The Federal Reserve is investigating cross-currency swaps that Goldman Sachs conducted for the Greek government that could have masked the true scale of its debt, Ben Bernanke, its chairman, said on Thursday.
In testimony to the Senate Committee on Banking, Housing and Urban Affairs, Bernanke said the Fed was "looking into a number of questions relating to Goldman Sachs, and other companies and their derivatives arrangements with Greece."
Bernanke was responding to a question from Chris Dodd, the chairman of the Senate committee, who asked whether hedge funds were destabilising the Greek economy by taking out credit default swaps against the risk that the beleaguered Mediterranean country would default on its obligations. He said the Fed was looking into this issue as well, noting that "credit default swaps are properly used as hedging instruments."
His remarks on the latter issue come in the wake of comments from Christine Lagarde, the French finance minister, who said last Thursday that speculation in the market for sovereign credit default swaps was partly to blame for the exacerbation of debt problems in the eurozone.
Angela Merkel, Germany's chancellor, last Thursday condemned Goldman Sachs' involvement in conducting currency swaps for the Greek government, without directly naming the investment bank. "It's a scandal if it turned out that the same banks that brought us to the brink of abyss helped fake the statistics," she said, according to Bloomberg, a wire service.
Goldman Sachs' share price was down three cents, just over 2% in early afternoon trading.
Cross-currency swaps are foreign exchange agreements between two parties to parts of a loan in one currency for the corresponding parts in another currency. They are used to secure cheaper funding, as they allow the borrower to take out a loan at the lowest rate available and then switch it for debt in the currency they prefer through a back-to-back loan. They are also used to cut exposure to exchange-rate volatility.
In July 2003, Risk.net reported that Goldman Sachs had carried out cross-currency swaps for Greece government, allowing it to reduce its publicly visible debt ratios to meet European Union (EU) targets. Since the real extent of its debt was discovered in December, the reliability of Greek statistical information has been called into question. In January, a European Commission report accused the Greek statistical service of reporting "incorrect data".
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