Is the Greco-European Financial Crisis Goldman’s Fault, Too?

February 10, 2010 | Last updated: July 31, 2020

The Greek debt crisis — which is threatening to spread to Spain, Portugal, Italy and Ireland and force the Germans to bail out the Greek government with German taxpayer dollars — is all the rage right now, with people trying to figure out how to stop the contagion and halt the default that might well trigger the next nadir in the nascent world economic recovery. Der Spiegel now reports that Goldman Sachs’ tricky derivatives trades may have masked the Greek debt just long enough to screw us all over yet again.

Under Eurozone rules, countries are required to keep total government debt to 60 percent of GDP and government budget deficits to 3 percent, in order to maintain the value of the euro, Eurozone-wide interest rates and general stability. Greece, it turns out, was always fudging its budget deficit numbers by “mistakenly” leaving things out — meaning that its budget deficits were inevitably above 3 percent and, in 2009, closer to 12 percent.

But even those figures aren’t accurate, because the Greeks used complex financial transactions, designed by Goldman Sachs, to kick the debt can down the road even further. Goldman had the Greeks issue bonds, valued in dollars, in yen in exchange for bonds that paid out in euros. But rather than receiving the euro-denominated bonds at market prices, Goldman made up an exchange rate that allowed the Greeks to look as though they were only engaging in a currency swap when, in effect, they were getting more than a billion more than they should have from the trades in credit. The credit wasn’t counted against their debt or deficit limits — though it will be, when the bonds they began issuing in 2002 begin maturing in 2012 and 2017.

It’s likely that Goldman made a killing on the commissions for the swaps, and then sold the swaps to a Greek bank for even higher profits.

The swaps, and the non-disclosure of them, are both perfectly acceptable within the Eurozone reporting rules. But what’s legal, as the United States already found out, isn’t the same as what is good for the economy. The Greek debt — which Goldman not only enabled but expanded — may throw Greece, if not the Eurozone, into a financial tailspin if the crisis isn’t resolved. That crisis is expected to trickle back to the United States, where our economy has only barely started down the road to recovery. And Goldman, with its $13 billion profit in 2009, will still be sitting pretty.