Market Overview

Was Goldman's Secret Greece Loan a Mistake?


Reports on Monday evening were suggesting that Goldman Sachs' (NYSE: GS) secret loan to Greece was an expensive mistake from the very beginning.

According to Bloomberg, the Greek government owed the band about 600 million euros ($793 million) on the day that the deal was struck back in 2001. This information comes from Spyros Papanicolaou, who took over the thankless task of heading Greece's debt-management agency in 2005.At that point, four years after the deal was signed, the price of the loan had almost doubled to 5.1 billion euros.

Both Papanicolaou and the man who held the post before him, Christoforos Sardelis basically revealed that the contract with Goldman Sachs helped Greece mask debt in order to meet European Union requirements. However, both believe that Greece did not know what it was getting into, and was ill-equipped to judge the risks.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis said in an interview.

Bloomberg said that the instant gain made by Goldman Sachs perfectly illustrates the dangers to clients of engaging in complex, tailored trades that lack comparable market prices and whose fees aren't disclosed.

“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant, said in a phone interview to Bloomberg. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren't compromised -- it's part of the DNA of that organization.”

As for the numbers, a gain of 600 million euros represents about 12% of the $6.35 billion revenue that GS reported for trading and principal investments in 2001, “a business segment that includes the bank's fixed-income, currencies and commodities division, which arranged the trade and posted record sales that year. The unit, then run by Lloyd C. Blankfein, 57, now the New York-based bank's chairman and chief executive officer, also went on to post record quarterly revenue the following year.”

Goldman Sachs has refused to say how much it made on the swap, but a spokeswoman for the company in London said that the deal was made in accordance with EU rules and regulations.

“Greece actually executed the swap transactions to reduce its debt-to-gross-domestic-product ratio because all member states were required by the Maastricht Treaty to show an improvement in their public finances,” Laffan said to Bloomberg in an e- mail. “The swaps were one of several techniques that many European governments used to meet the terms of the treaty.”

However, according to Eurostat, Greece kept the transactions with GS a secret in 2008 when the country was told to restate its accounts.

“The Greek authorities had never informed Eurostat about this complex issue and no opinion on the accounting treatment had been requested,” the Luxembourg-based agency said in a statement last month.

Posted-In: European UnionNews Politics Global Media General Best of Benzinga


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