Wealth Management Singapore

Greece and her budget problems has been in the news for some time now. The issued started way back in 1999.

Greece, which had an increasing budget deficit (where spending is higher than income) that cause it to fail the criteria for joining the single European currency in 1999, joined the euro in 2001. Member nations must keep deficits at less than 3 percent of GDP and trim national debt to less than 60 percent of GDP under the pact.

Greek Prime Minister George Papandreou, who came to power in October, more than tripled the country’s 2009 deficit estimate to 12.7 percent of GDP, and officials last month pledged to provide more reliable statistics after the EU complained of “severe irregularities” in the nation’s economic data.

It turns out that Greece turned to Goldman Sachs Group Inc. in 2002, just after adopting the euro, to get $1 billion in funding through a swap on $10 billion of debt. The transactions consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, Sardelis said. That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion of funding. Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time, declined to give specifics on by how much the swap reduced the country’s reported deficit or debt.

Sardelis said in an interview last week that Eurostat, the EU’s statistics office, was aware of the plan. Risk Magazine also reported on the swap in July 2003. EU regulators pressed Greece to disclose details of currency swaps after an inquiry by the country’s finance ministry uncovered a series of agreements with banks that it may have used to to delay payments and shrink its reported budget deficit.

A dispute is unfolding about how long and who in European Union have known that Greece used derivatives to conceal its growing budget deficit. The disagreement comes amid the worst crisis in Euro’s 11-year history. The existence of the swaps is fueling questions about whether Greece used the contracts to mask the fact it was struggling to comply with the currency’s membership criteria from the early days of its entry into the eurozone.

This sovereign debt crisis is spreading in Southern Europe, from Greece to Portugal, Spain and Italy, where government debts and budget deficits are high.

The cause of concern is the lost of confidence of investors in sovereign debt. Investors have sold government bonds in those countries as perceived default risks have risen. This has resulted in the rise in the yields of government bonds resulting in higher borrowing costs for the government and private sector as loans are often tied to the risk free rate of government bonds.

Greece was forced to revise her GDP growth forecast for 2009, saying the recession was worse than expected, and that the Greek economy would shrink by “around 1.5 percent” this year, rather than expand by 1.1 percent as previously predicted.

Now, Greece has just won European support for its plan to boost tax revenue and cut public spending. The European Commission said on Tuesday it would endorse Athens’ plan to bring back under control the public sector deficit, which last year reached almost 13 per cent of gross domestic product.

Meanwhile, BlackRock Inc., the world’s biggest asset manager, increased its Greek bond holdings, betting the European Union won’t allow the nation to default as Prime Minister Papandreou cuts the bloc’s biggest deficit.