The revelation that Goldman-Sachs used derivatives to help Greece disguise the true extent of its budget deficits turns out not to be breaking news. Felix Salmon alerts us to a story written by Nick Dunbar in Risk Magazine that exposed the scam all the way back in 2003.
So why didn't anybody do anything about it? Because Eurostat, the European Union's statistical information service, had already decided, in 2002, that the kind of financial manipulation engaged in by Goldman and Greece was "a completely legitimate transaction."
According to the rules governing membership in the Eurozone, participating nations must not violate specific ratios of debt to GDP. The credit swaps engineered by Goldman for Greece were designed to do precisely that. They made Greece's current finances look better while pushing liabilities into the far future, out of sight. And everyone knew it.
The answer can be found in ESA95, a 243-page manual on government deficit and debt accounting, published by the European Commission and Eurostat in 2002. ... the drafting of ESA95's section on derivatives was the subject of fierce arguments between the government statisticians and debt managers of certain eurozone countries.
The statisticians wanted derivatives-related cashflows to be treated as financial transactions, with no effect on deficit or interest costs, and with the derivatives' current market value stated as an asset or liability. The debt managers opposed this, insisting on having the freedom to use derivatives to adjust deficit ratios. The published version of ESA95 reflects the victory of the debt managers in this argument with a series of last-minute amendments.
The "victory of the debt managers" provides a useful bit of context for all the hyperventilation about how "Goldman Sachs broke the spirit of the Maastricht Treaty." Yes, the credit swaps that Goldman engineered clearly allowed Greece to wiggle around Eurozone requirements. But the shocked European Union officials expressing such outrage right now protest too much. Exactly the same manipulation can be found everywhere, and not just in Europe, where Greece was hardly the only country to play such games. Examples of similar chicanery abound in corporate accounting across the world. This is Enron economics all over again. It's lots of fun to pick on Goldman, because the tentacles of the giant vampire squid always seem to show up when financial chaos lurks, but Goldman wasn't doing anything unique.
Dunbar concludes his 2003 piece by observing, with wonderful drollness, that, as with "many accounting-driven derivatives transactions, such deals are bound to create discomfort among those who like accounts to reflect economic reality." Exactly! But such deals are the natural result of weakly-regulated systems in which the rules are written by the would-be manipulators. If Goldman hadn't assisted Greece, someone else would have.
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