Europe Economy

Goldman's Debt Swaps Are 'Destabilizing': Economist

The European Commission should thoroughly investigate the case of debt swaps involving Greece and Goldman Sachs, as these types of operations are destabilizing financial markets, Simon Johnson, Professor of Entrepreneurship at MIT Sloan School of Management, told

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Goldman Sachs was widely reported to have arranged a debt currency swap transaction for Greece at the beginning of the past decade, providing it with money up front in exchange for higher payments later.

The reports sparked the European Union's wrath and the group requested Greece to explain the debt swaps arrangements by Feb. 19.

"That's clearly a huge affront to the EU," Johnson, who propposed 10 questions for the EU investigation on his web site, told

"It's more than an insult, it's fundamentally destabilizing," he said, adding that the debt swaps were "undermining what the EU, Maastricht want to achieve."

Goldman Sachs officials declined to comment.

Under the Maastricht rules, EU member states' budget deficits must not exceed 3 percent of gross domestic product (GDP), while public debt must remain under 60 percent. Press reports suggested that the swap arranged by Goldman allowed Greece to push its debt problems into the future.

Make Goldman Pariah?

The European Commission could make entities that had transactions with Goldman Sachs over the past 10 years declare those transactions fully or suspend the US investment bank from European trading, according to Johnson.

"I think Goldman is just the front of a much larger story here," he said. "All similar arrangements by other banks should be investigated. There should be a full-scale investigation."

Greece insisted it did nothing wrong.

"The kind of derivatives contracts reported by some newspapers were legal at that time. Greece was not the only country to use them," Greek Finance Minister George Papaconstantinou said.

Press reports mentioned that such deals were done by a variety of countries at the time, Italy completing such a transaction with JP Morgan being just one of them.

Earlier this month, Greek officials blamed speculators for part of Greece's problems, saying the country's debt spreads were unjustified.

"To be sure, there is an element of speculative attack, but that's brought on by weak fundamentals," Johnson said.