Goldman Sachs Transactions with Greece
Greece, like most countries in Europe, uses the international debt markets to meet its financing needs, in addition to borrowing in the domestic market. As a result, many countries have significant amounts of debt denominated in foreign currencies. Greece actively accessed both the Japanese Yen and US Dollar markets, amongst others.
Following Greece’s decision to join the European Monetary Union and adopt the Euro (which, under the criteria set by the European Union, included a debt-to-GDP ratio of less than 60%), reducing the size of foreign denominated liabilities became a priority for Greece, as it did for most European sovereign states.
According to the EU accounting framework, unhedged foreign currency denominated debt was required to be translated into Euro using the year-end exchange rate. The strengthening of the dollar or yen against the Euro in 1999 and 2000, created an unfavorable increase in Greece’s reported Euro debt levels.
Accordingly, Greece entered into a series of hedging agreements designed to transform foreign debt into Euro, a common practice undertaken by many European member states with foreign debt outstanding. By the end of 2000, Goldman Sachs had a portfolio of swaps hedging USD and JPY debt issued by Greece.
In December 2000 and in June 2001, Greece entered into new cross currency swaps and restructured its cross currency swap portfolio with Goldman Sachs at a historical implied foreign exchange rate. These transactions reduced Greece’s foreign denominated debt in Euro terms by €2.367bn and, in turn, decreased Greece's debt as a percentage of GDP by just 1.6%, from 105.3% to 103.7%.
The Greek government has stated (and we agree) that these transactions were consistent with the Eurostat principles governing their use and application at the time.
Interest Rate Hedges
The December and June 2001 cross currency swaps generated a reduction in the value of the swap portfolio for Goldman Sachs. To offset this, Greece and Goldman Sachs entered into a long-dated interest rate swap. The new interest rate swap was on the back of a newly issued Greek bond, where Goldman Sachs paid the bond coupon for the life of the trade and received the cash flows based on variable interest rates.
Effect of Currency and Interest Rate Hedges
The transactions reduced the country’s debt by a total of €2.367bn, although they had a minimal effect on the country’s overall fiscal situation. In 2001, Greece's GDP was ~$131bn, and its debt was 103.7% of GDP. By 2008, Greece's GDP was ~$357bn and its debt was more than 99% of that.