Figuring complex Greek derivatives seeing a kabaddi match

Manasiecon blog just keeps getting better.

The recent post is on trying to figuring out complex Greek derivatives in a Kabaddi match:

She points to a Kabaddi match and how both the teams did not want to take one particular player:

The basic rule of any team game. The team can only be as strong as its weakest player. If kids can understand this, why couldn’t the Eurozone economists? The leader of the game, or the “core” as it is called, is obviously the most  burly, the strongest kid on the block. Germany. Germany may have excellent fundamentals by itself, but it would be impossible to pull off wonderful growth trajectory for the entire region if you insist on creating a United States of Europe as a matter of misplaced pride. Because it isn’t about emotions, you see.

And then, the Sheela aunty factor. The pushy aunt, who conceals the truth and makes sure that her favourite kid is pushed into the team. An aunt called as Goldman Sachs. The main problem that Greece had in 2001 was that it was heavily indebted and that too in dollar and yen terms. It was needed to not only trim down the level of existing debt, but also show a declining trend in terms of the public debt ratio as an entry level criterion of the Maastricht treaty.

Now, one way to trim down the existing level of debt is to ahmmm….hide it! Well, now, how can you just mask millions of dollars worth of public debt? So, Greece was given a rather helpful hand by the investment bank Goldman Sachs. While the actual cross currency swap operation is a little complex, let me just explain it here simply by giving a smallish example. For starters, let me say that what is hidden, is not necessarily illegal. So, Goldman Sachs practiced the oldest art in the derivatives market in order to legally help Greece mask their public debt. Here’s a quick peek into the devious tactics used by Sheela Sachs aunty.

Let us assume that the spot market exchange rate is 1.11 dollars per Euro. Let us further assume that Greece raises debt of $1.11 billion, on which it pays 5% interest bi-annually. Now, since Greece would want to use the money domestically, it needs to change the dollars into Euros. At what rate, really, is the question. If you change $1.11 billion into Euro at the going spot rate, then you are entitled to receive 1 billion Euros against the $1 billion that you have.

Enter Goldman Sachs. What GS does is that it offers to exchange $1.11 billion into Euro at a rate that is decidedly different from the spot rate. Thus, if GS were to use a reference rate of 1.08 dollar to the Euro, you can see that it’ll give Greece 1.02 billion Euro against the same $1.11 billion. That it’ll further hedge its risk exposure is again a given. In the meanwhile, Greece looks fundamentally much, much brighter due to the additional 0.02 billion Euros it has received in the transaction. If GS hedges itself right, it too makes money in the market and it’s a win-win for both aunty and Nilesh. The problem is that the team suffers.

Till when can this delicate cycle continue? To the point where GS has the financial muscle to pull this off. Come 2008 and the entire public debt issues and the murky derivatives around it came crashing down Eurozone’s ears in one of the most resounding crashes in recent financial history. Greece was given two huge bailouts by the Troika (EC, ECB and the IMF) to stabilize and was also offered a “haircut” i.e. trimming of the debt given by the Troika by about 50%. Of course, the Greeks want a trimming to the tune of 60%, one of the many reasons for the very stale “stalemate” between Greece and the EU.


The interesting (and depressing) thing is Sachs aunty continues her domination whereas the teams (Greeks) suffer.  Sachs aunty moves her attention to other Kabaddi teams where she could influence player selection once again..

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