Greek Debt Crisis

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  • Topic: Government debt, Sovereign bond, Government bond
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  • Published : October 2, 2011
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Research Briefing

April 2011

Morgen Investment Bank

 The long existed fiscal deficit and breakage of the EU rule is the ground for the Crisis. Goldman Sachs helped Greece mask billions of debt using cross-currency swap with an artificial exchange rate Any bailout from European Central Bank or IMF can only lead to a much heavier debt burden and a higher ratio of sovereign debt for Greece. Greece has a very high probability of 70%-75% of restructuring its debt. The loss for debt holder could amount to $56.79 billion, i.e. a 67% reduction in present value. Besides the extremely overvalued CDS, other hedging techniques exist.


Snapshot In October 2009, the Greek government suddenly announced that the percentage of budget deficit and public debt government to GDP was expected to be achieved respectively 12.7% and 113%, which were far above the 3% and 60%, the upper limit of the EU’s Stability and Growth Pact. Due to the significantly deteriorated fiscal situation of the Greek government, in December 2009, ratings agency Fitch cut Greece's long-term debt to BBB+, from A-. This is the first time in a decade that Greece did not have an A-rating, and pushed up the cost of borrowing. Moreover the other two rating agencies also downgraded the Greece’s credit rating, which symbolized the outbreak of the Greece debt crisis.

Seeds of the problem 1. Fiscal deficit

The fiscal issue has long troubled the Greece government. At present, the fiscal deficit to GDP ratio is as high as 12%, far exceeds the requirement of 3% set by the European union, in addition , the public debt to GDP ratio for the country has been peaked at 110%. The long existed fiscal deficit and its breakage of European Union rule become the ground for the crisis.


As for the tax revenue, tax dodging in Greece is so rampant that the Bank of Greece estimated the country could be losing as much as five billion Euros a year. Greece's revenue from income tax was 4.7% of GDP in 2007, compared with an EU average of 8%, as EU statistics shows. Tax revenue fell by 2.5% points of GDP between 2000 and 2007 to a euro region-low of 32 % even as economic growth averaged 4.1% a year. 2. Political issue

Corruption is widely regarded as one of the triggers of the Greek debt crisis threatening the euro common currency. A new study by Transparency International suggests that corruption is part of everyday life in Greece, and claims private households paid more than 780 million euro in bribes in 2009. 3. Swap with Goldman Sachs

Goldman Sachs helped Greece mask billions of debt using cross-currency swap with an artificial exchange rate. In this cross-currency swap, the Greek government issued debt in dollars and yen, which then were swapped for euro debt for a certain period at an exchange rate provided by Goldman Sachs — to be exchanged back into the original currencies at a later date. However, the exchange rate used here is an artificial high one and is more favorable than the available market rate, which as a result gave Greece more Euros and helped them cover up that additional part of its deficit. Why did Greece government need to use swap? Based on the regulations, each country needs to achieve the following two requirements to be allowed to become a member of the European Union. (1)an annual budget deficit no higher than 3% of GDP (2) a national debt lower than 60% of GDP. However, the actual deficit of the Greek government at that time was revealed later to be 5.2% of its GDP, far higher than the required standard. Therefore, in order to get the entrance permission of the EU in 2001, the government of Greece made an agreement with the investment bank Goldman Sachs about using complicated swap transactions to hide the a part of the real deficit to meet the EU’s requirements. The deal was not publicly announced, and billions of Euros of the loan were...
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