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A short story of how a country can default in a few days

An example of what the systemic establishment calls as "conspiracy theory" and a story from the recent past we must not forget

In 2000, Greece agreed with Goldman Sachs in a funding program (Ariadne), which has been renewed with new terms in 2001 leading to a second program (Aeolos), to supply money to the country. Greece granted the lenders the rights in using airports and gambling.

The nature of this financial product was such that, lending appeared as selling and allowed Greece to exclude the amount of loan from the state expenses, thus display lower public deficit than the real one.

Indeed, from NY Times:

In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.”

Therefore, the conclusions so far are:

First: such "tricks" of hiding the real deficit were applied in other countries too, like Italy, member of the eurozone, with the "help" of JP Morgan, and

Second: was proved that Goldman Sachs knew at least since 2000 the real figure of Greece's deficit.

Since No1 and No2 international investors in Athens stock market (Norges Bank Investment, Black Rock), are also key shareholders in Goldman Sachs and key shareholders of the three biggest rating agencies, means that, the rating agencies knew very well what was the real situation of the Greek economy all these years, i.e., the real deficit figure. However, CDS were in low-level, allowing Greece to borrow at low interest.

However, the story continues differently, as follows:

In the mid-October of 2009, Goldman Sachs suggested to Greece a new financial product which would ease, at great extent, the huge borrowing needs of the country for the rest of 2009 and 2010 since some older bonds, of huge value, were expiring during that period.

However, Goldman's proposal was not accepted by the Greek side. A few days later, Fitch downgrades Greece from A to A-, leading the country out of the top rating category. At the same time, stocks of the National Bank of Greece were sold massively in the NY stock market, as well as, subsequently, to the Athens stock market leading general index to a significant fall. At the same time, the price of Greek bonds was falling, the price of Greek CDS and interest was rising, as well as the cost of lending for Greece.

During the first days of November, a team of Goldman Sachs arrived in Athens to persuade the Greek side change its mind and close a new deal of financial lending, according to which the Bank of China would be involved in lending Greece, gaining some share in the National Bank of Greece and in the Greek Organization of Railroads, as a return.

While the negotiations were in process, the stock price of National Bank of Greece was rising in NY and Athens stock markets. At the same time, the pressure on Greek bonds and CDS stopped. Eventually, negotiations were not successful, as the Greek side rejected Goldman's proposal for good.

Nearly the next day of this rejection, massive stock selling of the National Bank of Greece was recorded again in NY stock market, as well as stocks of the big Greek banks Alpha and Eurobank, and finally, stocks of the whole Greek banking sector. Prices of the Greek bonds rapidly dropped while Greek CDS and loan interest were rising rapidly, bringing Greece closer to default, as it was more and more difficult to re-fund her debt.

On December 12, Fitch downgrades Greece further, rating the country with BBB+, while announced that further downgrades are possible. S&P with Moodys followed, downgrading Greece during December. The result was a massive selling of Greek bonds and skyrocketing of country's lending cost.

This means that, for at least 10 years there was no problem with interest, despite that everyone knew the real deficit figure, but the problem suddenly appeared in 2009 when, "accidentally", the Greek government rejected Goldman Sachs' proposal for a new "financial product". Within a short time, rating agencies downgraded Greece skyrocketing her lending cost.

In other words, as long as Greece was playing the game of Goldman Sachs, giving economic benefits inside the Greek territory, there was no problem with lending. When the new government stopped giving such benefits, probably because no one knew where would lead in the future, international banksters-speculators mobilized every mean that they had (rating agencies, media etc.), in order to show who is the boss and that there is no way for the country to avoid default, except of playing with their rules.

Since the beginning of the crisis, mainstream media tried to downgrade the significance of this story and put the blame for default exclusively to the "corrupted" public servants, labor unions and generally "lazy" Greeks who lived beyond their means.

Propaganda continues even today, despite the ongoing failed policies that ruined country and led millions of Greeks to poverty, and peaks every time that the lenders are about to impose new destructive measures, while the systemic mouthpieces often call such stories as "conspiracy theories".

Comments

  1. Don' t you think that the problem comes from the fact that they do not issue their own currency anymore. They have to pay in a currency they do not control. When devaluation is no longer possible you will default on your bonds instead of your currency such as Argentina or Venezuela.

    The US gets away from this since not only can they issue their own currency they can borrow only in the Dollars they issue = (No Devaluation Risk) and it happens to still be the World Reserve currency.

    In such a scenario Bonds cannot really default. Instead the currency default’s progressively every year. It’s a default in motion and such default is passed on to millions of people that to often have not enough, little or no (Non-Depreciating Assets) to hedge them self against Government and the Central Banks way of never running out of money and making irresponsibly permanent.

    If and when they over do the issuing of money in excess of GDP the middle class is can be destroyed but since Politicians and Central Banker often appear to suffer from Cognitive Dissonance they tend to amplify their mistakes with even more QE' s and spending expecting a different result. Not going to happen.

    ReplyDelete
    Replies
    1. Thanks for your comment.

      Well, the point of this article is to show that there is no transparency in the global market and since the biggest rating agencies are directly connected with the biggest banks they can play the game as they want. They have a terrifying power which can destroy whole countries in short time. This is a huge problem in the global financial system.

      For the rest, I don't think that Greece would avoid this because either inside or outside euro, the Central Bank of Greece is not a public institution, 95% of its stocks are in the stock market and no one knows who own them. Furthermore Greek government has absolutely no power in the central bank according to the Greek law. Therefore, monetary policy is not designed by the country but according to the big banking interests who brought Greece inside the eurozone without voting from the Greek people.

      Fed is a private institution also but since dollar is the global reserve currency the banksters are using US governments to serve their interests by printing money and loan it to the government at interest. However US has a story from the past where the most people suffered and big banks eliminated competitors and made huge profits with some speculators (1929). More or less, the same thing happened in 2008 and in Greece now. What is different with Greece is that is a much smaller country and much more easy to play games with.

      Politicians and bankers claimed that Greece will secure Greek economy by entering euro back in 2001 but proved that the international banking cartel with multinational monopolies are just using now the Greek crisis to impose the desirable policies across Europe.

      Delete
    2. Also at this time, the new Pasok Government came clean and announced a series of upward revisions to Greece's deficit. Culminating in an actual deficit of, what, 15%? Couldn't that also be a factor? Or perhaps even the main factor. Couldn't we simply examine the facts on their face, and recognize that sometimes a Cigar is just a Cigar (Freudian reference). I would be interested to see timelines showing the various upward revisions to Greece's deficit figures and the corresponding ratings agencies downgrading of Greece's debt. What was the order of these events? What were the borrowing rates? You could also include the visits by Goldman Sachs to Greece in October. So that we can see an ordering of events. But that will tell us nothing, because we won't know what was actually discussed.

      Also, you haven't offered any citations, so I have no idea whether any of what you say is true or not.

      Let me give you a personal anecdote. I'm of Greek heritage. I was born in Canada to Greek immigrants. Just over 12 years ago, some childhood friends of my father came to Canada for a summer long visit. One day, we all went to a local Loblaws grocery store to do some shopping. In the middle of one of aisles in the produce section, were two pallets of olive oil in tins. One had Greek olive oil, the other had Italian olive oil. The Italian olive oil cost $12.99 for a 3 liter tin. The Greek one cost 19.99 for a 3 liter tin. The Italian olive oil had been almost completely sold out. The Greek oil had hardly sold any. My father looked over to his friend from Greece, who is a staunch defender of all things Greek, and said, "Look! Take a look at these two piles of olive oil tins. Greeks can't even compete in the olive oil business!" The only thing my father's friend from Greece had to say was "But ours is better."

      The next day my fathers friend came to him and said, "Tasso, you know why theirs is selling and ours isn't. Because the Italians have bribed the store manager to jack up the price so their's sells and ours doesn't." I just stared at him bewildered. He had spent the evening cobbling together conspiracy theories to justify why Greek olive oil wasn't selling. He couldn't simply accept the facts of the thing. My father just laughed and said "Haralambe, you are such Greek."

      Delete
    3. Thank you, I did not know that the Central Bank of Greece as 95% of its stocks listed in the stock market. I have no idea how this would not make it public in the way publicly traded shares. Don' t they have to issue shareholders reporting?

      The Fed is a private institution but it does not make money by lending to the Government since it pays back 98% of its earning to the treasury.
      It's private but not in the way we generally are use to. It' s more like a system of Bank clearing, liquidity ,emergency money and Government funding via the secondary market and the primary dealers.

      I agree with you on Upgrade and Downgrades they are no longer to be trusted. There is still a lot of garbage out there that is maintained only by artificial int rates. Now Central Banks are in a catch 22.

      Delete
  2. Thanks for your comments

    The Man in the Furry Hat gives the half truth (maybe not even half), which is more or less what the mainstream media even in Greece propagate almost every day since the beginning of crisis. This is not a surprise as it is well known that private media are completely controlled by the Greek big capital and banks. The mainstream story is propagated by the media exactly to hide banks' responsibilities.

    The other half of the story is the info of this article (among other info), which comes from articles and documentaries which now almost forgotten, even in Greece. Naturally, since the propaganda is based in the one half.

    But the point is in my opinion, why this happens. Why financial giants became so powerful that can destroy countries. The answer is that, in essence, political power retreated in front of the power of markets and not just because politicians are puppets, but because Western societies lost their faith in vision.

    I'm about to write an article soon related to this subject if you are interested.

    Also there is a conflict about the role of Fed and central banks generally whether they are controlled by governments or are private institutions serving banking cartels. The battle continues. Maybe some day we learn the truth.

    ReplyDelete
  3. Anonymous18/9/14 17:39

    FYI:
    http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0025995#s3

    ReplyDelete
  4. I see this article was written November of last year but while the world has continued down the QE path little has changed. We have been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years. Have these actions really worked or merely masked over major flaws and problems? I contend that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future.

    Modern Monetary Theory often referred to as MMT by its many believers is to remove much of the risk ahead and guarantee that we will always be able to muddle forward. MMT is a economic theory that turns to newly acquired tools like derivatives and currency swaps are suppose to allow us to print and manipulate away problems. This has created an "almost surreal" feeling of indifference towards reality. More on why debt does matter and the system is about to fail in the article below.

    http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complacency.html

    ReplyDelete
    Replies
    1. Maybe we are facing a general cultural crisis especially in the Western world, not just a financial one. Read also:

      http://failedevolution.blogspot.gr/2014/01/how-western-societies-lost-their-faith.html

      Delete

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