One of the larger problems in the unfolding meltdown in Greece is the fraud apparently perpetrated by past Greek governments to conceal their true levels of debt. This is having a very adverse effect on Greek credit spreads to (German) Bunds.
10-year Greek bonds are trading at 6.67%, while German 10-years are at 3.14%, a full 353 basis points lower. The increasing spread owes not to inflation, but to sovereign credit risk – and the hidden debt is front and center in this fiasco.
Marc Chandler of Brown Brothers Harriman says this about recent revelations:
The German-based Spiegel On-Line has an article that is attracting market attention.
It claims that a large US investment house helped arrange a cross currency swap for Greece that helped to conceal another $1 bln in debt. Although this amount seems relatively small given the huge debt and deficit problems, many suspect it could be just the tip of the iceberg.
It is not unusual for sovereigns, including Greece, to borrow in foreign currencies, like dollars, yen and Swiss francs and swap back into euros. The article claims that the US investment house arranged a cross currency swap for Greece back in 2002 but gave exchange rates that in effect created for Greece an extra billion dollars.
Of course, the swap will have to be unwound, but like was in effect off-balance sheet and was not picked up by the stats office.
Many observers have already noted problems with the Greek accounting methods which have sometimes not included defense spending in the budget calculations and have also sometimes not included the debt owed to hospitals under its social programs.
Greek bonds as well as the other weaker credits in the euro zone are rallying today. But this could very well prove to be a one day wonder if we are right and no EU bail out will be forthcoming tomorrow.