Greece To Quit The Euro Whatever The Poll Result

 

The next few days will be high stakes on global financial markets as the results of the Greek election are digested, and just as importantly, the G20's reaction to the outcome of the election, along with that of central banks.

The Australian equity market will remain skittish as investors grapple with so many global unknowns, as well as the potential for more local profit downgrades as company boards sign their company accounts for the June 30 year.

Companies that have suffered big share price falls in the past few weeks are the ones most likely to announce profit downgrades or big asset write-downs as ASIC has been reminding companies of their accounting rule obligations when it comes to asset impairment charges.

In the past year the All Ordinaries index has fallen almost 10 per cent, which has a knock-on effect on the annual financial year performance of super funds, particularly balanced funds, and reduce the returns of Australia's $1.3 trillion retirement savings.

The brutal reality is that local and global equity markets have been living in fear for the past three years, and that will not change in the short term.

World markets have been praying for a fairytale ending to the European crisis. What they have got is an unfolding nightmare that has left policy makers hoping that whatever the outcome of the Greek elections today, Greece will remain in the eurozone.

Ultimately, Greece will leave the euro, and the outcome of today's election is unlikely to temper that inevitability. Who wins the election will merely determine the speed. If the pro-bailout New Democracy Party claims victory, Greece's departure will be slow; if the extremist Syriza wins, it will be accelerated, and if there is an inconclusive election outcome, the timing of its departure will be unpredictable.

But in the short term, the behaviour of markets will depend on the effectiveness or otherwise of the G20 meeting in Mexico today, where the focus will be on how to prevent an immediate breaking up the eurozone and destabilisation of the world economy.

It is reaching a critical point were the problem is far greater than getting the right government to run Greece. Spain is in trouble and Italy looks likely to be months away from requiring its own rescue plan.

Unfortunately nobody has an answer, which has battered confidence around the world and heightened an already volatile market and has started to create social unrest in some European countries.

Greece is almost ungovernable these days, a function of its bankruptcy, the collapse of proper institutional structures, chronic tax avoidance, an alarming decline in living standards and the abandonment of hope.

But the problem is wider than economics. Social unrest has the potential to spread like wildfire.

In Australia, the problems in Europe have had an impact on market sentiment, confidence, credit markets and the dollar. If the problems get worse, they will ripple through China, one of Australia's biggest trading partners, as well as the US, which is already suffering from its own issues.

What happens in Greece over the next few weeks, followed by Spain and Italy, will dominate everything. Let's hope sense prevails and governments and the global financial system are well prepared. With the crisis going on for so long, there certainly ought to be.

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Goldman Secret Greece Loan Shows Two Sinners as Client Unravels

Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed. Harvard University, Alabama’s Jefferson County and the German city of Pforzheim all have found themselves on the losing end of the one-of-a-kind private deals typically pitched to them by securities firms as means to improve their finances.
Goldman Sachs DNA

“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised -- it’s part of the DNA of that organization.”

A gain of 600 million euros represents about 12 percent of the $6.35 billion in revenue Goldman Sachs reported for trading and principal investments in 2001, a business segment that includes the bank’s fixed-income, currencies and commodities division, which arranged the trade and posted record sales that year. The unit, then run by Lloyd C. Blankfein, 57, now the New York-based bank’s chairman and chief executive officer, also went on to post record quarterly revenue the following year.
‘Extremely Profitable’

The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.

The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The size and complexity of the deal meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.

“It looks like an extremely profitable transaction for Goldman,” said Saul Haydon Rowe, a partner in Devon Capital LLP, a London-based firm that advises global investors on derivatives disputes.
Disappearing Debt

Goldman Sachs declined to comment about how much it made on the swaps. Fiona Laffan, a spokeswoman for the firm in London, said the agreements were executed in accordance with guidelines provided by Eurostat, the EU’s statistical agency.

“Greece actually executed the swap transactions to reduce its debt-to-gross-domestic-product ratio because all member states were required by the Maastricht Treaty to show an improvement in their public finances,” Laffan said in an e- mail. “The swaps were one of several techniques that many European governments used to meet the terms of the treaty.”

Cross-currency swaps are contracts borrowers use to convert foreign currency debt into a domestic-currency obligation using the market exchange rate. As first reported in 2003, Goldman Sachs used a fictitious, historical exchange rate in the swaps to make about 2 percent of Greece’s debt disappear from its national accounts. To repay the 2.8 billion euros it borrowed from the bank, Greece entered into a separate swap contract tied to interest-rate swings.

Falling bond yields caused that bet to sour, and tweaks to the deal failed to prevent the debt from almost doubling in size by the time the swap was restructured in August 2005.

Greece, which last month secured a second, 130 billion-euro bailout, is sitting on debt equal to about 160 percent of its GDP as of last year.
Eurostat Rules

Under Eurostat accounting rules, nations were permitted until 2008 to use so-called off-market rates in swaps to manage their debt. Greek officials, including Sardelis, say they learned that other EU countries such as Italy had employed similar methods to shrink their debts, taking advantage of the secrecy of over-the-counter derivatives compared with swaps traded on exchanges.

Eurostat said Greece didn’t report the Goldman Sachs transactions in 2008 when the agency told countries to restate their accounts.

“The Greek authorities had never informed Eurostat about this complex issue and no opinion on the accounting treatment had been requested,” the Luxembourg-based agency said in a statement last month.

Eurostat said it had only “general” discussions with financial institutions on its debt and deficit guidelines when the swap was executed in 2001. “It is possible that Goldman Sachs asked us for general clarifications,” Eurostat said, declining to elaborate.
Loudiadis Role

Bloomberg News filed a lawsuit at the EU’s General Court seeking disclosure of European Central Bank documents on Greece’s use of derivatives to hide loans. Releasing such information could damage the commercial interests of the ECB’s counterparties, hurt banks and markets, and undermine the economic policy of Greece and the EU, the central bank said last May in a response to the suit. A judgment is pending.

Sardelis, 61, and Papanicolaou, 72, said several banks, including Goldman Sachs, made proposals to manage Greece’s debt. The bank was represented by its top European sales executive at the time, Addy Loudiadis. She was trusted, said Papanicolaou, because she had helped price competitors’ derivatives and in 1999 warned the Greeks against buying a complex swap.

Sardelis, a former bank economist, described Loudiadis, who’s based in London, as “very professional -- a little bit aggressive as is everyone at Goldman Sachs.”
‘Teaser Rate’

The derivative Loudiadis offered Sardelis in 2001 was also complex. Designed to provide a cheap way to repay 2.8 billion euros, the swap had a “teaser rate,” or a three-year grace period, after which Greece would have 15 years to repay Goldman Sachs, Sardelis said. All in, the deal appeared cheap to officials at the time, he said.

“We calculated that this had an extra cost above our normal funding cost on the yield curve of 15 basis points,” Sardelis said. A basis point is 0.01 percentage point.

Loudiadis, now CEO of Rothesay Life, a Goldman Sachs unit that insures longevity risk for U.K. corporate pension plans, declined to comment, a company spokeswoman said.
‘Very Bad Bet’

Sardelis said he realized three months after the deal was signed that it was more complex than he appreciated. After the Sept. 11, 2001, attacks on the U.S., bond yields plunged as stock markets sold off worldwide. That caused a mark-to-market loss on the swap for Greece because of the formula used by Goldman Sachs to compute Greece’s repayments over time.

“If you calculated that when we did it, it looked very nice because the yield curve had a certain shape,” Sardelis said. “But after Sept. 11, we realized this would be the wrong formula. So after we discussed it with Goldman Sachs, we decided to change to a simpler formula.”

The revised deal proposed by the bank and executed in 2002, was to base repayments on what was then a new kind of derivative -- an inflation swap linked to the euro-area harmonized index of consumer prices. An inflation swap is a financial bet that pays off according to the degree to which a consumer-price index exceeds or falls short of a pre-specified level at maturity.

That didn’t work out well for Greece either. Bond yields fell, pushing the government’s losses to 5.1 billion euros, according to an analysis commissioned by Papanicolaou. It was “a very bad bet,” he said in an interview.

“This is even more reprehensible,” Papanicolaou said of the revised deal. “Goldman asked them to make a change that actually made things even worse because they went into an inflation swap.”
Confidentiality Requirement

Greece was handicapped, in part, by the terms Goldman Sachs imposed, he said.

“Sardelis couldn’t actually do what every debt manager should do when offered something, which is go to the market to check the price,” said Papanicolaou, who retired in 2010. “He didn’t do that because he was told by Goldman that if he did that, the deal is off.”

Sardelis declined to comment about the analysis, as did Petros Christodoulou, director general of the debt-management agency since February 2010.

It isn’t unusual for dealers to impose confidentiality requirements on clients in complex transactions to prevent traders from using the information to front-run or trade against the bank arranging and hedging the deal, said a former official who analyzed the swap and asked not to be named because the details are private.
‘Large Number’

Goldman Sachs’s initial 600 million-euro gross profit “sounds like a large number, but you have to take into account what the bank will be setting aside as a credit reserve, the cost to Goldman to fund the loan and the cost of hedging the currency component,” said Peter Shapiro, managing director of Swap Financial Group LLC in South Orange, New Jersey, an independent swaps adviser. “It’s hard to tell what the profit margin would have been.”

The report Papanicolaou commissioned after taking over the agency showed the repayment formula meant that Greece would have to pay Goldman Sachs 400 million euros a year, he said. The coupon and the mark-to-market swings on the swap prompted George Alogoskoufis, then finance minister, to decide to restructure the deal again to limit losses, Papanicolaou said.

Loudiadis and a team of Goldman Sachs advisers returned to Athens in August 2005, according to former Greek officials. The agreement they reached to transfer the swap to National Bank of Greece SA and extend the maturity to 2037 from 2019, gave the Greeks what they wanted, Papanicolaou said.
‘Squeeze Taxpayers’

The 5.1 billion-euro mark-to-market value of the swap was “locked in,” Papanicolaou said. It was that politically motivated decision to restructure and fix the increased market value that did as much damage as the original swap, said Sardelis, now a board member of Ethniki General Insurance Co., a subsidiary of National Bank of Greece.

“You can’t have prudent debt management if you change all the assumptions all the time,” he said.

Gustavo Piga, a professor of economics at University of Rome Tor Vergata and author of “Derivatives and Public Debt Management,” sees a different lesson.

“In secret deals, intermediaries have the upper hand and use it to squeeze taxpayers,” Piga said in an interview. “The bargaining power is in investment banks’ hands.”

Greek Lawmakers Pass Austerity Bill as Athens Burns

Greece's parliament approved a deeply unpopular austerity bill on Monday to secure a second EU/IMF bailout and avoid national bankruptcy, as buildings burned across central Athens and violence spread around the country.

Cinemas, cafes, shops and banks were set ablaze in central Athens and black-masked protesters fought riot police outside parliament before lawmakers voted on the package that demands deep pay, pension and job cuts -- the price of a 130 billion euro ($172 billion) bailout needed to keep the country afloat.

State television reported the violence spread to the tourist islands of Corfu and Crete, the northern city of Thessaloniki and towns in central Greece. Police said 150 shops were looted in the capital and 34 buildings set ablaze.

Altogether 199 of the 300 lawmakers backed the bill, but 43 deputies from the two parties in the government of Prime Minister Lucas Papademos, the socialists and conservatives, rebelled by voting against It. They were immediately expelled by their parties.

Asian shares and the euro gained modestly on Monday, relieved by the Greek parliament's passage of austerity measures that put the country a step closer to securing a much-needed bailout fund and avoiding a messy default.

MSCI's broadest index of Asia Pacific shares outside Japan edged up as much as 0.3 percent on the news.

The rebellion and street violence foreshadowed the problems the Greek government faces in implementing the cuts, which include a 22 percent reduction in the minimum wage -- a package critics say condemns the economy to an ever-deeper downward spiral.

Papademos, a technocrat brought in to get a grip on the crisis, denounced the worst breakdown of order since 2008, when violence gripped Greece for weeks after police shot a 15-year-old schoolboy.

"Vandalism, violence and destruction have no place in a democratic country and won't be tolerated," he told parliament as it prepared to vote.

"SHORT-TERM SACRIFICES"

But he admitted that imposing the austerity on a nation that has already endured several years of cuts would be tough.

"The full, timely and effective implementation of the programme won't be easy. We are fully aware that the economic programme means short-term sacrifices for the Greek people," Papademos said.

Greece needs the international funds before March 20 to meet debt repayments of 14.5 billion euros, or suffer a chaotic default which could shake the entire euro zone.

Outside parliament chaos reigned. A Reuters photographer saw buildings in Athens engulfed in flames and huge plumes of smoke rose in the night sky.

"We are facing destruction. Our country, our home, has become ripe for burning, the centre of Athens is in flames. We cannot allow populism to burn our country down," conservative lawmaker Costis Hatzidakis told parliament.

The air in Syntagma Square outside parliament was thick with teargas as riot police fought running battles with youths who smashed marble balustrades and hurled stones and petrol bombs.

Terrified Greeks and tourists fled the rock-strewn streets and the clouds of stinging gas, cramming into hotel lobbies for shelter as lines of riot police struggled to contain the mayhem.

State NET television reported that trouble had also broken out in Heraklion, capital of Crete, as well as the towns of Volos and Agrinio in central Greece.

On the streets of Athens many businesses were ablaze, including the neo-classical home to the Attikon cinema dating from 1870 and a building housing the Asty, an underground cinema used by the Gestapo as a torture chamber during World War Two.

NO GOOD CHOICES

The EU and IMF say they have had enough of broken promises and that the funds will be released only with the clear commitment of Greek political leaders that they will implement the reforms whoever wins an election potentially in April.

Euro zone paymaster Germany ratcheted up the pressure on Sunday. "The promises from Greece aren't enough for us any more," German Finance Minister Wolfgang Schaeuble said in an interview published in Welt am Sonntag newspaper.

"Greece needs to do its own homework to become competitive, whether that happens in conjunction with a new rescue programme or by another route that we actually don't want to take."

When asked if that other route meant Greece quitting the euro zone, Schaeuble said: "That is all in the hands of the Greeks themselves. But even in the event (Greece leaves the euro zone), which almost no one assumes will happen, they will still remain part of Europe."

The bill sets out 3.3 billion euros ($4.35 billion) of extra budget cuts for this year alone.

It also provides for a bond swap to ease Greece's debt burden by cutting the real value of private-sector investors' bond holdings by some 70 percent. Greece would have missed a Feb. 17 deadline to offer a debt "haircut" to private bondholders if the vote had not been passed.

Many Greeks believe their living standards are collapsing already and the new measures will deepen their misery.

"Enough is enough!" said 89-year-old Manolis Glezos, one of Greece's most famous leftists and a national hero. "They have no idea what an uprising by the Greek people means. And the Greek people, regardless of ideology, have risen."

Glezos is a national hero for sneaking up the Acropolis at night in 1941 and tearing down a Nazi flag from under the noses of the German occupiers, raising the morale of Athens residents.

Protest Violence Before Key Greek Austerity Vote

Greek police clashed with protesters trying to block the way into parliament on Wednesday as signs grew that the government would succeed in passing a sweeping austerity plan demanded by international creditors.

With Greece risking bankruptcy if the measures are blocked, parliament was expected to vote in the afternoon on the mix of spending cuts, tax increases and privatizations to be implemented as conditions for a massive bailout by the European Union and the International Monetary Fund.

After the start of a 48-hour general strike and violent clashes on Tuesday that transformed the central Syntagma Square into a battle zone, fresh protests were planned on Wednesday and thousands had gathered in front of parliament by midday.

Late on Tuesday, the government of Prime Minister George Papandreou received a boost when one of three rebel deputies from his PASOK party backtracked on his previous opposition and said he would vote for the package.

"I have made the decision to vote for the plan because national interests are more important than our own dignity," the deputy, Thomas Robopoulos, told Reuters.

A parliamentary official said the vote would probably take place between 2 and 5 p.m. (1100-1400 GMT).

One communist deputy was pelted with yoghurt as she made her way into parliament and three people were treated for minor injuries as protesters clashed with police during an attempt to bar the way into the chamber.

The communist-affiliated PAME labor group held a rally in the morning and several other meetings were expected during the day, culminating in a major demonstration by public service union ADEDY and private sector union GSEE at 7 p.m. (1600 GMT).

Greece's central bank governor, George Provopoulos, warned that a "no" vote would be catastrophic for Greece.

"For parliament to vote against this package would be a crime - the country would be voting for its suicide," he told the Financial Times.

The measures demanded by international lenders as the price for continuing to support Athens have caused bitter resentment among Greeks coping with the deepest recession since the 1970s and now facing years of grim austerity.

Another PASOK rebel, Panagiotis Kouroublis, said he still objected to the plan but declined to say whether he would vote against it. "I will speak to the Parliament later and you will hear what I have to say," he told Alter TV. "Nothing is more important than my dignity and my love for my country."

SLIM GOVERNMENT MAJORITY

Papandreou's Socialists hold a narrow majority with 155 seats in the 300-member legislature and with Robopoulos, the most prominent of a handful of potential rebels, backtracking on his opposition, chances of the vote going through improved.

In a sign of growing optimism on financial markets about the outcome, Greek bank stocks opened up 3 percent on Wednesday, while Greek bond yields fell.

However even with approval on Wednesday, there will still be a risk of lawmakers rejecting detailed austerity bills in votes on Thursday on the implementation of different elements of the plan, such as tax rises and the sale of state assets.

The EU and the IMF have said the entire plan must be passed this week for Greece to obtain the next, 12 billion euro ($17.3 billion) tranche of emergency loans under the bailout.

Greek officials have said the country needs the money by mid-July to continue paying its debts.

Despite heavy international pressure, the center-right opposition declared ihttp://www.blogger.com/img/blank.gift would vote against the package but close attention was being paid to a splinter group of conservative deputies led by former foreign minister Dora Bakoyanis.

Bakoyanis, who broke party ranks to vote in favor of Greece's first EU/IMF bailout last year, said on Wednesday she would abstain from voting this time. The other four deputies in her group would vote according to their consciences.

"The government cannot govern and apply the program and the political opposition is lying, this is the problem. It does not dare to tell people that there are no magic solutions, that sacrifices are necessary," Bakoyanis said.

View original source: Reuters.com