Answer to Question #84737 in Finance for Dennis

Question

How can cross currency swaps or derivatives be used to help a country hide its debt? How did Goldman Sachs do this in Greece’s case?

Answer 1

Normally governments use cross-currency swaps for refinancing. European governments obtain funds from investors around the world by issuing bonds in dollar, yen or Swiss francs for a certain period. But they need euros to pay their daily bills and they use cross-currency swaps, the contracts, where the other counterpart is an investment bank or other credit organization and the amount raised in yen and dollars is exchanged for the equivalent amount in euros.

But in Greece’s case bankers of Goldman Sachs used fictional exchange rates in swap, whereby Greece received a far higher sum in euro than the actual value in yen was and in this way got additional credit of up to $1 billion. The derivative contracts aren’t required to be reported according to the European rules, and the credit wasn't shown in the Greek debt statistics. It was needed for Greece because of strict rules about the government debt of the countries of European Union.