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Falsification of Greek public finance data : EU regulatory bodies' (absence of) response

Politics / Credit Crisis 2010 Dec 12, 2011 - 12:19 PM GMT

By: ECB_Watch

Politics Best Financial Markets Analysis ArticleThis is a follow up to the blog entry Deceptive tactics were used to thrust a head the nomination of the new ECB President. Here, we look into the broader issue of the falsification of Greece's public finance data: Eurostat audits, Jean Claude Trichet's willful hindrance against the release of ECB records, Goldman Sachs' communication, and whether the EU Parliament (Sharon Bowles), the Commission (Olli Rehn) and the European Securities and Markets Authority (Verena Ross) were proactive enough.

Eurostat audits

Eurostat is the statistical of office the EU Commission. In Eurostat parlance, a methodological visit is an audit that is undertaken in cases where the Eurostat identifies substantial risks or potential problems with the quality of the data.  There were a series of methodological visits to Greece. They began in 2009 and continued through 2010. Three major reports were produced, one on 29 October 2009, the second on 8 January 2010 and the third in November 2010. As per the last one, a series of failings in the institutional arrangements and practical compilation of Greek public finance data.

We skimmed through the January report and read the November 2010 report. Only the latter addresses the contentious Greek swaps transaction. It concluded as follows: Taking into account the work carried out [i.e. corrections to misreported data], as described in this report, the latest debt and deficit data for Greece now gives, in Eurostat's view, an essentially reliable picture, [including for] fiscal data for the years 2006-2009. It is, therefore, an important report as it represents Eurostat's final opinion on the matter. Eurostat's summary of its dealings with Greece as pertaining to the contentious Greek swaps transaction contradicts the blithely reported claim that the transactions were legal. Goldman Sachs gave the optimistic version in a communique released in February 2010: 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 [2000 and 2001].. First, Eurostat claims that At the beginning of the year 2010, it became known that Greece had entered in 2001 into currency off-market swap agreements with Goldman Sachs, using an exchange rate different from the spot prevailing one.. Weighing each word is probably important in determining legality, knowing the scheme was reported as early as 2003 in an article by It said that, perhaps not coincidentally, Greece's credit rating by one of the three major CRAs was raised, that year, from A to A+. Second, Eurostat says that Greece patently misled it in 2008, claiming that it neither engaged in FOREX swaps, nor in off market swaps. These are exactly the type of transactions agreed between Greece and Goldman Sachs in 2001 and, as we see next, were actively managed thereafter.

Eurostat's audit says that in August 2005 a significant restructuring of the swap contract took place.  It resulted in an increase in the amount of undisclosed Greek debt data, for the portion that is imputable to the deal, from 2.830 bn euros in 2001 to 5.125 bn euros in 2006. It's a 81% increase. The second amount persisted until 2009, according to Eurostat, who regularized it in Greece's national accounts in 2010 [2]. As a side note, Mario Draghi was appointed head of Bank Italy in 2006, ending his employment at Goldman Sachs. The latter had begun in 2002, when Goldman Sachs was reportedly the lead manager of Greece's debt underwriting. He denied any connection to the deal in a hearing before the ECON Committee in June 2001. For more detail, refer to the blog entry Deceptive tactics were used to thrust a head the nomination of the new ECB President.

Goldman Sachs' communication

Goldman Sachs Managing Director Gerald Corrigan testified before the House of Commons in February 2010. We know about it thanks to an article by Finfacts Ireland. He is quoted as essentially shifting blame on the EU for not having stringent rules. He also rationalizes the bank's activity as commonplace in the industry. Finally, there is no evidence that Corrigan alludes to the important restructuring of Greek swaps that took place in August 2005, which resulted in an 81% increase in the window dressing of debt. We looked for the transcript at but did not find it, whereas others involving the same individual (who has the hear of the British Parliament) are returned by search engines.

The transaction generated hundreds of millions of dollars for the firm according to a press release by Bloomberg, EU seeks Greek swaps disclosure after ministry probe. As a side note, the Federal Crisis Inquiry Commission revealed that Goldman Sachs makes between 25% to 35% of its revenue from derivatives business according to an article by Seeking Alpha, Goldman reveals derivatives revenue. The key player, Antigone Loudiadis, made a substantial fortune from it in just one year. And she enjoyed a dramatic career boost thereafter.  Incidentally, she made controversial headlines again, not long ago, as CEO of Rothesay Life, as regards to death derivatives.

One wonders whether Corrigan's admission of weak control and his rationalization of the bank's action, together with the bank's and key player's likely motives to engage in such transactions, might fall under the definition of the Fraud Triangle... That's just a superficial conjecture but, unfortunately, there is a significant legal precedent attesting of unethical business practices at this company.  Goldman Sachs paid half a billion dollars to settle SEC charges that it misled investors in a subprime mortgage product (ABACUS) just as the U.S. housing market was starting to collapse.
Obstruction by Jean Claude Trichet

First, Bloomberg filed a request with the ECB in November 2010 to have access to ECB internal documents detailing the contentious transactions. It was denied. Second, Bloomberg contested the decision at the EU's General Court in Luxembourg in December 2010. Third, the ECB asked the General Court to dismiss the lawsuit, in May 2011,  just one month before Mario Draghi's nomination, apparently using a veto prerogative. That's one month before the nomination of the next ECB President whose possible role in the falsification of Greek debt as Goldman Sachs VP from 2002 to 2005 was raised by Simon Johnson as early as February 2010 (refer to our last post). Fourth, Bloomberg reacted in June 2011 with these words : The European Central Bank allowed itself to be deceived by a default in the making and now refuses to share with the taxpaying citizens it represents the details of the deception. Secret and opaque financing got Europe into a mess that can only be resolved by the transparency of full disclosure..

Were the European Parliament and the Commission keeping up?

Sharon Bowles, in her capacity as Chair of the ECON Committee is expected to have had some interest in the Eurostat audits. As a member of the UK's Liberal Democratic Party, she is de facto affiliated with the Alliance of Liberals and Democrats of Europe, in short ALDE (ALDE). This political party released a statement on 14 April 2010, Greece : the moment of truth, in which Guy Verhofstadt, a group leader of ALDE, calls for Sharon Bowles to ask Director General of Eurostat to explain how accounts could have been legally modified and what measures were taken in the aftermath to prevent such actions.. This was supposed to be discussed in a hearing the same day, which we could not find, but we did find Gerald Corrigan's deposition. The topic reemerged in a parliamentary debate about Quality of statistical data in the Union and enhanced auditing powers by the Commission, on 15 June 2010. To frame it, we suppose, Sharon Bowles posted on 4 June 2010 the question of "whether any [Member States] have submitted falsifications or false data or statistics either intentionally or by neglect?". One might have expected more focus as a follow up to Greece : the moment of truth and the evidence revealed in the audits. In particular,  the January 2010 stated widespread misreporting of deficit and debt data by the Greek authorities during in November 2004, [...] and on five occasions between 2005 and 2009.

In Commissioner Olli Rehn's words spoken during the 15 June 2010 debate, the closest match to Sharon Bowles' question was As is well known, the Commission has undertaken in-depth work on Greek statistics over several years. The amended regulation should, in future, better mitigate the risk of fraud or manipulation of statistics, or of any other kind of irregularity. Yesterday, there was a new development concerning Greece. You will know that Moody’s decided to downgrade Greek bonds yesterday.. On 21 July 2011, a parliamentary question was addressed to him, on the subject of Appointment of Mario Draghi as President of the European Central Bank. This question was : Does the Commission have information on Mario Draghi's involvement, whilst he was Goldman Sachs' European vice-chair, in the dealings between the bank and the Greek Government over the concealment of accountancy fiddles?. Olli Rehn's answer, on 22 August 2011, was that transactions in derivatives between the Greek debt agency and Goldman Sachs dated back to 2001, implying that the President of the ECB had no connection to them. This is one of the two arguments presented by Mario Draghi before the ECON Committee in June, just before the vote on his nomination, that were found to be unsatisfactory. Olli Rehn backs up his claim, in this answer, by citing the November 2010 Eurostat audit. Yet, this audit revealed that the terms of the contract between Goldman Sachs and the Greek Ministry of Finance were modified in August 2005, presumably while Mario Draghi still worked at Goldman Sachs, since his term of office at the Central Bank of Italy started in January 2006. Recall, also, that this modification resulted in an 81% increase in the amount of debt concealed through this type of scheme.

In short, there is evidence, albeit circumstantial, that the ECON Committee, around 2010, was lagging behind Eurostat's methodological visits to Greece. In August 2011, the Commissioner for Economic and Monetary Affairs defense of Mario Draghi's reputation, in response to a parliamentary question, was inconsistent with the Eurostat audit he cited in his answer.

Has justice run its normal course?

Let's try to understand by looking at a comparable case, the United States, where the financial lobby is nonetheless powerful. The above mentioned settlement with the SEC in July 2011 marked the end of a civil lawsuit that had begun in April 2010. Then, it was reported in a Reuters article, US starts criminal probe into Goldman,  that, upon referral by the SEC, federal prosecutors in New York had begun a criminal investigation into other transactions. In parallel, the Senate Permanent Subcommittee on Investigations, for short PSI, was investigating the financial crisis. It's outcome,  a bi partisan report, known as the Levin-Coburn report, was released in April 2011. According to the Wall Street Journal, it asked for bank regulators to examine mortgage-related securities to identify any possible legal violations and use Goldman Sachs as a case study in implementing conflict prohibitions. In October 2011, the aforementioned federal investigation, in New York, reportedly materialized with $1bn lawsuit against the bank, using evidence from the Levin-Coburn Report : Timberwolf was cited in a scathing U.S. Senate panel report in April that faulted Goldman, Deutsche Bank AG and others for hawking debt they expected to perform poorly..

Is the system of government fundamentally different in Europe, in this respect? Of course not. The equivalent of the SEC, in the EU, is the European Securities Markets Authority, for short ESMA, formerly the CESR. It has been granted enforcement authority, known as level 4 of its governing procedure, only recently. Yet, it can issue a recommandation to a national authority[to carry out legal action]. To do so, ESMA must first carry out an investigation. According to the same provision (level 4), the European Parliament (Sharon Bowles), or the Commission (Olli Rehn) can request ESMA to get it under way. The falsification of Greek debt, based on what was said thus far, and the fact that Goldman Sachs did not disclose it (See February 2010 Bloomberg article), presumably constitutes a fairly obvious breach of their fiduciary duty as a primary dealer—a privilege granted by government. Is anyone aware of the ECON Committee or the Directorate General for Economic and Financial Affairs (DG ECON) launching an investigation into this scheme? Let's try to find out. In October 2011, a new Executive Director of ESMA,  Verena Ross, was nominated, with ECON Committee's —ahem— approval. She gave a keynote speech to that effect in October 2011, in which she laid out here vision of the future focus of the work [of ESMA]. A lot has to do with harmonizing rules and processes across member states [3]. None of it addresses the glaring priority of bringing to justice the suspected perpetrators of financial crime. If Verena Ross' speech is to be taken at its word, the future focus of ESMA has a negative connotation: turn the page and pretend that financial crime never happened. In fairness, there were reports of a possible probe into this bank's activities by the UK's FSA and Bafin in Germany in the first half of 2010, but nothing specific about the falsification of Greek debt that we are aware of. There was, however, a specific reference to that effect, in the US, by Fed Chairman Bernanke in the same period. We can't be certain that these investigations have stalled, or were put to rest. But in view of what precedes, there is reason to suspect that authorities have turned a blind eye to the problem.

As stated earlier, we have made a point, as far as the falsification of Greek debt is concerned, to focus on the transactions that intersect with those found in the Eurostat audits. In addition, there are allegations, by some financial experts, of a broader cynical scheme undertaken by the bank, that is reminiscent of its practices in the subprime crisis. Essentially, these are hedging and speculative bets using insider knowledge of Greek public finances. Let's briefly review the literature. In February 2010, two authors, Marshal Auerback and L. Randall Wray alleged that From 2001 through November 2009 [...] not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece’s debt—making income on bets that Greece would default. No doubt they also took positions as the financial conditions deteriorated—betting on default and driving up CDS spreads. . Corroborating evidence and analysis can be found in the following articles, listed in in chronological order : What about Greece and Goldman Sachs (Diplomatic World), Clearing the air: Goldman Sachs and Greece (Hellenesonline) and Goldman bet against entire European nations —who were clients— the same way it bet against its subprime mortgage clients (Washington's blog).


In reviewing the Eurostat audits, we have seen that the window dressing scheme of Greece's public finances, initiated in 2001 with Goldman Sachs as counterparty, increased by 81% in 2006 as a result of a renegotiation in August 2005. The language used in these audits leaves little doubt as to intentional deception by the parties of the deal. However,  Eurostat has to explain how it became aware of the 2001 deal only in early 2010.

The bank's attempts to dispel allegations of wrong doing, in 2010, notably in a hearing at the British parliament, seem sugar coated, and partial as regards to the the 2005 renegotiation.

Is Jean Claude Trichet's justification of his obstruction to the release of ECB documents detailing the  transactions, namely preventing acute market risks, satisfactory?

The ECON Committee did not seem up to date with the progress of the audits, in 2010, which raises doubt as to whether the debate Greece: the moment of truth delivered on its promise. For instance, has EU Parliament critically examined Goldman Sachs' testimonial? The Commissioner for Economic and Monetary Affairs, in August 2011, either had a superficial knowledge of these audits or feigned to ignore important data contained within, in connection with a parliamentary question about Mario Draghi's past at Goldman Sachs.

To understand the law enforcement side of this issue, we summarized the interplay between the executive and the legislative branches, in the U.S., that has resulted in  financial crime investigations and lawsuits. We established that the Commission (DG ECON) and the EU Parliament (ECON Committee) have the authority to commission ESMA to investigate the falsification of Greek public finance data, but there is no evidence that either has used this prerogative.


[1] Don't the fees (up to 200 millions euros) seem high? Their ratio to the amount of debt that Greece was able raise thanks to the scheme while masking it (2.830 bn euros as of 2001) is 7.1%.

[2] The masking scheme was the combination of two sets of swaps transactions. The first transaction, a currency swap, neutralized Greece's currency risk resulting from preexisting foreign denominated debt, which is standard practice. The snag, however, is that it was priced using an exchange rate different from that priced by the market, resulting in an upfront cash payment—in essence a loan—from Goldman Sachs to Greece. The second swap, also off-market, amounted to a promise, by Greece, to make a stream of payments to Goldman Sachs—in fact, reimbursement of the loan. The maturity of the transaction, agreed in 2001, was to take effect in 2019. The renegotiation in August 2005 pushed that maturity to 2037.

[3] The first pertains to the Single rule book i.e. harmonization of guidelines and recommendations across EU member states. The second, linked to the first, deals with another aspect of legislative harmonization. The third, pertains to analyzing financial market trends and identify risks to protect investors, with also - as the ultimate stick, the power to ban some products and activity if necessary. The fourth is the supervision of Credit Rating Agencies (CRA), and the fifth if to promote financial stability by actively contribut[ing] data and analysis

Source and Sources

By Jareth

ECB Watch

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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18 Dec 11, 19:22
accurate Greek data

For accurate data on public finance in Greece, see the citations to IMF data in my article -

Their projections might be wishful thinking. Their data are not.

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