Full press release from Goldman Sachs giving the company's perspective on the recent topic du jour about its arrangement of numerous Greek currency swaps. One wonders why pour more gas on the pr nightmare fire, if indeed everything was according to the books. One also wonders just how many of the "European member states with foreign debt outstanding" that performed comparable transactions will be presented as a shocker to Eurostat, which at last check was only 7 years behind the curve.
February 21, 2010
Greece, like most countries in
Europe, uses the international debt markets to meet its financing
needs, in addition to borrowing in the domestic market. As a result,
many countries have significant amounts of debt denominated in foreign
currencies. Greece actively accessed both the Japanese Yen and US
Dollar markets, amongst others.
Following Greece’s decision to join the European Monetary Union and
adopt the Euro (which, under the criteria set by the European Union,
included a debt-to-GDP ratio of less than 60%), reducing the size of
foreign denominated liabilities became a priority for Greece, as it did
for most European sovereign states.
According to the EU accounting framework, unhedged foreign currency
denominated debt was required to be translated into Euro using the
year-end exchange rate. The strengthening of the dollar or yen against
the Euro in 1999 and 2000, created an unfavorable increase in Greece’s
reported Euro debt levels.
Greece entered into a series of hedging agreements designed to
transform foreign debt into Euro, a common practice undertaken by many
European member states with foreign debt outstanding. By the end of
2000, Goldman Sachs had a portfolio of swaps hedging USD and JPY debt
issued by Greece.
In December 2000 and in June 2001, Greece entered into new cross
currency swaps and restructured its cross currency swap portfolio with
Goldman Sachs at a historical implied foreign exchange rate. These
transactions reduced Greece’s foreign denominated debt in Euro terms by
€2.367bn and, in turn, decreased Greece's debt as a percentage of GDP
by just 1.6%, from 105.3% to 103.7%.
The Greek government has stated (and we agree) that these
transactions were consistent with the Eurostat principles governing
their use and application at the time.
Interest Rate Hedges
The December and June 2001
cross currency swaps generated a reduction in the value of the swap
portfolio for Goldman Sachs. To offset this, Greece and Goldman Sachs
entered into a long-dated interest rate swap. The new interest rate
swap was on the back of a newly issued Greek bond, where Goldman Sachs
paid the bond coupon for the life of the trade and received the cash
flows based on variable interest rates.
Effect of Currency and Interest Rate Hedges
transactions reduced the country’s debt by a total of €2.367bn,
although they had a minimal effect on the country’s overall fiscal
situation. In 2001, Greece's GDP was ~$131bn, and its debt was 103.7%
of GDP. By 2008, Greece's GDP was ~$357bn and its debt was more than
99% of that. Greece’s deficit in 2001 was -4.5%; without the swaps, it
would have been -4.64%.