The Greek Debt Coverup: Headed for Cable TV?

If you like The Sopranos, you'll like the Greek debt crisis. As events unfold and people win or lose, the veneer of civility in the financial markets, diaphanous in the best of times, may be wearing through completely. People who play in the financial sandbox can be very poor losers. Perhaps we are seeing that in the latest episode of the Greek debt drama.

The New York Times reports that, in 2000 and 2001, the government of Greece entered into derivatives deals with Goldman Sachs which allowed it to downplay its true debt levels. http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp. Details are scant. The transactions are described as swaps, although they appear to take the form of sales of revenue streams like the proceeds of the Greek national lottery and the landing fees collected by Greece's airports. Evidently, the transactions were structured to let the Greek government avoid characterizing them as debt. That seems to have helped the government present a sufficiently conservative fiscal picture to meet the requirements for EU membership.

If an American public company did something like this, it might well find itself receiving SEC subpoenas. If it acted deliberately with an intent to mislead investors, its executives might have the unsettling experience of testifying before a federal grand jury (which means answering questions without having your lawyer present).

State and local governments in America aren't immune from federal regulation. When Orange County, California did some dumb derivatives deals in the 1990s, it and a couple of its officials were sanctioned by the SEC for failing to disclose serious risks of loss that later materialized. See http://www.sec.gov/litigation/litreleases/lr14792.txt. When the Massachusetts Turnpike Authority, in constructing the infamous Big Dig in Boston, failed to disclose nasty cost overruns, it and its one-time chairman were also sanctioned by the SEC. http://www.sec.gov/litigation/admin/33-8260.htm. So the principle of full and fair disclosure by governments isn't unfamiliar to the U.S. financial markets. But, in 2001, when Greece joined the EU, it evidently wasn't required to reveal how it had gussied up its financial statements.

The Times story indicates that the Greek derivatives deals were in 2002 revealed to be loans, after accounting standards changed. And, to the Greek government's credit, it reportedly turned down a financing transaction proposed by Goldman in late 2009 that would have allowed it to defer recognition of public health care expenses. (We can't help wondering what that involved--the sale of the Parthenon?)

It's interesting that this story appears now, right after the EU announced, albeit vaguely, that it would somehow not let the Greek debt situation deteriorate into financial panic. It's unclear how the Times picked up on these derivatives deals. But they must have had a source or two or three, because newspapers don't know about this sort of stuff on their own. And the source(s) must have talked to the Times recently. Otherwise, why wouldn't the Times have run the story, say, three months ago when the Dubai debt mess brought sovereign debt problems prominently into focus?

Who might the source(s) be? Logic and experience indicate market player(s) who might have taken a hit when Greek debt recovered after the EU announcement, perhaps holder(s) of credit default swaps. CDS's on Greek debt fell in value after the EU made its love-those-Greeks announcement. You don't have to have any substantive exposure to a relevant debt to buy a credit default swap. A CDS can be used to make a pure side bet, like putting money down in Las Vegas on the outcome of the Super Bowl. A player making a pure bet would have taken losses without any counterbalancing gain from underlying debt when the EU embraced Greece (okay, not quite). As we noted earlier, players in the financial markets sandbox can be very pouty losers. Maybe a speculator or two contacted the Times and clued them in, hoping that public revelation of these machinations might call into question the accuracy even now of the Greek government's accounting, and reverse recent price trends in credit default swaps.

Heightening suspicions is the fact that the Times also just ran a story about a Greek government statistician who found himself living in a world of controversy when he was allegedly associated with inaccuracies that understated the Greek government's budget deficit by more than two-thirds. See http://www.nytimes.com/2010/02/14/world/europe/14greek.html?ref=business. This individual, no longer employed by the Greek government and now living in New York to "escape from Greece," insists that he isn't at fault. Regardless of who understated the Greek budget deficit, why would an obscure Greek statistician suddenly be of interest to one of the most widely-read newspapers in the world? What are the chances that two stories about the inaccuracies of Greece's national accounting would randomly run in The New York Times the weekend after the EU reluctantly rides to the semi-rescue and some people lose money betting against Greek debt?

The probity of Greece's national accounting is a legitimate subject for the press, and it's quite common for newspapers to run related stories on the same day. There's no reason to think the Times did anything improper by running these stories when it did. But the Times surely didn't know about Greece's national accounting problems all on its own. Financial market players have always tried to spark the dissemination of information favoring their investments. In addition, financial crises produce volatile prices, which give banks, hedge funds and other big bonus boys the opportunity to make outsized profits. With millions and maybe billions on the line, these folks play for keeps (as in, they want to make and keep profits). They might hope that the relative equanimity produced by last week's announcement of EU support for Greece will be disturbed by these recent stories about dodgy Greek national accounting. Perhaps some holders will start selling their suddenly not so gorgeous bonds. Other players, perhaps more speculative, might step in and buy. Credit default swaps could again become fashionable.

The nastiness index appears to be rising. The Greek and other Euro bloc sovereign debt problems remain far from resolution. Stay tuned. So far, no one has been wrapped in chains and tossed off a boat. But the plot thickens.