THE DOT - if this turns orange or red be alert

Tuesday, February 9, 2010

part 2

3. Some sort of deal is very likely around the weekend - a very beneficial astro constellation starts next week which should bring a 1-2 week rally into motion. Despite all this theatric action Europe enjoys the Euro to be weaker and giving guarantee's does not change the matter of fact that the PIIGS can default. California is also guaranteed by the USA but the negativity of the situation does not improve at all. All tricksters in the EU will come to the limelight sooner or later as Germany has not integrated several hundred of billions it owns to pension funds to its official budget either or made some Enronesque swaps with Goldman.

excerpt 1

Germany Considers Loan Guarantees for Greece

BERLIN—Germany is considering a plan with its European Union partners to offer Greece and other troubled euro-zone members loan guarantees in a bid to calm fears of a government default and prevent a widening of the credit woes that have shaken global markets in recent days, people familiar with the matter said.

Europe's Debt Crisis

Take a look at events that have rattled European governments and global markets.

The proposed plan would be undertaken within the EU framework but led by Germany, one of the people said. German Finance Minister Wolfgang Schaeuble has discussed the idea in recent days with European Central Bank President Jean-Claude Trichet, according to the person.

The deliberations underscore concerns in Europe that the market turmoil surrounding high debt levels in Greece and other countries on the periphery of the 16-nation euro zone could undermine the monetary union.

It is unclear how the guarantees might be structured, but any initiative that allows countries in violation of the currency bloc's deficit rules, such as Greece and Spain, avoid the consequences of loose fiscal policies, would likely fuel concerns over the long-term viability of the common currency.

That the EU nonetheless is considering such a step suggests that policymakers view the alternative—a potential default of a euro-zone country—to be an even worse outcome and one that could have grave consequences for both the Europe and the global economy.

EU leaders are expected to discuss the situation at a summit in Brussels on Thurday. A final decision on the plan may not come this week but Germany has concluded that guarantees are likely the most efficient way to contain the debt crisis, a person familiar with the matter said.

A spokesman for Germany's finance ministry said no decisions on aid had been made.

excerpt 2

How Greece hid its borrowing in the swaps market

Feb 9, 2010 07:55 EST

Beat Balzli has an intriguing story at Spiegel saying that Greece has been hiding the true nature of its deficits and its debt using clever derivatives dreamed up by Goldman Sachs. I believe it, although the details are sparse:

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.

According to Balzli, Goldman has no risk on this deal, after selling the swap to a Greek bank in 2005.

How might a deal like this work? Let’s say that Greece issues a bond for $10 billion, which it would then normally swap into euros at the prevailing interest rate, getting $10 billion worth of euros up front. In this case, it seems, the swap was tweaked so that Greece got $11 billion worth of euros up front — and, of course, has to pay just as many euros back when the bond matures. Essentially, it has borrowed $11 billion rather than $10 billion. But for the purposes of Greece’s official debt statistics, it has borrowed only $10 billion: the extra $1 billion is hidden in the swap.

This wouldn’t be the first time that Goldman came up with a clever capital-markets deal to help a European country get around the Maastricht rules: as far back as 2004, Goldman put together something called Aries Vermoegensverwaltungs for Germany, in which Germany essentially borrowed money at much higher than market rates just so that the borrowing wouldn’t show up in the official statistics. And according to Balzli, Italy has been doing something almost identical to the Greek swap operation, using a different, unnamed, bank.

It’s a bit depressing that EU member states are behaving in this silly way, refusing to come clean on their real finances. But so long as they’re providing the demand for clever capital-markets operations like these, you can be sure that the investment bankers at Goldman and many other investment banks will be lining up to show them ways of hiding reality from Eurostat in Luxembourg.

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