Greece is the WOR(L)D: February 10, update
There is a good article at Naked Capitalism that shows how Goldman Sachs helped the previous Greek government hide at least $1 billion of its public debt:
Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called 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.
Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.
But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.
Far from blameless in this sordid tale, successive government have falsified the true picture of Greece’s debt bomb. An important part of that spending spree was on lavish military procurements:
The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.
Another study cites the close link between Greece military expenditures and its public debt:
Greece has over the years allocated substantial human and material resources to defence. Its defence burden (i.e. military expenditure as a share of GDP) has invariably been substantially higher than the EU and NATO averages. Furthermore, during the post-bipolar period, when the defence budgets of most countries shrunk, Greek defence spending grew in real terms. This paper contributes to the existing literature on Greek defence spending and its effects by empirically estimating the impact of such expenditures on the country’s fiscal situation during the period 1960-2001 something that has largely been ignored in the relevant literature. In particular, it focuses on the effects of military spending on government debt and its two components: internal and external debt. The empirical findings reported here suggest that central government debt and, in particular, external debt has been adversely influenced by military expenditure but also by the domestic political cycle.
Deepening debt is what we would expect, since Greece was pursuing fairly aggressive military expansion without a corresponding trade surplus to offset the cost. As Krugman’s model states, such a policy had to result, sooner or later, in an attack on its currency, and corresponding collapse of the country’s economy. The fact that Greece uses the euro doesn’t alter the issue: If it cannot devalue its currency, wages must fall in any case. Government spending is a part of the surplus product of a country, if it and total profits are to be maintained at some level previously in excess of existing total surplus produced, as was the case in Greece, wages must fall.
Yves Smith points out that Goldman’s deals are often used, “to shift risk onto chumps.” It turns out that the chumps, in this case, will be the unions. The working class of Greece is going to take it in the neck on this one – exports have to expand, and this will come at their expense if Athens, Washington and Wall Street have their way. Without deliberate effort to reduce military expenditures and renunciation of external debt, Greece is going to reenact Argentina in short order.