The markets last week were alert to the two dominant stories of Greece’s crisis and the release of oil from U.S.’s strategic reserve.
The U.S. government’s release of 30 million barrels of oil Thursday really made no sense. The price of oil has been declining for weeks on its own, dropping 15 percent. In reaction to the release, the markets panicked on the news and sold off hard. This appears to be a panic move by politicians in an attempt to remove energy cost inflation from the economy. But it just is not enough oil to accomplish this. The IEA global release of strategic reserves totaled 60 million barrels, the U.S. contribution half this release, which amounts to 16 hours of global oil supply. Yup, just 16 hours. Smart money says in just a few weeks oil will be not that far from where it started before the release thereby making the lowering price a temporary outcome. But instead putting us in a precarious situation as we no longer have those reserves for a time when we may really need them.
As for Greece, I found an article by Shah Gilani from The Money Map Report where he outlines just how Greece got into this mess fascinating. If you happen to have been watching what is transpiring, it is definitely worth the few minutes it will take to read. If they had any left to blacken, it would be one more for GS.
The Real Greek Tragedy
In 2000, Greece wanted to join the European Union. The Maastricht Treaty mandates that, for a country to be accepted into the Union, its deficit cannot amount to more than 3% of its GDP. Greece’s was closer to 5%.
So the country turned to financial engineering experts Goldman Sachs to build a “bridge to nowhere,” temporarily parking its debts out of sight.
Here’s how it went down.
First, in a 2000 deal, Greece offset some of its debt by “selling” the future revenue streams from its national lotteries. The next year, Greece “sold” future revenue streams from its airports’ landing fees.
(These deals were termed “sales,” because, at the time they were constructed, they couldn’t be called “loans.” A loan would have to be paid back, and would remain on the balance sheet as debt.)
But still more money was needed to lower the deficit-to-GDP ratio. So Goldman arranged a $10 billion currency swap. Instead of using spot rates to price the currencies being exchanged, Goldman used historic rates. Due to the pricing mismatch, Greece got to keep an extra $1 billion in the deal.
And – just like magic – Greece passed the Maastricht test and traded in its old drachmas for shiny new euros.
Of course, Goldman wasn’t going to just give Greece a billion dollars. So, to pay back the favor, the parties entered into an interest rate swap.
Greece had outstanding bonds on which it was required to pay a fixed interest rate of 4%. Goldman kindly offered to pay 4% if Greece would swap it for an obligation of its own – a floating rate equal to LIBOR plus an additional 6.6%! In other words, Goldman gets at least 6.6% and pays out 4%, netting 2.6% on $10 billion – at least $260 million a year. That’s how Greece paid Goldman back for its fancy financial footwork.
Then in 2005, Goldman sold the balance of the swap to the National Bank of Greece, for yet another tidy fee. At that point Greece (by then an E.U. member) owed almost $9 billion on the debt swap to the new holder of that debt – its own National Bank.
But the country was far from over its addiction to borrowed money…
The “Hellenic Swap”
As the global credit crisis was unfolding and the ECB was dishing out cheap money, the National Bank of Greece couldn’t get any handouts. It didn’t have any collateral.
What it did have was that loan it was holding from Greece itself, which was being paid back from tax revenues from airport landing fees, lottery earnings, and road tolls (the one Goldman had packaged).
Goldman to the rescue… The firm arranged another interest rate swap between the NBG and the Greek government. Only this time, the Bank got the higher rate, and what amounts to an annual sum of about $201 million.
But that’s chump change for the Bank. It really wanted a big chunk – billions – from the ECB.
So Goldman set up a Special Purpose Vehicle (SPV) to issue notes in the amount of $6.96 billion with an interest rate 4.5%, which – guess what – it swapped with the NBG for its 7.4% interest payment stream. The Bank ended up with the SPV’s notes and used those as collateral to borrow from the ECB.
The Moral of the Story (If There Is One)
So Goldman intentionally helped Greece cheat its way into the E.U., took its future tax revenues to get them in, made billions in the process, and then helped both the country and its biggest bank borrow even more money it could never pay back.
Actually, that sounds more like comedy…
The real tragedy is that Goldman and other big American banks are doing this all over the world. Many of the world’s economies are being leveraged up by a corrupt strain of capitalism that enriches itself while pushing the world towards another precipice.