Much noise this morning surrounding the news that Goldman Sachs (and a number of other banks) allegedly helped Greece to hide the full scale of its ballooning government debts through financial jiggery-pokery over the past decade or so. Eurostat has now demanded an explanation from the Greeks for $1bn of currency swaps it says it was unaware of (though Greece seems to be insisting the authorities did know).
The original story about Goldman’s involvement appeared in Der Spiegel last week (though the theme has been the subject of investigation by the excellent euro blog A Fistful of Euros for some time), and over the weekend the New York Times produced an excellent feature filling in the gaps. One of the more intriguing lines from that latter piece says: “Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.”
So, the obvious question goes, what about the UK? Did Britain hide its debts? Was Goldman Sachs involved? Should we panic?
To which the answers, respectively, are: yes, yes and no. Britain has been finding various ways to hide its debt off its balance sheet for years; Goldman Sachs was one of the prime movers in this industry, through its infrastructure arm; but the fact is we (and by extension, one presumes, investors) have known about this for quite some time. The chief modus operandi here was the private finance initiative, something which helped the Government remove just south of £50bn from the official balance sheet. Goldman was a big player in the industry. But let’s not get carried away by vampire squid criticism here – it was one of many players in a well-established industry. *
Plus, there is a difference between this and securitisation, one of the things the Greeks indulged in. PFI involves giving the private sector the right to build and maintain public infrastructure, and to pay them a fee for the service; securitisation involves the private sector not in the delivery but only the financing of the service. And although PFI is financial sleight-of-hand, it is not quite as eye-deceiving as the securitisation the Greeks apparently took part in. In fact, the Government itself provides a handy spreadsheet of all the PFI deals (including whether they are on or off balance sheet – most are off).
So has Britain indulged in much pure securitisation? Not according to the ONS, which points out that aside from those securitisation deals inherited from Northern Rock and Bradford & Bingley etc there were only a few pure securitisation packages carried out by the public sector (London Underground and London and Continental Railways being a couple) but that they are all on balance sheet. The Treasury also denies the use of Greek-style currency swaps of the type Goldman Sachs apparently helped organise all those years ago, allegedly without telling Eurostat.
However, this whole episode underlines two important broader lessons. First, that what matters in this case is confidence and transparency. Unlike Greece, Britain has, for the meantime at least, still got the confidence of investors, and this is not merely because those investors think the people and politicians are resigned to major deficit cuts, but because they trust the statistics more than the euro ones . Or at least, they are aware of what is on and off balance sheet. This newspaper (and many others) have been banging on about off-balance sheet liabilities for years. In Greece, on the other hand, there were episodes of outright chicanery, which the incoming government has felt able to kitchen sink. Were the UK government to admit to any similar stuff (and of course that is possible) it would be an almost certain route to a fiscal crisis.
Second, whether secretly or openly, governments across Europe have done as much as possible over the past decade to push debt off their balance sheets. Now, while there are decent explanations as to why you would want to involve the private sector in providing and managing services, one suspects these moves have often been with the intention of shoving a lot of the financial pain onto the next lot.
As Martin Weale of the National Institute for Economic and Social Research puts it: “No rational person would buy a car and think it doesn’t cost anything because you spread the payments over five years. Someone who believes in magic might.”
This episode serves as a reminder of the scale of this effort to shift debt offstage, and of how many different avenues politicians explored in order to live today, pay tomorrow. For those who believe that we’ve just come to the end of an endemic super credit cycle, this episode provides yet more supporting evidence.
* PS I should have added: Goldman, while active in the PFI industry, was not as important a player as some of the other banks – including Barclays and HSBC. Though it was support services and construction firms (eg Serco, John Laing to name two) which benefited most from the industry.
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