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EU Probes Hidden Greek Deals as 400% Yield Gap Shows Doubt

EU Probes Hidden Greek Deals as 400% Yield Gap Shows Doubt

19.October.2010, 21:16

Four months after the 110 billion-euro ($140 billion) bailout for Greece, the nation still hasn’tdisclosed the full details of secret financial transactions itused to conceal debt.


“We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agencyEurostat, said in a Sept. 2 interview in his Luxembourg office.Eurostat first requested the contracts in February.


Radermacher vows new toughness when officials from hisstaff head to Greece this month to come up with a “solidestimate” of the total value of debt hidden by the opaquecontracts. “This is a new era,” he said.


Greece is the only euro country that lied about using thesecomplex swap contracts after Eurostat told countries to reportthem in 2008, Radermacher, 58, said. It also likely signed agreater number of individual agreements than any other euromember, based on information it has provided to Eurostat, hesaid. Greece’s debt was 115.1 percent of its total economicoutput last year, second among the 16 counties that share theeuro, behind Italy’s 115.8 percent.


“What the Greeks did was an absolute cardinal sin,” saidRuairi Quinn, former finance minister of Ireland who presidedover the 1996 meeting where debt and deficit limits forcountries joining the euro were set. “They deserve to bepunished for it. I think they have been severely punishedfor it.”


Doubling Deficit Estimate


Greece has requested technical help from Eurostat for itsstatistics service, and data from the country now reflectsguarantees and swaps that weren’t previously included, FinanceMinister George Papaconstantinou said in an interview today.The statistics agency became independent from the financeministry this year.


There is “a clear political will for full transparency ineverything,” he said. “There is a clear and complete breakwith past practices.”


Confidence in Greece’s statistics and its ability to repaydebt was shattered in October, when the country more thandoubled its 2009 deficit estimate. The euro plunged, sparkingquestions whether the single European currency could survive.It has lost 15 percent of its value against the dollar sinceOct. 20.


Restructuring Debt


Investors still don’t trust Greece. They demand yields morethan five times that of Germany to hold 10-year Greek debt - asign that buyers fear the country will have to reorganize itsborrowing.


“I think restructuring will be a necessary part of thempulling out of the predicament they are in,” said Andrew Bosomworth, Munich-based head of portfolio management at PacificInvestment Management Co., which oversees the world’s largest bond fund. He cited the projection of the International Monetary Fund, which foresees Greece’s debt topping out 149 percent of gross domestic product in 2012. Italy in May estimated that its debt would be 117.2 percent of economic output in 2012.


National Bank of Greece SA Chief Executive OfficerApostolos Tamvakakis said today that the bank “stronglybelieves” the country will not default on its debt and thatGreece is moving in the right direction. The bank yesterday setout plans to raise 2.8 billion euros to bolster capital and helpwith its expansion in Greece and the region. The shares dropped7.8 percent to 9.59 euros at 12:24 p.m. in Athens trading today.


Increased Exposure


Banks worldwide increased their total exposure to Greekdebt in the first quarter of the year by 7.1 percent, or $20.7billion, to $297.2 billion, according to a Sept. 6 report by theBasel, Switzerland-based Bank for International Settlements.Norway’s sovereign wealth fund, the world’s second largest, saidin August that it had bought Greek bonds, along with those fromSpain and Portugal, because of higher yields and as thosegovernments push to reduce their deficits.


Greece received the three-year, 110 billion-euro bailoutfrom the European Union and International Monetary Fund in Mayafter investor concern about the government’s ability to curbthe budget deficit led to soaring borrowing costs that pushedthe country to the brink of default. Greece pledged to implementausterity measures equivalent to almost 14 percent of GDPin exchange for the rescue funds.


The fiscal crisis turned attention to currency swapsarranged by Goldman Sachs Group Inc. that helped Greece hide theextent of its debt.


More Swaps


“There are more, or even many, of this kind of swapoperation, which we have to clarify,” said Radermacher, theformer president of the German Federal Statistics Office who wasappointed as the EU’s chief statistician in April 2008. “TheGoldman Sachs case was the beginning.”


Greece has told the agency that the other contracts wereeach significantly smaller than the ones signed with GoldmanSachs, Radermacher said. Signed in 2000 and 2001, the Goldmanswaps reduced the country’s foreign denominated debt in euroterms by 2.367 billion euros and lowered debt as a proportion ofGDP to 103.7 percent from 105.3 percent, according to a Feb. 21statement by Goldman.


Goldman Sachs spokewoman Fiona Laffan declined to commentfor this article.


In April, Eurostat said it might have to revise Greece’s2009 debt figure higher by as much as 7 percentage points ofGDP, in part because of the use of swap contracts that allowedit to reduce current reported debt in return for greaterliabilities in future years.


Prime Minister


About a third of Greece’s borrowings have swaps attached tothem, according to a person with direct knowledge of theoperations. Only a portion of those contracts were set up in away to reduce current reported debt, the person said.Radermacher said he believed Greece stopped using swaps thatincluded up-front payments in 2008, about the same time thatEurostat questioned the country that year.


Greek Prime Minister George Papandreou, elected in October,has pledged to change his country, asking Greeks to pay taxesand accept sacrifices to pull the country through its financialcrisis. His slogan is “either we change or we sink.”


“Our largest deficit was our credibility deficit,”Papandreou said in a Sept. 3 speech to his ruling Pasok party.He wasn’t available to comment for this article.


Investigating Statistics


The new government has initiated a series of measures toend opaque financing in Greece. The statistics agency nowreports directly to Greece’s parliament, rather than the financeministry. A parliamentary committee this month will begininvestigating the false statistics.


Under the rules to join the euro, countries’ debts must notexceed 60 percent of GDP. Interest payments linked to swaps areincluded in the calculation. That means that until accountingguidance was changed in 2008, upfront payments or lower initialinterest payments could initially lower the debt or cause it torise by a smaller amount than would otherwise be the case, whileliabilities could increase down the road.


The problem is that such contracts rely on an estimate thatthe future debt will be lower or economic activity much greater,allowing a country to meet higher payments, said Yannis Stournaras, director general of the Foundation for Economic andIndustrial Research in Athens. He was chairman of Greece’sCouncil of Economic Advisors from 1994 through 2000.


‘Hope Over Experience’


“You might say this is triumph of hope over experience,”he said, adding that the blame should be shared with theEuropean Commission, which didn’t intervene despite years ofwarnings by Eurostat of problems with Greek data.


“We addressed the issue several times in meetings offinance ministers and we asked for enhanced powers for Eurostatin 2005, which we didn’t receive at the time,” said Amadeu Altafaj, a spokesman for the Commission.


In April 2009, the European Central Bank identified a Greekswap operation of unusual terms, according to a confidential ECBdocument dated March 3, 2010, obtained by Bloomberg News. TheECB said its executive board prepared internal reports on theswaps. ECB spokesman Niels Buenemann declined to comment on it.


Greece began using this type of contract for the 2001budget year to avoid recording a spike in debt the first yearafter it adopted the euro, Stournaras said. It continued to usethem after 2001 and increased their use after 2004, he said.


Under guidance set out in 2008 by Eurostat, any upfrontpayments linked to a swap must be counted as a loan.


Upfront Payments


Germany, Italy, Poland and Belgium, like Greece, receivedupfront payments from derivatives, Radermacher said at a hearingat the European Parliament in April. The difference, he said inthe September interview, was that when Eurostat asked the othercountries about the contracts in 2008, they provided the dataand adjusted their debt figures.


A spokeswoman for Italy’s Finance Ministry in Rome said thecountry had received upfront payments and revised its debtfigures accordingly when the accounting guidelines were revised.Officials from the other three countries’ debt agencies did notreturn calls for comment.


Eurostat gained new powers effective last month that allowit to audit a country’s financial data if it can show there areclear risks that the statistics aren’t accurate. The visit toGreece this month will include officials from Eurostat, theEuropean Central Bank and the European Commission’s Economic andFinancial Affairs directorate, Radermacher said.


‘More Muscles’


“Because we have more muscles, so to say, we are free toask for an inside look to whatever we find important orrelevant,” Radermacher said.


He said he expects to have sufficient details to present anestimate of the off-market swaps’ impact for its semi-annualreport on member states’ debts and deficits on October 22.


The transition to providing full and accurate data has beenslow, according to Radermacher.


The EU’s statistics agency for months got partial responsesto requests for complete records on the country’s use of swaps.Eurostat still doesn’t know the full number of contracts Greecesigned that used historical or other non-market interest orcurrency rates. Nor does it know the total amount of debtcovered by those transactions or the effect on the country’sdebt-to-GDP ratio.


Greece’s statistics office blamed the delay in answerson a lack of staff and expertise in the field, said Eurostatofficials.


In August, Greece made a proposal for how to estimate thetotal effect of the off-market swaps without including any ofthe contracts themselves, Radermacher said.


Some Surprises


He likened the task of unraveling Greece’s financialpicture to the recent renovation of his house.


“You start to renovate and you open up the walls, then youare confronted with some surprises, and this is more or less thecase here,” he said.


In the past few months, Greece has told Eurostat of a “bignumber” of off-market swaps, Radermacher said.


Eurostat’s ability to untangle the web of transactions anddemand accurate records from all euro members is critical torestoring investor confidence in the currency and in Greece,says Edward Scicluna, a member of the European Parliament, whichheld a hearing in April on swaps.


Greek government bonds have lost about 24 percent sinceOctober, according to Bloomberg/EFFAS indexes.


‘Smoke and Mirrors’


“The swaps were part of the smoke and mirrors that werepart of the mystique of the euro,” said Bill Blain, joint headof fixed income at Matrix Corporate Capital LLP in London.“There’s potential for Europe to trip-up again. It needs toprovide full information and demonstrate that it’s in control ofthe situation.”


Changing Greece from a country that operates on hope to onethat relies on hard numbers is Papandreou’s biggest challenge,said Ireland’s Quinn, who lived in Greece for a year in theearly 1970s.


“Part of becoming modern Europe is shedding that traditionof being economical with the truth and not telling the fullstory,” he said.


The stakes for Greece are significant, Andreas Georgiou,head of the Hellenic Statistics Authority, said in a speech toemployees on July 22, the day he took up his position. Providingreal, credible figures will mean “to a great degree the successof the country’s economic policy in these difficult times aswell as possibly our national interests on a long-term basis.”He didn’t comment for this article.


“If there’s a feeling that there’s proper due diligence,I’d feel more confident about investing,” said Robin Marshall,a director of fixed income at Smith & Williamson InvestmentManagement in London, which manages $20 billion in assetsincluding Greek debt. “For investors, the credibility hinges asmuch on perception as on the numbers themselves.”


To contact the reporters on this story:Alan Katz in Paris at;Elisa Martinuzzi in Milan at







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