Dateline Greece: Goldman, Just Pay Up

As more skeletons fall out of the closet, it is coming to light that Greece’s profligacy was abetted and managed for several years by the top Wall Street financial firms via complex instruments.

In 2001, before spendthrift Greece could enter the eurozone by satisfying the deficit limit rules of the currency union, Goldman Sachs entered the picture with a tricky currency trade deal that would hide billions of dollars of additional public borrowing and not make it look like debt. For this piece of consultancy, which helped Greece join the euro by hook or by crook, Goldman received fees of $300 million.

In 2005, Goldman sold to the National Bank of Greece an "interest rate swap," one of the notorious derivatives that have come under scrutiny since the Wall Street implosion of 2008. Greek critics of such dubious debt-hiding transactions had warned their government of the mounting long-term liabilities to the likes of Goldman, but to no avail.

According to news reports, Greece mortgaged revenue-generating assets like the national lottery, airports and highways as part of the agreements with Goldman in what amounted to “a garage sale on a national scale.”

Goldman Sachs is reported to have attempted a redux of 2001 when its president, Gary Cohn, landed in Athens in November 2009 with a similar debt deferral proposal that would continue to fool investors and the EU. This time around, Greece did not oblige.

But the damage had already been done over a decade of spiraling foreign debt that was repackaged and postponed with Wall Street’s wizardry. We now know that similar borrowing binges were occurring in the rest of the PIGS (Portugal, Italy, Greece and Spain) economies courtesy of the financial dodging expertise of Goldman, JPMorgan and the entire cadre of hedge funds.

Economies of developing countries, especially in Africa and Latin America, have endured decades of bitter experiences of falling into debt traps that sap productive resources, benefit speculative financiers and weaken state capacities to govern.

In their cases, the Bretton Woods institutions acted as economic restructuring consultants and funding taps that only opened if the recipients met crushing conditionalities.

John Perkins’s book, “Confessions of an Economic Hit Man,” reveals how highly paid professionals with knowledge of macroeconomics and world affairs were deployed to convince political and financial leaders of poor countries to accept massive “development loans” from the World Bank and USAID. Once ensnared, the supplicants would be subjected to pressure on different issues from Washington.

In the PIGS economies, it was not so much strategically motivated hit men working for the U.S. government but rather some freewheeling U.S. financial corporations that could make a killing out of clients who were addicted to reckless state spending.

In late February 2010, as the EU began investigating the Wall Street shenanigans in Athens, Goldman defended its Greek misadventures by arguing, predictably enough, that they were legal actions consistent with the regulations of their time.

Of course, much of the fault lay with the Greek politicians who were seduced by the Wall Street financial advisers who, for their part, were simply pursuing the bread-and-butter business of circulating wealth for profit.

Had Athens been more disciplined in organizing its finances, there would not have been a window of opportunity for Goldman and company to exploit its vulnerability.

But southern Europe’s debt-proneness has systemic consequences from which Wall Street cannot easily extricate itself. While there is no evidence to suggest that U.S. investment banks deliberately dug the graves of PIGS to weaken the euro, the disastrous social costs of their financial chicanery call for reparations.

It may not be unfair if the EU demands that Goldman, which now leads the earnings chart on Wall Street, accept moral responsibility and contribute to bailing out Greece.

Who knows — now that even the U.S. Federal Reserve is making noises about investigating Goldman's practices, the firm may be in a hurry to pay up.

Editor’s Note: This feature is adapted from a longer version published in The Financial Express on February 25, 2010.