Greece Said to Have Arranged Swaps With 15 Banks

(Update1)

By Elisa Martinuzzi – February 22, 2010 03:12 EST

George Papaconstantinou, Greece’s finance minister

Feb. 22 (Bloomberg) — Greece arranged swap agreements with about 15 securities firms, including some payments from banks that may have helped hide the country’s true deficit, according to a person with direct knowledge of the contracts.

The swaps that allowed Greece to receive payments upfront date from before 2008, when European Union regulators changed rules to limit the use of the contracts, said the person, who spoke on condition of anonymity. Goldman Sachs Group Inc., which provided Greece with about $1 billion in funding in a 2002 swap, may have arranged the biggest of the contracts, the person said.

The EU accounting watchdog ordered Greece last week to provide information on its swaps as it probes whether the country used derivatives to hide the extent of its budget deficit, and if other countries used them. Swaps are typically designed to help countries to manage their debt rather than generate cash, according to Cesare Conti, a business professor at Italy’s Bocconi University.

“Upfront payments don’t necessarily lead to hidden debt,” Conti said in a telephone interview from Milan. “If swaps are used to manage obligations, rather than increase them, they’re beneficial.”

Concern about Greece’s ability to finance its deficit and debt have roiled financial markets since the government revealed the country had a budget shortfall of 12.7 percent last year, more than four times limit allowed for those countries using the euro, and the highest ratio in the 27-nation European Union.

Primary Dealers

The spread, the premium investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, reached 396 basis points last month, the most since the year before the euro’s debut in 1999. That compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.

The 15 banks that have swap agreements with Greece are among the country’s so-called primary dealers, said the person. Greece had 21 dealers last year, including Citigroup Inc., Barclays Plc and Morgan Stanley, according to the country’s central bank.

Spokesmen for Goldman Sachs in New York and Morgan Stanley in London declined to comment. Officials at Barclays and Citigroup in London didn’t have an immediate comment.

“Governments seek a large number of swap counterparties to reduce the exposure to any one bank,” Conti said.

An official for the Greek government didn’t have an immediate comment. The swaps used by Greece were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.

Government Inquiry

A Greek government inquiry uncovered this month a series of swaps agreements that have allowed the government to defer interest payments to a later date, causing “long-term damage” to the country. Greece’s central government debt totaled 298.5 billion euros ($406.8 billion) at the end of 2009, according to the Finance Ministry.

German Chancellor Angela Merkel said on Feb. 18 it would be a “scandal” if banks helped Greece massage its budget. French Finance Minister Christine Lagarde, speaking on France Inter radio the same day, said that even if the swaps were legal, they probably contributed to instability.

Greek government bonds tumbled last week amid concern the country may not deliver measures to trim its budget deficit, and as the EU promised assistance without specifying what form it would take. The yield on the benchmark 10-year Greek government bonds rose 32 basis points to 6.46 percent last week.

To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

Institution for Growth in Greece (IfG)

Press Release from 2014-05-20

Establishment of the first sub-fund

• The first of three planned sub-funds was established on 7 May 2014 in Luxembourg
• Greece and KfW are to each provide financing of EUR 100 million
• IfG will distribute the funds to small and medium-sized enterprises (SMEs) in Greece with the help of accredited Greek banks
• Key objective is to provide Greek SMEs with improved access to investment loans and working capital to help foster economic growth

The first of three planned IfG sub-funds was founded on 7 May 2014 in Luxembourg. The Hellenic Republic and KfW — on behalf of the German Federal Government — will each contribute EUR 100 million in funding debt to this sub-fund. These funds will be lent to small and medium-sized enterprises in Greece in the form of loans from Greek on-lending banks. The IfG will thus make it easier for Greek SMEs to access investment loans and working capital, thereby contributing towards the recovery of the Greek economy.

The Greek Minister of Finance Yannis Stournaras, the Greek Minister of Development and Competitiveness Kostis Hatzidakis and the Chief Executive Officer of KfW Dr Ulrich Schröder are meeting today in Athens to officially give the project the “green light” and to discuss how to best implement the agreed measures.

The establishment of the first sub-fund is an important milestone; it is a key prerequisite for the start of the operational phase of this project, which is supported by the German Federal Ministry of Finance.

In the first round of discussions, various Greek banks were informed of the project and of their potential role as sales partners.

The next steps now involve the conclusion of contracts between IfG and Greek on-lending banks, as well as the commencement of business activity in the third quarter of 2014.

About the Institution for Growth (IfG)

In May 2012, a European working party was appointed to develop a concept for the foundation of an institute to promote the Greek economy. The working party includes representatives of the European Investment Bank, the European Commission, the French Ministry for Finance and KfW.

In February 2013, the Greek Minister of Development and Competitiveness Kostis Hatzidakis approved the proposed concept for an IfG umbrella fund with three different sub-funds to be founded according to their specific promotional purpose: one sub-fund that will provide borrowed funds to Greek SMEs, one sub-fund that will provide equity capital to Greek SMEs and one sub-fund for financing infrastructure projects.

As part of a delegation trip by Federal Minister Dr Schäuble to Athens in July 2013, a memorandum of understanding was signed to implement the first sub-fund (borrowed funds for small and medium-sized companies).

US debt six times greater than declared – study

Reuters / Kim Hong-Ji

The United States has accumulated over $70 trillion in unreported debt, an amount nearly six times the declared figure, according to a new study by University of California-San Diego economics Professor James Hamilton.

The unique aspect of Hamilton’s study  is that he examines federal debt that has not been publicly released, specifically the government’s support for “housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds.”

Since the global economy hit rock bottom in 2008, US federal debt has gone through the roof, increasing from $5 trillion to an estimated $12 trillion in 2013. Meeting the interest payments alone on that debt burden presents a formidable challenge for US taxpayers: In addition to the debt, Americans must pay back around $220 billion annually just in interest.

And with interest rates set to rise from their historic lows, Americans will be confronted with a significantly higher bill in the future. In fact, the Congressional Budget Office anticipates that net interest expense on US federal debt will exceed the entire defense budget by 2021.

This fiscal horror story playing out across America, however, is actually much worse than publicly recognized.

Much of the current debt load is a direct result of the Great Recession of 2008, which saw an unprecedented effort on the part of Washington to rescue the US economy from financial ruin.

This led to a series of controversial operations on the part of the US Federal Reserve known as “quantitative easing” or “large-scale asset purchases.” The aim of these programs was that by buying long-term securities, the Fed would be able to lower the long-term interest rate, encourage investment and get the economy rolling again.

According to Hamilton, “the net effect of the Fed’s emergency lending between 2006 and 2008 was to increase the net indebtedness of the federal government by over a trillion dollars, balanced by acquisition of corresponding assets (the emergency loans).”

 

The real shocker in the report, however, came with the cost of Medicare and Social Security, which ran at $27.6 trillion and $26.5 trillion respectively.

Hamilton could not conceal his surprise at the findings.

“These numbers are so huge it is hard even to discuss them in a coherent way,” he said before providing a caveat on the US demographic situation. “The US population is aging, and an aging population means fewer people paying in and more people expecting benefits. This reality is unambiguously going to be a key constraint on the sustainability of fiscal policy for the United States.

“One would think we should be saving as a nation today as preparation for retirement, and if in fact we are not, the current enormous on-balance-sheet federal debt is all the more of a concern.”

It is not just the sick and elderly, however, who are adding to the US debt burden. Government loans for students also featured high in the report.

The US Department of Education approved $714 billion at the end of 2012, which is a significant jump from the $104 billion issued at the end of 2007.  But with the US economy failing to generate new jobs, many of these now college graduates lack the financial means to return their debt.

Although the report paints an extremely worrisome picture of America’s fiscal situation, some say it may actually be overly optimistic.

The US debt burden is much greater says Boston University economics professor Laurence J. Kotlikoff, who served on President Ronald Reagan’s Council of Economic Advisers.

“If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap,” Kotlikoff said in an interview with National Public Radio. “That’s our true indebtedness.”

According to the US National Debt Clock, the US government has a $16.8 trillion debt, which comes out to be over $53,000 for each US citizen. Looking at those steadily accumulating numbers, it is difficult to see how the US will square the circle of a steadily-aging population together with the harsh reality of the modern economy.

Robert Bridge is the author of the book, Midnight in the American Empire, which examines the dangerous consequences of excessive corporate power in the United States.

Pope fires entire board of Vatican financial watchdog

Pope Francis (2nd R) arrives to lead the funeral service of cardinal Simon Lourdusamy in Saint Peter’s Basilica at the Vatican June 5, 2014.

Credit: Reuters/Alessandro Bianchi

(Reuters) – Pope Francis sacked the five-man board of the Vatican’s financial watchdog on Thursday – all Italians – in the latest move to break with an old guard associated with a murky past under his predecessor.

The Vatican said the pope named four experts from Switzerland, Singapore, the United States and Italy to replace them on the board of the Financial Information Authority (AIF), the Holy See’s internal regulatory office. The new board includes a woman for the first time.

All five outgoing members were Italians who had been expected to serve five-year terms ending in 2016 and were laymen associated with the Vatican’s discredited financial old guard.

Reformers inside the Vatican had been pushing for the pope, who already has taken a series of steps to clean up Vatican finances, to appoint professionals with an international background to work with Rene Bruelhart, a Swiss lawyer who heads the AIF and who has been pushing for change.

Vatican sources said Bruelhart, Liechtenstein’s former top anti-money laundering expert, was chafing under the old board and wanted Francis to appoint global professionals like him.

“Bruelhart wanted a board he could work with and it seems the pope has come down on his side and sent the old boy network packing,” said a Vatican source familiar with the situation.

The new board of the AIF includes Marc Odendall, who administers and advises philanthropic organisations in Switzerland, and Juan C. Zarate, a Harvard law professor and senior advisor at the Center for Strategic and International Studies, a think tank based in Washington D.C.

The other two board members are Joseph Yuvaraj Pillay, former managing director of the Monetary Authority of Singapore and senior advisor to that country’s president, and Maria Bianca Farina, the head of two Italian insurance companies.

Francis, who was elected in March 2013 after the resignation of former Pope Benedict, in February set up a new Secretariat for the Economy reporting directly to him and appointed an outsider, Australian Cardinal George Pell, to head it.

In January he removed Cardinal Attilio Nicora, a prelate who played a senior role in Vatican finances for more than a decade, as president of the AIF and replaced him with an archbishop with a track record of reform within the Vatican bureaucracy.

He also replaced four of the five cardinals in the commission that supervises the Vatican’s troubled bank, known as the Institute for Works of Religion (IOR).

Since the arrival of Bruelhart in 2012, the AIF has been spearheading reforms to bring the Vatican in line with international standards on financial transparency and money laundering. But Vatican sources say he has encountered resistance from an old, entrenched guard.

A report last December by Moneyval, a monitoring committee of the Council of Europe, said the Vatican had enacted significant reforms but must still exercise more oversight over its bank.

Francis, who has said Vatican finances must be transparent in order for the Church to have credibility, decided against closing the IOR on condition that reforms, including closing accounts by people not entitled to have them, continued.

Only Vatican employees, religious institutions, orders of priests and nuns and Catholic charities are allowed to have accounts at the bank. But investigators have found that a number were being used by outsiders or that legitimate account holders were handling money for third parties.

Monsignor Nunzio Scarano, a former senior Vatican accountant who had close ties to the IOR, is currently on trial accused of plotting to smuggle millions of dollars into Italy from Switzerland in a scheme to help rich friends avoid taxes.

Scarano has also been indicted on separate charges of laundering millions of euros through the IOR. Paolo Cipriani and Massimo Tulli, the IOR’s director and deputy director, who resigned last July after Scarano’s arrest, have been ordered to stand trial on charges of violating anti-money laundering norms.