Now comes Goldman Sachs trying to justify the Greek Debt Swaps....
Following Greeces decision to join the European Monetary Union and adopt the Euro (which, under the criteria set by the European Union, included a debt-to-GDP ratio of less than 60%), reducing the size of foreign denominated liabilities became a priority for Greece, as it did for most European sovereign states.
According to the EU accounting framework, unhedged foreign currency denominated debt was required to be translated into Euro using the year-end exchange rate. The strengthening of the dollar or yen against the Euro in 1999 and 2000, created an unfavorable increase in Greeces reported Euro debt levels.
Accordingly, Greece entered into a series of hedging agreements designed to transform foreign debt into Euro, a common practice undertaken by many European member states with foreign debt outstanding. By the end of 2000, Goldman Sachs had a portfolio of swaps hedging USD and JPY debt issued by Greece.
The firm goes on to make the case that the percentage changes involved in the debt outstanding were effectively immaterially small.
Of course that's not the question at hand. The question was the true intention of any such agreements and transactions by Greece (and Goldman's knowledge thereof, as "the smartest guys in the room.")
On that point the following is clear: When you pay off your VISA card with a cash advance on your Master Card, you appear to have less debt if only the VISA card is considered, but the fact remains that the essence of such a transaction is simply to shuffle the cards such that something you don't want to recognize now is put off until later - at a higher price.
Goldman of course benefited from these deals (and it is entitled to be paid for the work it does) but that leaves aside whether Greece's benefit was simply to reduce the "optics problem" of its debt while in fact increasing the magnitude thereof, and whether such a thing should be permitted by the EU - or, for that matter, by any other regulator.
PS: Did AIG write any CDS on Greek debt, and did Goldman buy said CDS from AIG?
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