Goldman Sachs, the giant investment bank, is today at the centre of the row over the Greek government's finances, amid recriminations over complex financial deals that allowed the eurozone nation to skirt its debt limits.
With European finance ministers meeting in Brussels today and tomorrow to discuss ways to prevent a debt crisis threatening the eurozone as a whole, a spotlight has been shone on techniques used by Greece and other indebted countries to give the appearance of lower budget deficits and debt levels.
The euro membership rules place strict caps on the size of government deficits relative to a national economy, but Goldman Sachs and other banks helped Greece raise cash earlier in the decade in ways that did not appear in the official statistics. With the current recession causing even official budget deficits to balloon all across the continent, fears of further hidden liabilities have been contributing to the crisis of confidence in Greek debt and pulling down the value of the euro.
Goldman Sachs has been the most important of more than a dozen banks used by the Greek government to manage its national debt using derivatives.
The bank's traders created a number of financial deals that allowed the country to raise money to cut its budget deficit now, in return for repayments over time or at a later date.
In one deal, Goldman channelled $1bn of funding to the government in 2002, in a transaction called a cross-currency swap. There is no suggestion of any wrong-doing by Goldman Sachs. Such deals are an expensive way of raising money, but they have the advantage of not having to be accounted for as debt.
The eurozone rules dictate that governments must keep a country's deficit below 3 per cent of its Gross Domestic Product (GDP) and must take on total debt of no more than 60 per cent of GDP – rules that Greece did not keep to, even during the economic boom. Goldman Sachs, the world's most powerful investment bank, is already under intense scrutiny in the ongoing controversy over banking practices, pay and profits. President Barack Obama last month launched an assault on Wall Street, proposing to cap the size of the biggest US banks and clamp down on their trading activities. On the same day, Goldman began distributing nearly £10bn in pay and bonuses to its staff for their 2009 performance, just a year after the financial system was bailed out by governments.
Reflecting the importance of the Greek government as a client, and the scale of the fees to be generated from derivatives deals, Goldman sent Gary Cohn, who as chief operating officer is second-in-command of the global group, to Athens last November to pitch for new business with the debt management office.
According to a report yesterday, Goldman suggested a way that Greece could push healthcare liabilities further out into the future. The bank has refused to comment. Other eurozone countries have been discovered using cross-currency swaps similar to one causing concern in Greece, including Italy, which did a controversial transaction with JP Morgan before it joined the euro.
The size and scale of the use of derivatives is not fully understood, even by Eurostat, the European Union's official statistics body, which has complained that member nations' finances are opaque and that the information it is given about derivatives deals is incomplete.
Gustavo Piga, an economics professor at the University of Rome, whose 2001 paper on the topic sparked furious debate within the EU, questioned the wisdom of using Wall Street banks to invent ways to skirt debt rules. "What kind of relationships start to arise between these governments and these banks once they are in this mortal embrace of reciprocal blackmail potential? How does this change the dynamics on other issues, such as the regulation of banks?
"We have no idea – maybe nothing, but certainly there is a conflict of interest here," he told Risk magazine this week.
EU leaders promised last Thursday to make sure that Greece could meet its debt repayments, but sketched no mechanism for doing so, and pledged no specific sums of money. They reiterated their demands for Greece to redouble efforts to impose the swingeing public spending cuts that have prompted widespread labour unrest.
Finance ministers are continuing to work on contingency plans for a bailout this week, amid signs of disagreement over the scale of austerity measures to be demanded of Greece.
The European Central Bank is seeking tougher measures than the politicians are willing to demand.