Tuesday, February 23, 2010

Post 221. Russian Roulette, PIGS' Style?

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Russian  Roulette,  PIGS' Style?

An article published on 13 February in "The New York Times" has been hardly noticed in Italy. And yet it is the bell that indicates the end of recreation for the Italian economy. The headline "Wall St. helped to mask debt fueling Europe's crisis" summarises the hypothesis of the three authors: L. Story, L. Thomas, and N. Schwartz. The American banks and above all Goldman Sachs have allowed certain European countries to hide their deficit from the EU. The one with most exposure is Greece, that in 2000 and 2001 had at least two contracts of “swaps” with Goldman Sachs with names drawn from Greek mythology: Ariadne and Aeolus, to get immediate cash in exchange for a deal on future earnings from airport taxes and lotteries. The Greek government classified the contracts as sales and not as (risky) long-term loans. No one knows how many of these contracts have been drawn up and for what value.
Angela Merkel has declared that it would be a scandal if Greece had hidden its debt. According to the agency Bloomberg, there are at least 15 banks that have granted loans in the form of “swaps” in which the risk of the other party is down to Greece. Basically with the “swaps”, the banks provide sums of money in advance according to an event that may or may not happen and (usually) it doesn’t happen. Thus the client then finds they have to repay the loan with hefty interest rates as is happening for many Italian towns that have got into debt in recent years. The “swap” is used to move a debt further into the future but sooner or later it has to be paid. It’s like a credit card. The problem gets more serious when the debt is not declared as such and it suddenly pops up on the States’ balance sheet. The same that happened with the sub-prime for the banks can happen with the swap derivatives for the States.
The banks are always searching for great business opportunities and the States that are about to go under have always been just that. Last November, with Greece in a full crisis, Goldman Sachs went back to Athens to the scene of the crime to put forward the suggestion of using the umpteenth financial instrument to push the Health Service debt into the future. Greece did not accept, or perhaps it was not able to accept.
The article also mentions Italy … “Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.” …. “countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.” At the end of 2009, Greece’s public debt was 298.5 billion euro. If Greece were to default, it would drag down with it many large banks. However, the Greek economy is only worth 3% of the European GDP. An intervention plan is possible. The true threat to European economic stability is Italy, according to Robert Mundell Nobel prize-winner for economics. Italy has about 1,800 billion euro in debt, six times that of Greece, a quarter of the whole European debt and it could be the target of speculative attacks. How many derivatives has the Treasury contracted to? And with whom? And with what conditions? On the public debt, State secrecy should not operate. Tremorti, if you are there, knock once!

Posted by Beppe Grillo at 06:43 PM in |


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