Wall St deals hid level of Greek debt

Wall St tactics akin to the ones that fostered subprime mortgages in the United States have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide mounting debts.

As worries over Greece rattle world markets, records and interviews show that with Wall St's help, the nation engaged in a decade-long effort to skirt European debt limits.

One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning.

In early November - three months before Athens became the epicentre of global financial anxiety - a team from Goldman Sachs arrived in the city with a proposition for a Government struggling to pay its bills.

The bankers, led by Goldman's president, Gary Cohn, held out a financing instrument that would have pushed debt from Greece's health care system far into the future, much as when strapped homeowners take out second mortgages to pay off credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe's monetary union, Goldman helped the Government quietly borrow billions, people familiar with the transaction said.

That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe's deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of debts and with its richer neighbours vowing to come to its aid, the deals over the last decade are raising questions about Wall St's role in the world's latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt.

Instruments developed by Goldman Sachs, JPMorgan Chase and several other banks enabled politicians to mask additional borrowing in Greece and Italy.

In dozens of deals across the Continent, banks provided cash upfront in return for Government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say such deals, because they are not recorded as loans, mislead investors and regulators about liabilities.

The crisis in Greece poses the most significant challenge yet to the euro, and the Continent's goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes US$300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.

A spokeswoman for the Greek finance ministry said the Government had met many banks recently and had not committed to any bank's offers. She said all debt financings were conducted in an effort of transparency.

- BLOOMBERG