Falsification of Greek public finance data

In reviewing the Eurostat audits, we have seen that the window dressing scheme of Greece’s public finances, initiated in 2001 with Goldman Sachs as counterparty, increased by 81% in 2006 as a result of a renegotiation in August 2005.

The language used in these audits leaves little doubt as to the intent, by the parties of the deal, to conceal debt and deficit levels. However, Eurostat has to explain how it became aware of the 2001 deal only in early 2010.

Here, we look into the broader issue of the falsification of Greece’s public finance data: Eurostat audits, Jean Claude Trichet’s willful hindrance against the release of ECB records, Goldman Sachs’ communication, and whether the EU Parliament (Sharon Bowles), the Commission (Olli Rehn) and the European Securities and Markets Authority (Verena Ross) were proactive enough.

Eurostat audits

Eurostat is the statistical of office the EU Commission. In Eurostat parlance, a “methodological visit” is an audit that is “undertaken in cases where the Eurostat identifies substantial risks or potential problems with the quality of the data”. There were a series of methodological visits to Greece. They began in 2009 and continued through 2010. Three major reports were produced, one on 29 October 2009, the second on 8 January 2010 and the third in November 2010. As per the last one, a “series of failings in the institutional arrangements and practical compilation of Greek public finance data”. We skimmed through the January report and read the November 2010 report. Only the latter addresses the contentious Greek swaps transaction. It concluded as follows: “Taking into account the work carried out [i.e. corrections to misreported data], as described in this report, the latest debt and deficit data for Greece now gives, in Eurostat’s view, an essentially reliable picture, [including for] fiscal data for the years 2006-2009″. It is, therefore, an important report as it represents Eurostat’s final opinion on the issue of the Greek swaps contracted with Goldman Sachs.

Eurostat’s summary of its dealings with Greece as pertaining to these swaps would be hard to reconcile, prima facie, with the blithely reported claim that the transactions were legal. Goldman Sachs gave the optimistic version in a communique released in February 2010: “The Greek government has stated (and we agree) that these transactions were consistent with the Eurostat principles governing their use and application at the time [2000 and 2001].”. First, Eurostat claims that “At the beginning of the year 2010, it became known that Greece had entered in 2001 into currency off-market swap agreements with Goldman Sachs, using an exchange rate different from the spot prevailing one.”. Weighing each word is probably important in determining legality, knowing the scheme was reported as early as 2003 in an article by Risk.net. Perhaps not coincidentally, notes the article, Greece’s credit rating by one of the three major CRAs was raised, that year, from A to A+. Second, Eurostat says that Greece patently misled it in 2008, claiming that it neither engaged in “FOREX swaps, nor in off market swaps”. These are exactly the type of transactions agreed between Greece and Goldman Sachs in 2001 and, as we see next, were actively managed thereafter.

Eurostat’s audit says that “in August 2005 a significant restructuring of the swap contract took place. The maturity of the swap was extended from 2019 to 2037″. This, together with other modifications, resulted in an increase in the amount of undisclosed Greek debt data, for the portion that is imputable to the deal, from 2.830 bn euros in 2001 [1] to 5.125 bn euros in 2006. It’s a 81% increase. Eurostat adds that “[a]lmost at the same time, GS sold its rights and obligations to the National Bank of Greece (NBG, a bank completely privatised in November 2004)”. As a side note, Mario Draghi was appointed head of Bank Italy in 2006, ending his employment at Goldman Sachs. The latter had begun in 2002, when Goldman Sachs was reportedly the lead manager of Greece’s debt underwriting. He denied any connection to the deal in a hearing before the ECON Committee in June 2001. For more detail, refer to the blog entry Deceptive tactics were used to thrust a head the nomination of the new ECB President.

To complete our coverage of the swap transactions, let us quote Eurostat: “[t]he swap was marginally restructured again in late 2008 [and was] securitised in February 2009 via a Special Purpose Vehicle (Titlos) that paid EUR 5.5 billion to the NBG.”. There is no question that the 81% increase in the debt hiding scheme, in 2006, is imputable to the August 2005 modification : “the restructuring operations implemented in 2005 and 2008 were in fact the explicit recognition of an increase of the liability (principal amount of the loan) to be recorded as debt of Greece”. The corresponding amount, 5.125 bn euros, persisted in 2007. The 2008 modification pushed it to 5.4 bn euros, and 2009 saw a decrease to 5.281 bn euros. We think that the last decrease is the result of an amortization scheme kicking in after a “grace period” of two years which is mentioned in the report. In 2010, Eurostat retrospectively assigned these amounts as additions to government debt.

Goldman Sachs’ communication

Goldman Sachs Managing Director Gerald Corrigan testified before the House of Commons in February 2010. We know about it thanks to an article by Finfacts Ireland. He is quoted as essentially shifting blame on the EU for not having stringent rules. He also rationalizes the bank’s activity as commonplace in the industry. Finally, there is no evidence that Corrigan alludes to the important restructuring of Greek swaps that took place in August 2005, which resulted in an 81% increase in the window dressing of debt. We looked for the transcript at parliament.uk but did not find it, whereas others involving the same individual (who has the hear of the British parliament) are returned by search engines.

The transaction generated hundreds of millions of dollars for the firm according to a press release by Bloomberg, EU seeks Greek swaps disclosure after ministry probe. Using the upper estimate of the fees given in Risk net (200 millions euros), its ratio to the amount of debt that Greece was able raise in 2011 via to the masking scheme (2.830 bn euros) is 7.1%. As a side note, the Federal Crisis Inquiry Commission revealed that Goldman Sachs makes between 25% to 35% of its revenue from derivatives business according to an article by Seeking Alpha, Goldman reveals derivatives revenue. The key deal maker, Antigone Loudiadis, made a substantial fortune from it in just one year, reported the Wall Street Journal in 2010. And she enjoyed a dramatic career boost thereafter. Incidentally, she made controversial headlines again, not long ago, as CEO of Rothesay Life, as regards to “death derivatives”.

One wonders whether Corrigan’s admission of weak control and his rationalization of the bank’s action, together with the bank’s and key player’s likely motives to engage in such transactions, might fall under the definition of the Fraud Triangle… That’s just a superficial conjecture but, unfortunately, there is a significant legal precedent attesting of unethical business practices at this company. Goldman Sachs paid half a billion dollars to settle SEC charges that it misled investors in a subprime mortgage product (ABACUS) just as the U.S. housing market was starting to collapse.

Obstruction by Jean Claude Trichet

First, Bloomberg filed a request with the ECB in November 2010 to have access to ECB internal documents detailing the contentious transactions. It was denied. Second, Bloomberg contested the decision at the EU’s General Court in Luxembourg in December 2010. Third, the ECB asked the General Court to dismiss the lawsuit, in May 2011, just one month before Mario Draghi’s nomination, apparently using a veto prerogative. That’s one month before the nomination of the next ECB President whose possible role in the falsification of Greek debt as Goldman Sachs VP from 2002 to 2005 was raised by Simon Johnson as early as February 2010 (refer to our last post). Fourth, Bloomberg reacted in June 2011 with these words : “The European Central Bank allowed itself to be deceived by a default in the making and now refuses to share with the taxpaying citizens it represents the details of the deception. Secret and opaque financing got Europe into a mess that can only be resolved by the transparency of full disclosure.”.

Read More: HellenesOnline


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