Did Wall Street enable the Greek debt crisis?

“People seem to forget,” wrote economist and former labor secretary Robert Reich in a column that was widely circulated in a variety of forms over the last few days, “that the Greek debt crisis ... grew out of a deal with Goldman Sachs, engineered by Goldman's Lloyd Blankfein.”

Perhaps, especially in the U.S., and paradoxically, especially in the last year or so, as the Greek financial crisis again churned its way into the news cycle, people forgot — but in Europe, and even in the U.S. press at various times over the last 14 years, the deep, dark connections between Greece’s debt and Wall Street derivatives markets have been, if not top-of-mind, always close at hand.

Under the rules governing the euro, the Greek economy was really carrying too much debt to join the European common currency (this was back in 2001, a couple of years after formal trading in euros began). But a team from Wall Street investment giant Goldman Sachs saw a way around that pesky Maastricht Treaty stuff, and the Greek government, excited by the prospect of reinvigorating their small, shaky economy, were eager to sign on.

At the time, Greece owed 600 million euros ($660 million at today’s rates, substantially more back then) over and above the 2.8 billion euros it had borrowed. Goldman engineered a currency swap where Greek debt, issued in dollars and yen, was exchanged for euros that were priced at a “historical” (a fancy word for “completely fictitious”) rate. The investment house also set up an off-market interest-rate swap to repay the loan. Wait ... what should this be called?

Not a loan, apparently, but a currency deal — and because this was considered a currency deal and not a loan, the arrangement was not just not counted as another obligation on Greece’s ledger, it was kept out of the public eye altogether. It was simply a private deal between a country and a Wall Street broker.

The swaps reportedly made 2 percent of the Greek debt disappear from the country’s balance sheet. Not enough to meet Maastricht rules exactly, but enough for EU regulators to agree the Greek load was heading in the right direction.

The deal also made up 12 percent of Goldman’s $6.35 billion in trading and investment revenue for 2001.

Yes, that is a big number.

Because the deal was considered extraordinary in both size and structure, Goldman Sachs charged Greece a premium fee of $300 million — and it did so while warning the country not to shop around for a better price. Goldman was also pledged landing fees from Greek airports and revenue from the national lottery as part of the transaction.

And most of this was actually exposed twelve years ago by Nick Dunbar in an article in Risk Magazine.

But back in 2001, within three months of inking the deal, when bond markets tanked after the attacks of September 11, Greek officials realized that maybe Goldman’s easy money wasn’t so easy, after all. And after years of tweaks and secondary deals, all while the national debt nearly doubled in size, Greece faced another crisis in 2005.

This time, Goldman Sachs “restructured” the deal, selling the interest rate swap to the National Bank of Greece. This increased the debt, stretched out the payments into the century’s fourth decade, and increased Goldman’s projected cut to something like $500 million, according to Dunbar (as reported later by the New York Times).

Such arrangements may have continued were it not for a change of government in Greece in 2009. The incoming president tripled the country’s deficit estimates, while the European Union tightened its accounting rules, partly in reaction to the unreliability of Greek budget estimates. Still, Goldman remained undaunted.

A month after assuming office, the new Athens government entertained a delegation headed by then-Goldman Sachs president Gary Cohn. Cohn offered to finance the country’s health care system debt, pushing it far into the future. After all, argued Goldman’s team, it had worked before.

It had certainly worked for Goldman: The Wall Street house not only earned large transaction fees and rights to future Greek revenue, it also hedged its investments, essentially placing a bet on the economy of Greece to fail. Looking at the deals in the rearview mirror, analysts said Goldman’s exposure on Greece was, for all intents and purposes, zero.

Then-Greek Finance Minister George Papaconstantinou defended his country’s dealings in 2010, calling them “legal at the time.” But even if legal, everyone — including the German government — knew they weren’t entirely honest. 

“Goldman Sachs broke the spirit of the Maastricht Treaty, though it is not certain it broke the law,” Michael Meister, financial affairs spokesman for German Chancellor Angela Merkel, told Bloomberg in 2010. The German government, back then, pledged new rules to better safeguard the integrity of the euro.

Perhaps it was the possibility of that scrutiny, or perhaps the new Greek government saw the contrast in the fortunes of their country and Goldman, but Greece declined the bank’s 2009 deal. It was soon after that reports first surfaced of the wheeling and dealing in managing Greek debt.

There have even been suggestions, in recent days, of legal action against Goldman. Jaber George Jabbour, who used to design swaps at Goldman, has reportedly written the Greek government, saying that his former employer charged “unreasonable” fees on the Greek deals, and advising that the government could “right historical wrongs” and reduce its debt by moving to claw back some of Goldman’s gains.

It's not only Greek officials and Goldman-Sachs that were aware of such maneuvering. Analysts have noted Germany’s creative accounting in the wake of the 2008 financial collapse, while derivatives deals between Italy and JP Morgan in the mid-1990s are seen as the precursors of Goldman’s Greek gambit.

The price of such recklessness, however, is born not by Wall Street banks and the bigger European economies that enabled or turned a blind eye to it. The consequences are born by ordinary Greek people that now find themselves in the the economic equivalent of debtors’ prison.