News just came out that Greece Defaulted on its Loan with the IMF
The Wall Street Journal just published news that Greece defaulted on its IMF loan. Link
I have connections to some people in the banking industry who have said for years that Greece’s default was inevitable. Now the default looks like it is here.
Edward,
From Bloomberg in 2012.
“March 6 (Bloomberg) — Greece’s secret loan from Goldman Sachs Group Inc. was a costly mistake from the start.
On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.
Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.”
From: http://www.bloomberg.com/news/articles/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels
The central banks should take a harder line with corporate persons like Goldman Sachs.
They participated in a fraud. Let Goldman Sachs make up the difference between the payment the Greeks make and what was owed.
Or refuse to allow any of their business units to do business within the borders of the European Union.
So what are the overall implications to the rest of the world economy?
So based on the reference provided by JimH, which I recall reading about a few years ago, the question comes up regarding who is actually owed the money that is described as Greek debt? Is it the IMF that is owed funds? Or is it a group of marauding bankers masquerading as serious business people? And how much of the Greek debt is money actually given over to Greece as opposed to money that represents costly fees that were charged to complete questionable loan transactions? An illegal debt is the same as no debt at all.
The Goldman deal with Greece was a disaster.
Greece needed money in Euros to pay bills. But the cost for Greece to borrow in Euros was high. So the central bank borrowed in Yen at a much lower % rate. This made Greece “short” EURJPY. The yen soared and Greece lost money when it unwound the currency swap.
This transaction is broadly described as “the carry trade”. Funding in a low % currency and then swapping it to a high % currency is an everyday thing in global finance. So what Greece did was neither uncommon, nor a crazy thing to do.
Greece borrowed in every country that it could. It borrowed a bunch in dollars and created the same FX risk.
The currency swap deal was a stinker for Greece. All in the Yen short (and later a derivative position on inflation) cost the Greeks about $5b. A disaster that took 10 years to unfold.
These types of losses are not uncommon. In January of this year the Swiss Central Bank lost $31.9B in a single day. This huge loss was caused by the Swiss being on the wrong side of an FX carry trade. The Swiss made a bet of $300B on its reserves – and lost. Switzerland has a population of 8m, Greece 11m.
Funny thing about this. In the past 24 months Japan has devalued the Yen by a whopping 40%. If Greece had kept the original Yen borrowing it would have reaped a $5b gain versus the hit they took. Go figure.
One other thing. It is not remotely correct to assume that Greece’s losses are Goldman’s gains. That is not how global risks are managed.
BKrasting wrote: “It is not remotely correct to assume that Greece’s losses are Goldman’s gains.”
Goldman profited by that transaction, assisted Greece in a misrepresentation of their debt levels, and then shorted Greek debt.
See: http://www.businessinsider.com/goldman-sachs-shorted-greek-debt-after-it-arranged-those-shady-swaps-2010-2
As a result, Greece was able to run up even more debt instead of dealing with their problems at a much earlier stage.
The Greeks have become debt slaves. If the debt holders get their way then the money currently paid to pensioners and recirculated in the Greek economy would instead leave the country.
If I were a Greek I would vote no on Sunday.
The simple unvarnished truth is that since the end of the Great Depression our attitudes about debt have slowly but surely trended toward insanity. Our attitude became that people, corporations, and governments should borrow against their future to spend today. We spent our future. And anyone who expressed reservations about that was considered some sort of primitive life form.
While the debt load was increasing, there was more money spent into the various economies. Those days are ending, in the aggregate. Now spending must be reduced and as economies slow, more and more of that debt will have to be written off.
We have been here before.
JimH – You point to a BI article. Did you read it? The quote:
Despite its role in creating swaps that may have allowed the Greek government to mask its growing debts, Goldman has no net exposure to a default on Greek debt, a person familiar with the matter says.
Goldman is “flat” when it comes to Greece, the person said.
Like I said, Goldman was just a middle man in this story. Want to beat up on Goldman and the rest of the Wall Street crowd? This is the wrong place to do it.
No central bank is required to “mark to market”. Not the US Fed, the ECB or BOJ, not any of them.
Greece “hid” a portion of its actual debt by covering a currency swap with a historical rate rollover.
Okay, you don’t like that outcome. I understand, but this happens every day, 24/7.Greece was small beer at this casino.
BKrasting,
So you believe that aiding and abetting Greece to dummy up the accounting of their debt should have no consequences? Delaying a day of reckoning by obfuscation is okay. Everybody does it.
Bankers have been whining about the regulations in Dodd Frank. Those regulations came about because of the behavior of banks during the run up to the Great Recession. Everybody does it, is just another way of saying that more regulation is required.
The Greeks have become debt slaves. The question is how bad will it have to get before debt is written down or off. Going after pensioners is too far, as far as I am concerned.
What is the lesson for the rest of us?
The simple unvarnished truth is that since the end of the Great Depression our attitudes about debt have slowly but surely trended toward insanity. Our attitude became that people, corporations, and governments should borrow against their future to spend today. We spent our future.
While the debt load was increasing, there was more money spent into the various economies. Those days are ending, in the aggregate. Now spending must be reduced and economies will slow.
And heaven help the debtors and their debt holders.
Jim – Yes, Greece is a slave of its debt. So is Puerto Rico and Japan.
PR has a debt to GDP of 75%, Japan is at 237%, the USA is 103% and poor old Greece is 175% All of these are very high numbers. But damn near every economist out there says that these ratios are of no concern. Guys like Paul Krugman say that we have to pile on much more debt.
Dodd Frank has nothing to do with this. You talk about aiding and abetting. That is not correct. I say again that all of the central banks, including the US Fed, do not mark their holdings to market.
This is not about Goldman or Wall Street. This is about how the global CBs act.
Say you buy a stock at 100 and the price falls to 70. Do you have a loss? Not according to the IRS. To have a loss you have to sell the stock and realize the loss. Same is true for how CBs work. They do not report losses that have not been realized.
So it is not aiding and abetting. It is following the way accounting works.
Say you buy a house. You get a mortgage. You have two options. One is to borrow at a lower rate (floating), the other is you get a fixed rate loan. If you take the floating rate your monthly mortgage is low – BUT – you have a risk if interest rates rise.
Greece made the same bet. They borrowed in Yen because it was cheaper. This did make their overall debt picture look better (initially). But the Yen financing backfired in the same way that the floating mortgage could backfire.
People, companies and governments take on risk when they borrow. Risk brings both reward and losses. Like I say, this happens every day.
Jim – We’ve talking about hiding debt. How accounting masks reality. On this topic an interesting article from Der Speigel. The article adds up the potential losses that Germany faces with its holdings of Greek debt. The magazine concludes that the total number might come to 61b Euros. But that number would not “realized” in full until another 39 years. So for two generations the Germans would be understating their debt. The quote:
Even though the total figure of €61.53 billion is quite large, its actual impact on the German budget would be less dramatic because the losses would be spread out over a long period of time extending to 2054.
My point has been that this stuff happens every day. It is not about evil Wall Street types, it is about the way Central Banks/governments account for things.
The article:
http://www.spiegel.de/international/germany/germany-faces-billions-in-losses-if-greece-goes-bust-a-1041369.html
An example of hiding liabilities in the US comes from (among others) Social Security. The SS Trustees estimate that the Net Present Value of the unfunded portion of SS comes to $10.6 Trillion.
Is this hidden debt? “Sort of”, is the best answer I can give.
JimH
BKrasting
It seems to me it’s a poor idea to manage a national economy by gambling. I think I understand the need for “debt”, but these debts were not your old fashioned debt (if ever there were such a thing), these were casino gambling. Even I had enough sense not to take the bait when I was offered “investments” that were based on nothing more than gambling.
I may not understand “finance” but I suspect that Goldman coming out “flat” in a deal in which its client lost a lot of money has more going on than meets the eye.
But what is more important I think is are there any credible economists out there who can see a way for Greece to survive default and manage its economy on its own terms and not those of the Euro union?
My lie detector was quivering when I listened to the Euro man saying “what are they playing at?” and it didn’t help to have NPR turn to the Peterson Foundation for wisdom on the Greek referendum.
I think we are in a war with the big financial operators and international corporations. Everything I see points to a coordinated plan on their part to rule the world. Sorry if that sounds overwrought, but I don’t think one needs to be a conspiracy theorist to see
“when a long train of abuses and usurpations…pursuing invariably the same object, evinces a design to reduce them under absolute despotism…”
nor is there anything “unusual” about this: it is in the nature of power to seek more power. what is needed is countervailing power, but that begins with awareness of what is going on.
While all the media and most commentators refer to this event as Greece “defaulting,” the IMF itself does not use this word, and instead refers to Greece “being in arrears” on its owed payments.