The Greek Debt Crisis popped up near April as news mentioned of a potential default by the European country. I remember the first news about the problem linked Greece to Goldman Sachs. For years Greece has been masking up its true amount of debt holdings. Since the European Central Bank strictly requires its member states to hold a deficit under 3% of their GDP, big spenders like Greece finds itself in a troubled situation.
To get sneaky and make something smelly smell tasty, Greece struck a deal with Goldman Sachs. The deal used the derivative instrument called Cross-Currency Swaps (CCS). In a nutshell, these CCS are used between two parties that hope to switch currencies that involve both the principal loan and the interest payment associated with it. The swap simply exchanges a loan’s principle payment and its interest for another one of the same value but in different currency. In the case of Greece, Goldman Sachs fabricated a highly specialized swap that instead of exchanging for a same valued loan in a different currency, it exchanged Greeks debt for a higher valued one which means additional funding for the country. With this transaction between Greece and Goldman Sachs, the resulting CCS did not show up on the balance sheet of Greece. For the country, it was like borrowing without having to report to shareholdings.
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