Greece, the euro and JDX: The varying consequences of swaps

For several months now, subjects of informed speculation concerning the stability, if not long-run viability, of the euro have been the economies and financial status of Greece, Ireland, Spain, Italy and Portugal, or GISIP - which rhymes with gossip but really is unvarnished truth.

Greece, accepted, if not joyfully embraced by Europe, took the euro as its currency.

The great thing about the common currency, posited by those who over the years, have advocated dollarisation as a solution to Jamaica's perennial exchange rate devaluation slide, is that it banishes money-printing.

So the thinking suggests there must be an enforced discipline with respect to any tendency for fiscal and monetary excesses. That is indeed true. But in the euphoric decade of housing bubbles, derivatives and hitherto unknown leverage on Wall Street and beyond, this constraint has been in no way binding.

It wasn't binding because accession to the euro signalled to global investors that the sovereign debt of these countries was high-grade stuff.

In addition to this, their fiscal deficits were never really considered burdensome.

Indeed, Spain had a surplus a mere two and a half years ago while Greece boasted what analysts deem a manageable debt-to-GDP ratio. So borrowing on the international market was relatively easy.

What has changed? As truths are revealed, quite a lot. It turns out that in deals not unlike Lehman Brothers' now-infamous Repo 105s, Goldman Sachs assisted the Greek finance ministry to hide the true picture of its deficits by 'legally' circumventing the EU's Maastricht rules.

These rules inflict big, not cosmetic, fines on member countries breaching the 3.0 per cent of GDP budget deficit rule.

The German magazine Der Spiegel, reporting on Greece in mid-February 2010, tells us that: "Creative accounting took priority when it came to totting up government debt ... they only adhered to the three per cent deficit ceiling with the help of blatant balance-sheet cosmetics. One time, gigantic military expenditures were left out, and another time, billions in hospital debt."

But that was not all. The big one, which makes the Standard and Poor's downgrade seem mild, is the revelation that Greece's debt managers struck a deal with Goldman Sachs early in 2002 based on 'cross-currency swaps'.

Greek debt would be issued in dollars and yen, then swapped out for euro debt. At a later, convenient date, it would be reswapped, exchanged back to the original dollar or yen denomination. Such financing is not unusual. What was unusual in the Greek case was use of 'fictional exchange rates' allowing larger sums of euros needed to pay current bills.

Surely we remember front-loading or pre-payment of the bauxite levy and other creative arrangements to meet IMF targets. Well, Greece's IMF is Maastricht and Eurostat, the EU's rule maker, number gatherer and cruncher, which oversee financial arrangements. But the thing is, they don't buy Greek bonds - its sovereign debt.

comparisons

This brings me to comparisons of the Jamaica Debt Exchange (JDX) and the situation in which Greece finds itself. There are similarities, but the indicated fixes couldn't be farther removed from each other.

Greek under-representation and avoidance of income tax are actually, if you can believe it, worse than Jamaica's.

Jamaica defaulted only on its domestic debt. Had the JDX encompassed our foreign debt, the backlash would have been devastating.

To this extent, the almost 100 per cent JDX uptake is rather like the Godfather's offer that could neither be avoided by Government nor refused by bondholders.

Greece does not have this option. This is why the EU and the IMF have had to approve and announce loudly by megaphone a huge €110-billion bailout package for Greece. It is meant to assuage the misgivings and fears of holders and would-be purchasers of Greece's sovereign debt, some of which matures in short order.

The solution is opposed, says German opinion polling, by some 57 per cent of Germans who see it as fundamentally wrong to rescue a spendthrift Greece.

Meanwhile, Greek workers and the middle classes take to the streets in protest. Here is the contradictory aspect of accession to the euro: Greece has no national currency to devalue. It must deflate, so prices and wages will fall - structural adjustment southern European style.

For Jamaica, the JDX provides absolutely needed breathing space.

This lull in the debt hurricane passage is truly akin to the eye of the storm. It has to be used to improve efficiency, optimise collection of legitimate taxes, control crime, thereby reducing the cost, and improving the perception of Jamaica as a place to do business.

This is a lot to ask and to do.

Blissfully, unlike Greece we haven't had eruptions in the street.

wilbe65@yahoo.com