The Goldman-Greece files

30 July 2016/No Comments
By Nick Dunbar

When French president Francois Hollande recently attacked the decision of former European Commission chief Jose Manuel Barroso to accept a position at Goldman Sachs, he cited the US bank’s role helping Greece fiddle its Maastricht ratios.

Fifteen years after it was signed, and thirteen years after I first wrote about it in 2003, the notorious Goldman-Greece swap retains a larger than life symbolism in the debate about the European Union. A year ago I spoke about this to the New York Times, in a column written by Bill Cohan. As that article shows, there is a continued appetite for information about this deal.

The deal has attained an importance out of proportion to its initial impact on Greece’s balance sheet. As Goldman never tires of pointing out, Greece’s debt-GDP ratio declined by ‘only’ 1.8 per cent as a result of the swap. And Goldman says it can’t be blamed for the subsequent explosion of this ratio by over 70 percentage points and the collapse of Greece’s economy.

This misses the point. As the uproar over Barroso’s move to Goldman shows, the US bank is loathed in continental European capitals for having done the deal. With its prestigious name, Goldman gave Greece vindication that Maastricht rules could, and should, be flouted at will. The Brexit vote merely heightens the feeling that Goldman undermined the EU project right at the beginning, and the bank is not being forgiven for it.

The left axis shows the price of Greece credit default swaps on a logarithmic scale, and the right axis shows Greece's debt-GDP ratio. Screenshot of an interactive chart available to subscribers.
The left axis shows the price of Greece credit default swaps on a logarithmic scale, and the right axis shows Greece’s debt-GDP ratio. Screenshot of an interactive chart available to subscribers.

Since I first learned about the swap in a City of London restaurant in May 2003, I have accumulated an archive of unpublished interview notes, including background conversations with senior Goldman executives and my 2012 interviews with former Greek debt agency officials. As an exclusive for Risky Finance subscribers, here are some interesting details.

Someone lied to Goldman

No bank wants to defend a controversial deal purely on the grounds that it was legal. Goldman Sachs, like other investment banks, has business practice and risk committees whose job is to examine large transactions from all angles and protect the firm from potential problems. Goldman has a good track record but every now and again, such as with Libya, Malaysia, BHS and Greece, it makes a mistake.

Although the bank’s senior management will never admit it, the Greek swap was in reputational terms one of Goldman’s worst ever blunders. How did the firm’s vaunted compliance and review process allow it to happen?

One reason is that there was a precedent. Confirming what had been rumoured for years, Italy’s then-finance minister Giulio Tremonti said in 2010 that his country used off-market swaps to flatter its deficit ratios prior to joining the Eurozone in 1998. Italy is often cited by Goldman executives as justification for the Greek deal.

However, the precedent is misleading. As Tremonti was careful to point out, not only were Italy’s swaps done in lira, before the euro rules were codified. They were also explicitly approved by the European Commission. Neither of these were true in the case of Greece. Perhaps the best thing that can be said about Goldman is that it allowed itself to be hoodwinked. Read more…

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