Goldman’s Greek Swap Spurs ECB to Seek New EU Deficit Rules

(Bloomberg) -- The European Central Bank may try to get European Union rules amended so that countries can’t use swaps to cut excessive budget deficits, capitalizing on a debate sparked by Goldman Sachs Group Inc.’s swap arrangements with Greece.

European politicians have criticized Goldman Sachs after the Greek fiscal crisis turned attention to a currency swap the firm arranged in 2002 that helped Greece hide the extent of its budget deficit and overall debt level. The ECB document, dated March 3 and marked “restricted,” suggests the central bank should use the issue to push for tighter fiscal controls on euro-area nations that breach EU rules.

“Considering the recent upheaval in relation to these swaps, the opportunity should be seized” to amend the calculation of excessive deficits, the document says. “Such a change would increase the transparency and methodological soundness of government deficit figures, without compromising governments’ ability to actively manage their debt through a sound economic use of swaps.”

A Goldman spokeswoman didn’t return a phone call seeking comment yesterday. European Commission spokesman Amadeu Altafaj didn’t return a phone call seeking comment.

The Goldman Swap

In the document, the six-member Executive Board, headed by ECB President Jean-Claude Trichet, invites the Governing Council to mandate it to discuss the proposal with the European Commission. The Governing Council consists of the Executive Board and the heads of the euro area’s 16 member central banks, and is the ECB’s main policy-making forum.

Greece in 2002 entered a cross-currency swap agreement with Goldman Sachs on about $10 billion of debt issued in dollars and yen. That was swapped into euros using a historical exchange rate, a mechanism that generated about $1 billion in an up-front payment from Goldman to Greece. Goldman has said it did nothing wrong.

‘Unusual Terms’

National Bank of Greece SA, the country’s biggest lender, in August 2005 bought the rights to reimbursements owed by the Greek government from Goldman for 5.1 billion euros ($6.9 billion), according to the ECB document. In December 2008, the government and the National Bank of Greece agreed on a new swap and securitization, it says.

“It can be shown that the unusual terms of the swap amount to the Greek government effectively obtaining a 30-year loan of 5.4 billion euros from NBG,” the document says. The operation “appears to be a roll-over of a similar one concluded by the Greek government with Goldman Sachs earlier in the decade” and other off-market swaps.

The ECB identified the operation in April last year, according to the document. It says the asset-backed securities created in the 2009 securitization were retained in full by the National Bank of Greece with a view to pledging them as collateral with the ECB.

“It could be argued that the borrowing needs of the Greek government may be seen as indirectly supported by the Eurosystem’s refinancing operations,” the document says. “In the upcoming review of the eligibility criteria applicable to” asset-backed securities, the ECB “should become more restrictive, in particular with respect to idiosyncratic structures.”

Excessive Deficits

The two-page document is titled “The Use of Derivative Transactions in Deficit Financing and Government Debt Management, The Greek Case.”

When countries’ deficits exceed the EU limit of 3 percent of gross domestic product and they enter the European Commission’s so-called excessive deficit procedure, interest payments linked to swaps are included in the deficit calculation. That can result in a smaller gap. Normally, they are recorded as financial transactions and don’t affect a government’s net lending and borrowing, according to European Union statistics office Eurostat.

Luxembourg, Cyprus and Finland are the only euro-region nations not in the excessive deficit procedure at present.

‘Scandal’

Fifteen of the 16 euro members have made money on swaps used to manage their debts, Eurostat data from 2000 through 2008 shows.

Greece made a net 1.67 billion euros on swaps between 2000 and 2008. Italy, whose deficit exceeded the region’s limit five times in the last decade, earned 8.1 billion euros from interest-rate and currency swaps from 1998 through 2008.

European politicians argue that the Goldman swap arrangement helped Greece hide the scale of its fiscal woes. German Chancellor Angela Merkel said on Feb. 18 it would be a “scandal” if banks helped Greece massage its budget deficit, which ballooned to 12.7 percent of GDP last year.

Gerald Corrigan, the chairman of Goldman’s regulated bank subsidiary, told the U.K. Parliament’s Treasury Committee on Feb. 22 that his company did “nothing inappropriate” when it arranged currency swaps for Greece. Nevertheless, he conceded that the arrangement could have been more open.

“With the benefit of hindsight, it seems to be very clear that the standards of transparency could have, and probably should have been, higher,” he said.