The Hoi Poloi v Goldman Sachs

Numerian (Feb 15)  Posted by Michael Collins with permission of the author

Ask yourself who knows how much has really been borrowed by various governments around the world?

Greece is turning into a battle royal between the global financial
elites and the average worker in the industrial West. This started out
as a more limited struggle, pitting the finance ministers and central
banks of the European Union against the Greek unions, but the fight has
unexpectedly broadened with news of the surreptitious involvement of
Goldman Sachs in helping Greece avoid borrowing constraints.

The picture painted in the Western financial press makes the unions
the villain in this play. The unions are described as greedy, lazy, too
quick to strike, and insensitive to the burdens they were imposing on
the Greek economy. To cope with union threats and extortion, various
Greek governments had no choice but to borrow excessively, and well
beyond the European Union target range that allowed domestic budget
deficits to be no higher than 3% of GDP. As of last year, Greece’s
budget deficit was 12.7% of GDP.

The sheer level of these deficits – the highest in the European
community – has spooked international investors and the ratings
agencies like Moody’s, which have dropped the Greek sovereign credit
rating and threatened further demotions if nothing is done. This, along
with the prospect of default on their government debt, has thrown
Greece into a crisis and into the hands of the EU commissioners and
finance officials who are contemplating a bailout.

The EU is demanding that the Greek government commit to shock
therapy, beginning this year, as a way of earning any bailout money
from their neighbors. The therapy agreed to so far by the Greek
government includes worker layoffs, salary freezes, service cutbacks,
higher taxes, and a campaign against tax cheating. The prime minister
has pledged to reduce the deficit to 8.7% of GDP by the end of this
year, but this isn’t good enough for some EU commissioners, who expect
the deficit to be within the 3% limit by next year at the latest.

The “villains” are not accepting either this situation or the blame.
They have instituted widespread strikes of public services. The public
is being seriously discommoded by these strikes but has so far not
taken to blaming the unions for Greece’s crisis. There is widespread
disdain in Greece, as in many other countries, for the global financial
elites responsible for the international credit crisis.

Not helping the bankers were revelations this week that previous
Greek governments have entered into secret deals with Goldman Sachs and
other investment banks that allowed the government to borrow quietly
and evade EU regulations in doing so. The deals involved currency swap
derivatives that under normal circumstances would consist of a swap of
assets, not a loan. But Goldman Sachs structured these deals so that
Greece was given an upfront foreign exchange deal priced way off market
and favorably to Greece. The contract generated at least a billion
dollars of instantaneous foreign exchange profit for Greece. A reverse
foreign exchange contract was also done for a far maturity date, and
this off-market contract created a huge loss down the road. The net
effect of these two contracts was that Greece received a billion
dollars, and paid this amount back with interest far into the future.
As collateral for the deal, Greece pledged certain assets, such as all
of its proceeds for the next 20 years from the government-run lottery.

Off market currency swaps have long been used by the financial
industry, and for at least ten years consensus among banks has been
that these transactions should be booked as loans. It would be
interesting to find out if Goldman Sachs took any of the usual
precautions for the credit risk associated with these deals, such as
assigning the risk to a credit limit for Greece, and monitoring the
collateral against the loan.

What has become clear, though, is that the Greek government did not
treat these deals as a borrowing. In fact, the transaction was kept
secret from the EU statistical office, and therefore not counted
against the government’s borrowing limit. Now that it has been
revealed, the Greek Minister of Finance, Georges Papaconstantinou has
defended the transaction on the lame grounds that “everyone else was
doing this.” This would include Italy and probably Spain or Portugal.
Also, it appears as if over ten other investment banks entered into
transactions like this with the Greek government. The EU is attempting
to find out the true depth of Greek borrowing.

The people, or hoi polloi to use the ancient Greek term, are
anxious to find out just how much of their future has been mortgaged to
Wall Street. Apparently Goldman Sachs earned $300 million in fees on
the first currency swap, done in 2001, and was back recently proposing
that Greece sell off its revenues from its health care system. No one
knows what else has been sold off and for how long, but what started
out as a government financing problem has turned into a government
bankruptcy problem, The government may not have the cash flow to pay
off its debt, and may not have any more national assets to hock in
order to borrow more, even from the EU.

Mr. Papaconstantinou spoke today against the strikes that are now
being held across the country by civil servants. He said the nation’s
“public sector is out of control” and he compared fixing the deficit to
changing “the course of the Titanic.” That’s just what investors want
to hear – they’re along for a ride on the Titanic. As for the hoi polloi,
the average Greek citizen probably agrees that something was out of
control, but it may not have been the unions. It appears to have been
the Greek government, conniving with Wall Street banksters, that led to
things getting out of control.

Another way to look at this is to ask yourself who knows how much
has really been borrowed by various governments around the world? You
would think this would be vital information available to citizens from
their government economic bureaus, but clearly the Greek citizens
didn’t know what was going on, and the EU statistics office in Brussels
didn’t know either. But Goldman Sachs did. What sort of international
financial system is it that allows a private sector firm to have such
information when it is not even available to the citizens who are
responsible for repaying the debt?

The answer to that is a corrupt, broken, secretive, and exploitative
international financial system – one that grants enormous power and
wealth to a handful of private sector firms. This is the reality the
citizens of Greece – not just the unions – are now facing. It is a
reality that justifiably will create disgust and anger among the people
of Greece, who may well reject the shock therapy being offered by the
EU finance officials, thereby calling their bluff. If so, it will be
second rebuff of the international financial elites, following the
rejection of austerity measures by Iceland to repay its debt.

EU officials are still talking and acting as if they have matters
under control, and their pronouncements carry the weight of law. They
may be about to find out otherwise, and if so, the global financial
system and global markets are in for an economic version of shock and
awe.

Originally published in The Agonist Feb 15. Reprinted with permission of the author.

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