It turns out a big chunk of Greece’s debt and the Greek debt crisis relates to a deal made back in 2001 by Goldman Sachs, a deal formulated by the firm’s current CEO Lloyd Blankfein. According to numerous media reports, the cross currency swap deal set up by Goldman (which the Greeks agreed to because it was designed to hide that debt from the EU) ended up almost doubling the amount owed by the Greek government.

For background, Greece was already in big debt trouble back in 2001, and was looking for ways to hide the size of its debt. Greece was already in violation of economic standards mandated by the EU (the Maastricht Treaty), and things were only getting worse.

Then oft-reviled Goldman Sachs came riding up to the “rescue”, arranging a secret loan of 2.8 billion euros for Greece, and setting it up as an off-the-books “cross-currency swap”. The transaction converted Greece’s foreign-currency debt into a domestic-currency obligation based on a made up “market” exchange rate.

Greece Capital Controls Goldman Sachs

More on shady 2001 Goldman Sachs – Greece deal

As a result of the cross currency swap, close to  2% of Greece’s total debt disappeared from the books.

Christoforos Sardelis, the head of Greece’s Public Debt Management Agency at the time, described the deal in an interview with Bloomberg a few years later as “a very sexy story between two sinners.”

Goldman Sachs was paid a mind-boggling 600 million euros ($793 million at the time), notes Spyros Papanicolaou, who took over as head of the agency from Sardelis in 2005. That ended up representing close to 12% of Goldman’s revenue from its trading and principal-investments division in 2001 (a record year for the unit). Current CEO Lloyd Blankfein.was the chief of the trading division at the time.

The deal, however, went south, very shortly thereafter. Bond yields dropped precipitously after the 9/11 attacks, racking up a huge loss for Greece because of the way GS had compute the nation’s debt repayments in the deal. Greece ended up owing nearly twice the original deal amount, boosting the off-the-books debt from 2.8 billion euros up to 5.1 billion by 2005. The deal was restructured shortly thereafter and the 5.1 billion euros debt made permanent.

Mario Draghi, currently chief of the European Central Bank and deeply involved in the in the Greek crisis, was managing director of Goldman’s international division in 2005.

Potential legal action against Goldman Sachs by Greece

According to The Independent, Goldman Sachs is now facing potential legal action from Greece over the shady financial deals made in 2001 that clearly had a major role in the ongoing debt crisis.

The good news comes in the form of an ex-Goldman Sachs employee who has served as an adviser to several highly indebted governments to help recover losses from complicated deals with banks. The former GS banker, George Jabbour, has written to the Greek government to let them know they may be able to claw back some of the hundreds of millions of dollars it paid the megabank as a part of the deal to keep their debt hidden from the rest of the EU.

Jabbour, who formerly designed swaps at Goldman, has written the Greek government a formal letter that it could “right historical wrongs as part of [its] plan to reduce Greece’s debt”.

Of interest, Jabbour advised Portugal in renegotiating a number of complex trades made London banks during the financial crisis by naive government officials. The situation in Portugal eventually turned into a parliamentary inquiry, and ended up costing several senior officials and politicians their positions. Jabbour’s efforts also led to large compensation payments by several banks to the Portuguese government.

Jabbour says he believes the size of the profit Goldman made on the transactions was unreasonable. He argues that scrutiny and analysis of the documents and email exchanges would very likely give Greece solid reasons to seek compensation and help determine if the deal was for the primary purpose of disguising Greece’s debt.

Several sources have reported that Goldman Sachs made at least $500 million from its “swaps” for Greece. The firm denies that figure, but refuses to provide data to verify their claim. The man who put the Greek currency swaps deal together back in 2001, Antigone Loudiadis, was reportedly compensated $12 million by Goldman for his efforts in setting up the transactions.