How Wall Street Aided Greek Spending and Why
By Staff News & Analysis - February 16, 2010

The Greek crisis has taken on a decidedly sub-prime feel following revelations that Wall Street investment banks earned hundreds of millions of dollars over the past decade from transactions that helped the country hide billions of dollars of debt. The New York Times reported on the weekend that Wall Street tactics had played their part in worsening Greece's financial position and undermining the euro by helping European governments to hide their mounting debts. The reports said that in 2001, shortly after Greece joined Europe's monetary union, Goldman Sachs helped the government quietly raise billions of dollars. Athens was able to continue its free-spending ways while complying with the strict EU deficit regime, because the transaction was treated as a currency trade rather than a loan. Apparently, Greece wasn't the only EU government to use these types of deals, where a government would raise cash up front in exchange for handing over the rights to a future income stream. They were also popular in Italy, Spain and Portugal. Greece has defended its use of financial derivatives, saying they were legal at the time. The problem for Greece is that it now finds itself under extreme pressure to cut its budget deficit by slashing spending and boosting its revenues. But the result of these past deals with Wall Street banks is that the Greek government has already handed over the rights to big chunks of its revenues, such as airport fees and lottery proceeds, for years to come. And, of course, the revelation that Greece participated in these Wall Street transactions has further undermined its credibility within the EU. Greece had already been criticized by the EU for supplying incorrect information about its budget situation in the past. – Business Spectator

Dominant Social Theme: It's Goldman's fault.

Free-Market Analysis: It has apparently emerged that Wall Street's Goldman Sachs was not alone in helping Greece – and other countries – avoid EU-determined governmental budget limits. But the way this story is playing out, Wall Street is made to look like an enabler of bad and profligate Greek behavior. In fact, it seems a bit more complicated than that. Follow along (if you wish to) dear reader …

First we need to relate the story of a fine feedback we read somewhere explaining how (price) inflation was actually one of the causes of the current Greek predicament, and that the adoption of the euro itself had helped ruin the Greek economy. While corruption in Greece was certainly bad, the proximate cause of the current crisis, this feedbacker wrote, involved the one-size-fits-all euro. We were intrigued, as it was not an argument that has received a great deal of attention (though it rings true).

This person was of Greek descent and had visited Greece for years. His well-made point (or so it seemed to us) was that the euro was great for industrial Germany, and to a lesser degree France, but that it was hell for countries like Greece that had to import high-priced euro goods from industrial countries, while relying on lower-priced dollars and other currencies for their (tourist) revenue, etc. What this means practically is that Greek income went down while the nation's import costs went up. This is one definition of price inflation. The Greeks started borrowing, buying houses on credit, etc., and so did the government.

Now actually we have heard something like this before. And it makes sense. Italy, Spain, etc. – these governments are all terrible black holes. But Germany's government, we would venture to say is not that much better. What has apparently helped Germany is its industrial economy. Which brings us back to what we have been writing about the EU recently – that it is essentially a project that has massive benefits for Germany, so long as Germany agrees to be bound by EU conventions. Sort of like Gulliver being bound by Lilliputians.

Anyway, the EU is working out fairly well for Germany and a lot less well for the "Pigs" as they are called. And while the considered wisdom of the EU mainstream press is that the Greeks will do anything they need to stay in the union, we wonder when it is that Greek citizens will figure out that they have been sold downstream by their own elites – which wanted the upfront loot the EU was dangling – and EU bureaucrats themselves.

Greece is in for a long hard slog. The EU itself will insist on Greece reducing governmental "profligacy." But what this may mean in reality is that Greek citizens, having struggled with painful euro-inflation for years are now to be slugged with a "euro recession" of indeterminate length and viciousness. "How's that EU-thingy working out for you," Sarah Palin might ask. We also believe the EU, Germany, somebody … is going to have to step in and help Greece unless the intention is to have Greece default. How bad is it? This bad:

The recent credit crisis was over a few trillion in bad, mostly US, mortgage debts, with most of that at US banks. Greek debt is $350 billion, with about $270 billion of that spread among just three European countries and their banks. Make no mistake, a Greek default is another potential credit crisis in the making. As noted above, it is not just the writedown of Greek debt; it is the mark-to-market of other sovereign debt.

That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen. Just as the Fed (under Volker!) allowed US banks to mark up Latin American debt that had defaulted to its original loan value (and only slowly did they write it down; it took many years), I think the same thing will happen in Europe. Or the ECB will provide liquidity. Or there may be any of several other measures to keep things moving along. But real mark-to-market? Unlikely.

The entire EU is faced with no good choices. It is coming down to that moment of crisis predicted by Milton Friedman so many years ago. And there is no agreement on what to do. (-

We haven't predicted the breakup of the EU over Greece or the Pigs, only a great deal of pain, so far. But we have asked how long the long-suffering citizens of the EU will be prepared to tolerate an endlessly painful euro-experience. Eventually, the pain will be used as a cynical launching pad, we expect, for Europhiles to call for a political union to supersede the current economic one. Of course, this has probably been the plan all along, but we wonder whether it is going to work.

We think the EU is a despicable organization, clearly corrupt from heel to head, a dictatorial regulatory democracy of the worst kind, one apparently modeled on purpose after the USSR's old bureaucracy. It is a kind of engineered coup of the power elite, a step toward creating and then integrating large national blocks in anticipation of ever larger, global economic union. Unfortunately, for the elite, the Internet has clearly become a focal point for organizing against the EU in Europe, and has even been a main force in keeping Britain out of the euro.

It is not surprising to find Wall Street mixed up in the Greek mess. And many may make a big deal out of it. But as bad as Wall Street is, the EU itself is worse – at least when it comes to culpability for the Greek situation. And boy does the EU have problems. You probably won't read this elsewhere (which is why you read the Bell!) but the biggest problem the EU has is not the failing of the Pigs but the failing of the Euro promotion itself. And for this reason in this case, Wall Street's (direct) involvement seems to us, for once, more a symptom than a cause.

The EU's problems actually are far bigger than the Greece of the Pigs or the endless, looming economic crisis. The biggest problem is that the cynical plans of its leaders to exploit the inevitable currency crisis (one sure to come, they knew) are dimming thanks in large part we believe to modern electronic communications. There is an incredible amount of anti-EU sentiment on the Internet in Britain. And we have to think that there is a good deal of anti-EU sentiment being expressed elsewhere on the ‘Net in Europe as well.

After Thoughts

Here's our point: When the bureaucracy of the EU attempts to "spin" the currency crisis toward a more perfect political union, watch out. The EU powers-that-be rammed the euro through. But building a stronger political union at this point in time, given the ubiquity and power of the ‘Net and the increasing disillusion of EU citizens, may be a rougher haul than EU planners expected. Times have changed. Power elite dominant social themes are not looking healthy, and it is possible that the EU itself may fall victim. Couldn't happen to a more deserving bunch.

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