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Thursday 8 December 2016

Goldman faces legal action if lenders were misled over Greece

Published 18/02/2010 | 07:08

Greek finance minister George Papaconstantinou said credit swaps used by Greece to manage debt were 'at the time legal'. Photo: Getty Images
Greek finance minister George Papaconstantinou said credit swaps used by Greece to manage debt were 'at the time legal'. Photo: Getty Images

GIANT investment bank Goldman Sachs could face legal action if lenders to the Greek government were misled about the state of the country's finances, some experts say.

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Anger is growing both in financial markets and among EU policymakers over the way Goldman managed $15bn (€11bn) of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses.

The New York-based bank helped Greece raise $1bn of off-balance-sheet funding in 2002 through the swap, which EU regulators said they knew nothing about until recent days.

INVESTIGATION

Eurostat, the EU's statistics office, has ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries to see what other methods may have been used to reduce headline debt figures.

Failing to disclose the swap may have allowed Goldman, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital, a London-based broker and fund manager.

"The price of bonds should reflect the reality of Greece's finances," Mr Blain said.

"If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled."

Goldman could face legal liability "if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading," said Thomas Hazen, a law professor at the University of North Carolina

"But that would be a tough hill to climb, in terms of burden of proof. There'd have to be some sort of smoking-gun memo."

Michael DuVally, a spokes-man at Goldman Sachs in New York, declined to comment. Greek finance minister George Papaconstantinou has said the swaps used by Greece to manage debt were "at the time legal".

The government did not use the swaps now, he said.

Goldman Sachs earned about €735m underwriting 10 government bonds since 2002. Prospectuses for six of them contain no mention of the swaps. The other four could not be obtained. (Bloomberg).

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