Call for public inquiry in murder case with NoW links
5 August 2011
By Dominic Ponsford
Lawyers acting for the family of a murdered private detective have called for a new public inquiry which could shed more light on corrupt relationships between police and journalists.
Daniel Morgan was murdered with an axe in 1987 but despite five police investigations no-one has ever been convicted of his murder.
In March last year Morgan's former business partner Jonathan Rees was one of three men acquitted of Morgan's murder when the trial collapsed after 20-months of pre-trial hearings.
BBC Panorama revealed in March this year that Rees and his company, Southern Investigations, was widely used by journalists to find out secret information. Rees was used by the Daily Mirror and Sunday Mirror to probe the bank accounts of Sophie, Countess of Wessex, and Prince Michael of Kent in 1999.
Rees was also used by the News of the World and rehired by the paper after his release from prison in 2005 following his conviction for a serious criminal offence.
During the emergency Commons debate on phone-hacking on 7 July, MP Tom Watson alleged that the News of the World had interfered with a murder investigation in 2002.
Press Gazette understands that the murder investigation in question was into the death of Daniel Morgan.
Watson said: "Rebekah Brooks was present at a meeting with Scotland Yard when police officers pursuing a murder investigation provided her with evidence that her newspaper was interfering with the pursuit of justice.
"They gave her the name of another senior executive at News International, Alex Marunchak. At the meeting, which included Dick Fedorcio of the Metropolitan police, she was told that News of the World staff were guilty of interference and party to using unlawful means to attempt to discredit a police officer and his wife.
"Rebekah Brooks was told of actions by people whom she paid to expose and discredit David Cook and his wife Jackie Haines, so that Mr Cook would be prevented from completing an investigation into a murder. News International was paying people to interfere with police officers and was doing so on behalf of known criminals. We know now that News International had entered the criminal underworld.
"Rebekah Brooks cannot deny being present at that meeting when the actions of people whom she paid were exposed. She cannot deny now being warned that under her auspices unlawful tactics were used for the purpose of interfering with the pursuit of justice. She cannot deny that one of her staff, Alex Marunchak, was named and involved.
"She cannot deny either that she was told by the police that her own paper was using unlawful tactics, in that case to help one of her lawbreaking investigators. This, in my view, shows that her culpability goes beyond taking the blame as head of the organisation; it is about direct knowledge of unlawful behaviour. Was Mr Marunchak dismissed? No. He was promoted."
This meeting was also brought up during Commons media select committee questions to Rebekah Brooks and former Met Police assistant commissioner John Yates last month. Brooks said that it was extraordinary that Rees was re-hired by the News of the World in 2005 after a serious criminal conviction.
Daniel Morgan's brother Alastair said: "For almost a quarter of a century, my family has done everything possible to secure justice for Daniel and to expose police corruption. For much of this time, we have encountered stubborn obstruction and worse at the highest levels of the Metropolitan Police.
"We have found an impotent police complaints system and met with inertia or worse on the part of successive governments. We have been failed utterly by all of the institutions designed to protect us. We have seen for ourselves a criminal justice system which has proved incapable of coming to terms with the murder or the subsequent criminality of those charged with enforcing the law.
"In the midst of what is a tragic mess for my family, we recognise that those responsible for the most recent prosecution, police officers and lawyers alike, have done their utmost to redress the catastrophic failures of earlier investigations. Nevertheless, despite their best efforts, the fact remains that there has been no public scrutiny of the evidence available in relation to Daniel’s murder.
"We find real significance in recent and continuing revelations around the News of the World affair in relation to the close relationships between NoW journalists, corrupt police officers and some of those charged with Daniel’s murder.
"In that light, we call upon the Home Secretary now to order a full judicial inquiry into this sorry state of affairs. We consider that the material placed before her cries out for proper public scrutiny of the murder and its handling by the police and the prosecuting authorities over the years. We know she will need courage to ensure that there is such scrutiny - courage which we have found to be signally lacking in her predecessors.”
Lawyers acting for the Morgan family have sent the Home Secretary a detailed submission setting out the grounds for a judicial inquiry into the case.
On 31 March, 2011, acting Met Commissioner Tim Godwin apologised to the Morgan family and acknowledged publicly that there had been a “repeated failure by the MPS over many years following Daniel’s murder to accept that corruption had played such a significant part in failing to bring those responsible to justice”.
He said: “We recognise that we have to take responsibility for the consequences of the repeated failure of the MPS over the years to confront the role played by police corruption in protecting those responsible for the murder from being brought to justice.”
Tuesday, February 28, 2012
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Report: Mossad chief visited New Delhi days before attack on Israeli officials - Haaretz Daily Newspaper | Israel News
Mossad chief Tamir Pardo visited New Delhi just days before an attack on Israeli officials in the Indian capital this week, Indian media reported on Thursday, highlighting the extent to which Israeli intelligence was in the dark regarding possibility of a terror attack taking place in the country.
On Monday, the wife of an Israeli diplomat was moderately wounded when a car bomb exploded outside of Israel's embassy in New Delhi.
Investigators at the scene of the car bomb attack on the Israeli embassy in New Delhi on February 13, 2012.Credit: AP
The attack was one of three targeting Israeli officials abroad this week, with failed attempts to strike at diplomats reported the same day in Tbilisi and on the following day in Bangkok.
Neither attack was preceded by a specific intelligence warning.
Citing Indian officials, a report in the Times of India on Thursday placed Pardo's visit a week ago, saying he met with the heads of local intelligence. The report even quoted the Mossad chief as saying that Israeli citizens felt safer in India than in Turkey, the Caucusus or South America.
Pardo reportedly led a delegation of top Mossad officials, who discussed the possibility of Iranian counter attacks against Israeli targets. However, according to the report, the possibility of an attack taking place in New Delhi was not discussed.
The Times of India report also indicated that Israel's deputy envoy to India, Yahel Vilan, and the embassy's security officer, Shahar Gal Nero, sent a letter on February 1 to the New Delhi police warning of the possibility of attacks targeting Israeli citizens ahead of the anniversary of Mughniyah's assassination, and following attacks against Iranian nuclear scientists.
However, the letter did not detail any specific intelligence regarding the possibility of an attack taking place on Indian soil.
Indian intelligence officials were quoted as saying they feared increased use of magnetic bombs such as that used in the New Delhi attack.
One source indicated to the newspaper that an Indian intelligence agency had intercepted a phone call mentioning that Pakistani terrorists could make use of such explosive devices.
A report of the phone call was passed on to all Indian security agencies shortly prior to the attack on Monday, which represented the first time such bombs were known to have been used in India.
Kuwaiti report: Iran attempts to assassinate Barak intercepted during Singapore visit
Also on Thursday, the Kuwaiti newspaper al-Jarida reported that Singapore security forces had intercepted a joint Iranian-Hezbollah attempt to assassinate Israeli Defense Minister Ehud Barak during a recent visit to the country.
Senior Israeli defense officials told Haaretz on Thursday that the report had no basis in reality.
The al-Jarida article, which was attributed to the newspaper itself without giving the name of any specific writer, claims to cite senior Israeli sources as saying that the assassination was prevented after Mossad informed Singapore of the plot.
According to the report, the terror squad received abundant and precise intelligence concerning the timetable of Barak's visit to the country last week, and planned to track his movements and eventually assassinate him at his hotel.
Upon learning of the plan, Mossad informed Singapore's security agencies, who then arrested three of the squad's members. They were jointly interrogated by local authorities and Mossad officials who arrived to attempt to extract information concerning other squads that might be operating in Asia and planning to target Israelis.
Al-Jarida was founded in 2007, and has since published several exclusive reports based on Israeli sources, in what is seen in the Arab world as a way for Israel to deliver messages to Lebanon and Syria.
One of the paper's reports, probably backed by sources in the Prime Minister's Office, eventually led to the removal of Uzi Arad as Prime Minister Benjamin Netanyahu's National Security Advisor.
Lebanese pundits have argued in the past that the newspaper, considered to be independent, was financially backed by Israel and serves to deliver Israeli propaganda.
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Conservative peer Lord James of Blackheath: I'm a money washer, not a money launderer
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
"I have also had extensive connections with north African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."
However Lord James said today that he had not intended to imply he had done anything improper.
He told technology and business website ZDNet UK that he had been brought into five companies between 1989 and 1997/98 at the direction of the Bank of England.
Lord James' express instructions were to run the companies down and liquidise the assets as they had been identified as conduits for IRA funds.
"The IRA had five companies completely ruined. They had built the companies up as pensions funds.
"I'm a money washer, not a money launderer," he said.
Read more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#ixzz14SxfwoSG
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
"I have also had extensive connections with north African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."
However Lord James said today that he had not intended to imply he had done anything improper.
He told technology and business website ZDNet UK that he had been brought into five companies between 1989 and 1997/98 at the direction of the Bank of England.
Lord James' express instructions were to run the companies down and liquidise the assets as they had been identified as conduits for IRA funds.
"The IRA had five companies completely ruined. They had built the companies up as pensions funds.
"I'm a money washer, not a money launderer," he said.
Read more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#ixzz14SxfwoS
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
"I have also had extensive connections with north African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."
However Lord James said today that he had not intended to imply he had done anything improper.
He told technology and business website ZDNet UK that he had been brought into five companies between 1989 and 1997/98 at the direction of the Bank of England.
Lord James' express instructions were to run the companies down and liquidise the assets as they had been identified as conduits for IRA funds.
"The IRA had five companies completely ruined. They had built the companies up as pensions funds.
"I'm a money washer, not a money launderer," he said.
Read more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#ixzz14Sxfw
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
"I have also had extensive connections with north African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."
However Lord James said today that he had not intended to imply he had done anything improper.
He told technology and business website ZDNet UK that he had been brought into five companies between 1989 and 1997/98 at the direction of the Bank of England.
Lord James' express instructions were to run the companies down and liquidise the assets as they had been identified as conduits for IRA funds.
"The IRA had five companies completely ruined. They had built the companies up as pensions funds.
"I'm a money washer, not a money launderer," he said.
Shadowy Foundation X will pay UK debt
The life-peer also told colleagues during Monday's address that a shadowy group has contacted him with an offer to help solve the UK's economic problems.
Lord James claims the group, which he referred to as 'Foundation X', has more gold on hand than all the world's bullion reserves combined. He said the group has offered to give the UK £5bn immediately and another £17bn for schools, hospitals and London's crossrail project.
"I have come to the absolute conclusion that foundation X is completely genuine and sincere and that it directly wishes to make the United Kingdom one of the principal points that it will use to disseminate its extraordinarily great wealth into the world at this present moment, as part of an attempt to seek the recovery of the global economy."
Lord James said he has been investigating this group for the last 20 weeks during which time he has consulted with Lord Sassoon, Commercial Secretary to the Treasury and who sits in the Cabinet and Lord Strathclyde who leads the Conservative party in the House of Lords. Lord James said that after this 20 week probe he is convinced that 'Foundation X' is 'absolutely genuine and sincere'.
"For the past 20 weeks I have been engaged in a very strange dialogue with the two noble Lords [Sassoon and Strathclyde], in the course of which I have been trying to bring to their attention the willing availability of a strange organisation which wishes to make a great deal of money available to assist the recovery of the economy in this country.
"For want of a better name, I shall call it Foundation X. That is not its real name, but it will do for the moment. Foundation X was introduced to me 20 weeks ago last week by an eminent City firm, which is FSA controlled. Its chairman came to me and said, 'We have this extraordinary request to assist in a major financial reconstruction. It is megabucks, but we need your help to assist us in understanding whether this business is legitimate'?"
"Foundation X is saying at this moment that it is prepared to put up the entire £5 billion for the funding of the three Is recreation; the British Government can have the entire independent management and control of it—foundation X does not want anything to do with it; there will be no interest charged; and, by the way, if the British Government would like it as well, if it will help, the foundation will be prepared to put up money for funding hospitals, schools, the building of Crossrail immediately with £17 billion transfer by Christmas, if requested, and all these other things.
"These things can be done, if wished, but a senior member of the Government has to accept the invitation to a phone call to the chairman of foundation X—and then we can get into business."
Lord James ended his speech saying: "This is too big an issue. I am just an ageing, obsessive old Peer and I am easily dispensable, but getting to the truth is not. We need to know what really is happening here. We must find out the truth of this situation."
His address lasted over 15-minutes before proceedings moved on.
Lord James of Blackheath told ZDNet UK that 'Foundation X' is to his knowledge a viable organisation.
Bloggers have speculated that 'Foundation X' was the "United Nations Office of InteRead more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-mon
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money...
Read more -
https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#ixzz14Sxt0iSL
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
Read more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#ixzz14Sxt0iSL
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
"I have also had extensive connections with north African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."
However Lord James said today that he had not intended to imply he had done anything improper.
He told technology and business website ZDNet UK that he had been brought into five companies between 1989 and 1997/98 at the direction of the Bank of England.
Lord James' express instructions were to run the companies down and liquidise the assets as they had been identified as conduits for IRA funds.
"The IRA had five companies completely ruined. They had built the companies up as pensions funds.
Read more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#ixzz14qMLAG19
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
"I have also had extensive connections with north African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."
However Lord James said today that he had not intended to imply he had done anything improper.
He told technology and business website ZDNet UK that he had been brought into five companies between 1989 and 1997/98 at the direction of the Bank of England.
Lord James' express instructions were to run the companies down and liquidise the assets as they had been identified as conduits for IRA funds.
Read more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#ixzz14qM69z79
Conservative peer Lord James of Blackheath has said that he was appointed by the Bank of England to "deal with problems" caused by the laundering of IRA money.
Addressing fellow peers late on Monday night Lord James said:
"I have had one of the biggest experiences in the laundering of terrorist money and funny money that anyone has had in the City. I have handled billions of pounds of terrorist money."
Labour peer Baroness Hollis of Heigham asked: "Where did it go to?"
Lord James, a respected corporate troubleshooter, replied: "Not into my pocket. My biggest terrorist client was the IRA and I am pleased to say that I managed to write off more than £1billion of its money.
"I have also had extensive connections with north African terrorists, but that was of a far nastier nature, and I do not want to talk about that because it is still a security issue. I hasten to add that it is no good getting the police in, because I shall immediately call the Bank of England as my defence witness, given that it put me in to deal with these problems."
However Lord James said today that he had not intended to imply he had done anything improper.
He told technology and business website ZDNet UK that he had been brought into five companies between 1989 and 1997/98 at the direction of the Bank of England.
Lord James' express instructions were to run the companies down and liquidise the assets as they had been identified as conduits for IRA funds.
Read more: https://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/conservative-peer-lord-james-of-blackheath-im-a-money-washer-not-a-money-launderer-14995248.html#
Friday, February 17, 2012
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Monday, February 13, 2012
Revealed: Goldman Sachs’ mega-deal for Greece - Risk.net
Ever since the deficit and debt rules for eurozone member states were drawn up in the early 1990s, there have been persistent rumours and allegations that governments have used derivatives to get around them. For some time, economists have argued that the combination of strict external targets with considerable local autonomy in sovereign debt management almost inevitably leads high-deficit countries towards derivatives.
It is now widely known that since 1996, Italy’s Treasury has regularly used swaps transactions to optically reduce its publicly reported debt and deficit ratios. Such trades remain controversial, and were the subject of fierce debate in late 2001, when Italian academic Gustavo Piga published a paper accusing eurozone countries of ‘window dressing’ their public accounts using derivatives (Risk January 2002, page 17).
Now, Italy has been joined by the Hellenic Republic of Greece, as evidence emerges of a remarkable deal between the public debt division of Greece’s finance ministry and the investment bank Goldman Sachs. The deal is not only likely to reopen an old debate on public accounting for derivatives, but also sheds light on the way banks charge clients for taking credit and market risk exposure.
Intended to rein in fiscal profligacy among aspiring eurozone entrants, the Stability and Growth Pact (SGP) – established in 1996 – sets two important targets for member states: a debt/GDP ratio of less than 60% and a deficit/GDP ratio of less than 3%. Of the two, the second is considered more important. Countries that show persistent breaches of the 3% target are liable to pay heavy fines to Brussels of up to 0.5% of GDP under the so-called Excessive Deficit Programme (EDP). Performing the key regulatory role of determining whether the targets have been met is the European Statistical Office (Eurostat).
Greece, which joined the single currency in early 2001, resembles mid-1990s Italy in certain respects. Until recently it was a country of high deficits and high inflation, and for this reason did not bother joining the first wave of eurozone countries in 1998. In the run-up to joining the eurozone, Greek inflation and budget deficits fell sharply, and GDP grew as the incumbent socialist government pursued a policy of UK-style public-sector reform. However, like Italy, Greece’s debt/GDP ratio has remained high, at over 100%, and as a result its interest costs are the highest in the eurozone.
Public statement
In November 2001, the Greek finance ministry’s public debt division made a public statement about its debt management strategy. It acknowledged that its debt was a ‘critical macroeconomic parameter’, and pledged to reduce debt servicing costs by means that included ‘the extensive use of derivatives’. Apparently, this was not enough for Brussels. In February 2002, the European Commission pointed out future deficit forecasts by Greece relied ‘primarily’ on achieving reductions in interest costs. It called for Greece to reduce its ‘very high’ debt ratio, and to provide ‘more detailed information on financial operations’.
Although Greece’s public debt division points out that it uses 18 derivatives counterparties, there is no doubt that the division, which is headed by Christopher Sardelis, has a particularly close relationship with Goldman Sachs. Indeed, the account has been handled personally at Goldman Sachs by Antigone Loudiadis, the London-based European head of sales for the firm’s fixed-income, currencies and commodities unit. Highly respected by other dealers, Loudiadis has enjoyed a successful career at Goldman, joining the firm’s partnership committee and attaining her present position in 2000. According to sources, in 2001* Loudiadis and her team put together a deal aimed at alleviating Greece’s problem of debt ratios and high interest costs.
The transactions agreed between the Greek public debt division and Goldman Sachs involved cross-currency swaps linked to Greece’s outstanding yen and dollar debt. Cross-currency swaps were among the earliest over-the-counter derivatives contracts to be traded, and have a perfectly routine purpose in debt management, namely to transform the currency of an obligation.
For example, an issuer with foreign fixed-rate debt might choose to lock in a favourable exchange rate move. To do this, it could swap a stream of fixed domestic currency payments for a stream of foreign currency ones, referenced to the notional of the debt using the prevailing spot foreign exchange rate, with an exchange of the two notionals at maturity. Because they are transacted at spot exchange rates, cross-currency swaps of this type have zero present value at inception, although the net value (and credit exposure of either counterparty) may subsequently fluctuate.
However, according to sources, the cross-currency swaps transacted by Goldman for Greece’s public debt division were ‘off-market’ – the spot exchange rate was not used for re-denominating the notional of the foreign currency debt. Instead, a weaker level of euro versus dollar or yen was used in the contracts, resulting in a mismatch between the domestic and foreign currency swap notionals. The effect of this was to create an upfront payment by Goldman to Greece at inception, and an increased stream of interest payments to Greece during the lifetime of the swap. Goldman would recoup these non-standard cashflows at maturity, receiving a large ‘balloon’ cash payment from Greece.
Since neither Goldman nor Greece will comment on the deal, much of the details remain vague. It is not clear which exchange rates were used in the actual contracts. Under the terms of a similar ‘off-market’ deal transacted by Italy in 1997, the exchange rates prevailing at the time of the underlying bond issue were used, which would have made sense in the case of Greece since the deal happened after a period of euro strengthening against the yen and dollar.
Although the overall deal is believed to have consisted of three or four individual transactions or tranches, according to sources, the total cross-currency swap notional was approximately $10 billion, with tenors ranging from 15 to 20 years. While the size of upfront payment to Greece’s public debt division is not clear, it seems the total credit risk incurred by Goldman Sachs was roughly $1 billion. Effectively, Goldman Sachs was extending a long-dated illiquid loan to its client.
Goldman Sachs is known for its conservative approach to credit risk, and chose to hedge its exposure to Greece by immediately placing the risk with a well-known investor in sovereign credit: Frankfurt-based Deutsche Pfandbriefe Bank (Depfa). According to sources, Depfa entered into a credit default swap with Goldman Sachs, selling $1 billion of protection on Greece for up to 20 years. Depfa declined to comment.
Total charge
Details have also emerged of the way Greece’s public debt division was charged for the transaction. According to market sources, the total charge was approximately $200 million. This charge can be broken down into several components. First, Greece was charged for the credit risk in the transaction. Long-dated Greek government bonds were trading at a spread of 30 basis points in 2002. A billion-dollar investment in such bonds, purchased in asset swap form and held for 20 years, would yield about $60 million. According to Risk’s sources, Depfa demanded a substantial premium for taking on what was in effect an illiquid, privately placed loan.
Second, Greece paid a principal risk charge to Goldman Sachs for its market risk exposure. Although standard euro/dollar and euro/yen cross-currency swaps are highly liquid instruments that trade at tight bid-offer spreads in the interbank market, such large, off-market transactions cannot be hedged in this market without significantly moving the price against the dealer. Goldman Sachs may have hedged some of the risk using futures, forwards and interest rate swaps, while retaining substantial cross-currency and interest rate basis risks in its portfolio. Of course, the ultimate profit and loss experienced by Goldman Sachs on the transactions remains unknown.
Equally murky is the exact effect of Goldman Sachs’ transactions on Greece’s publicly reported national accounts. Since the deficit was a comfortable 1.2% of GDP in 2002, it is more likely that the cashflows were either used to help lower the debt/GDP ratio from 107% in 2001, to 104.9% in 2002 (by funding buybacks) or to lower interest payments from 7.4% in 2001 to 6.4% in 2002. But why did the large negative market value of the swaps not appear on the liability side of Greece’s balance sheet?
The answer can be found in ESA95, a 243-page manual on government deficit and debt accounting, published by the European Commission and Eurostat in 2002. As revealed by Piga, the drafting of ESA95’s section on derivatives was the subject of fierce arguments between the government statisticians and debt managers of certain eurozone countries.
The statisticians wanted derivatives-related cashflows to be treated as financial transactions, with no effect on deficit or interest costs, and with the derivatives’ current market value stated as an asset or liability. The debt managers opposed this, insisting on having the freedom to use derivatives to adjust deficit ratios. The published version of ESA95 reflects the victory of the debt managers in this argument with a series of last-minute amendments.
In particular, ESA95 states in a page-long ‘clarification’ that ‘streams of interest payments under swaps agreements will continue… having an impact on general government net borrowing/net lending’. In other words, upfront swap payments – which Eurostat classifies as interest – can reduce debt, without the corresponding negative market value of the swap increasing it. According to ESA95, the clarification only covers ‘currency swaps based on existing liabilities’.
Legitimate transaction
There is no doubt that Goldman Sachs’ deal with Greece was a completely legitimate transaction under Eurostat rules. Moreover, both Goldman Sachs and Greece’s public debt division are following a path well trodden by other European sovereigns and derivatives dealers. However, like many accounting-driven derivatives transactions, such deals are bound to create discomfort among those who like accounts to reflect economic reality. For example, the Greece-Goldman deal may be of interest to credit rating agency Standard & Poor’s, which upgraded Greece’s long-term debt from A to A+ in June 2003.
Among other derivatives dealers, the deal is bound to create envy at Goldman Sachs’ skill in solving the risk management needs of such an important client. As long as the current Eurostat rules do not change, the use of derivatives in deficit and debt management by eurozone sovereigns is likely to flourish. The planned expansion of the eurozone to include 15 east European countries may lead to especially rich pickings for dealers able to seize such opportunities.
Monday, February 06, 2012
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