Goldman Sachs sets up Europe for the big fall. Sovereign defaults loom
Alcuin Bramerton
Greeceâ?Ts debt managers agreed a huge deal with Goldman Sachs at the start of 2002. The fix involved cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period, to be exchanged back into the original currencies at a later date.
Transactions of this kind are part of normal government refinancing. Europeâ?Ts governments obtain funds from international investors by issuing bonds in yen, dollar or Swiss francs. They don\'t use euros. They need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.
However, with Greece, Goldman Sachs devised a special kind of swap with fictional exchange rates. This enabled Greece to receive a far higher sum than the actual euro market value of ten billion dollars or yen. In this way Goldman secretly arranged additional credit of up to $1 billion for the Greeks.
This credit disguised as a swap didnâ?Tt show up in the official Greek debt statistics. Eurostatâ?Ts reporting rules donâ?Tt comprehensively record transactions involving financial derivatives. The Maastricht rules can be circumvented through swaps.
But now, eight years later, in February 2010, Goldman Sachs analysts have cut National Bank of Greece and Greek Postal Savings Bank from neutral to sell, and Italian banks Banca Monte dei Paschi di Siena, Banco Popolare and Credito Emiliano from neutral to sell. Goldman says there are now elevated levels of sovereign risk which will hit bank returns via higher and diverging cost of equity, mark-to-market impact on bond portfolios, upward pressure on financing costs and downward pressure on volume growth and returns.
http://alcuinbramerton.blogspot.com/
Feb. 9, 2010