system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
Disguised debt: Shoppers next to a T-shirt referring to Greece’s financial crisis in central Athens. The crisis in Greece poses the most significant challenge yet to the euro, and the continent’s goal of economic unity. Dusan Vranic/AP
Athens passed on the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbours 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.
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.
The crisis in Greece poses the most significant challenge yet to 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 (around Rs14 trillion), 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.
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 as varied as the military and healthcare. The market for sovereign debt—the Wall Street term for loans to governments—is as unfettered as it is vast.
For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: Countries such as Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the common currency.
©2010/THE NEW YORK TIMES