Here’s a fine example of unintentional irony, from atop the front page of Monday’s Wall Street Journal:  “Debt Deals Haunt Europe”.  And the sub-heading: “Investors Re-Examine Complex Financial Maneuvers Used to Hide Borrowings”. As you might expect, the story was all about Greece and the so-called PIIGS – Portugal, Ireland, Italy and Spain. But it could just as easily have been written about the U.S. or a dozen other large countries that have somehow retained their AAA credit ratings despite having borrowed sums too large to ever repay.  And let’s not overlook the fact that there are a few U.S. states – California, New York and New Jersey spring to mind – whose exposure to debt makes Greece’s look like chump change.

The elephantine subtext of the Journal story is that Europe’s debt woes are intertwined with those of the U.S., and that, moreover, if one or the other sovereignty were to fall, Asia would fall too. Financially speaking, the world is wearing a bomb belt that could detonate at the slightest misstep.  Think about it. If just one company, American insurance giant AIG, came close to toppling the global financial system – which it did — imagine how a sovereign failure might play out.  Let’s start with poor, picked-on Greece. The country is on life support, its ability to borrow sustained by Germany’s full faith and credit. But guess which country’s financial system would be next to unravel if Germany’s commitment (or its ability) to “save” all of Europe falters?  Answer: France, whose banks hold 80 billion euros in Greek debt. That’s twice the amount held by Germany, so you can understand why the EU’s supposed backing of Greece is one-country deep and a thousand spin doctors wide. [For a superb global perspective on Europe’s problems, we recommend the current edition of The Privateer,  one of our very favorite newsletters. Published twice a month out of Australia, its editor is William Buckler.]

Goldman, of Course…

Concerning the “complex financial maneuvers” used to hide Greece’s excessive borrowing, you guessed it: Goldman Sachs was in the thick of it, hoodwinking EU regulators with an “off-market” currency swap in 2001. By the time Goldman’s top guns put the finishing touches on that deal, you can bet it looked like a bake sale on their client’s books.  And now, Greece’s credit rating has fallen in the dumper while all of the supposedly responsible First World countries are still rated AAA.  We’re not holding our breath for the Wall Street Journal and other trusted agents of the Fourth Estate to explain why. In any event, here’s how the thimble-riggers at Moody’s evaluated the chance of a downgrade for nations rated AAA in 2009:  “For a  AAA government to be downgraded, Moody’s must have concluded that the deterioration in credit metrics is (1) observable and material in absolute terms; (2) observable and material in relative terms; and (3) unlikely to be reversed in the near future. The decision underlying a potential downgrade would also depend on the extent of the actual and potential deterioration of a government’s balance sheet; whether a country’s economic model can be regenerated, thereby allowing the economy to rebound; and whether governments can repair their fiscal position by raising taxes or cutting expenditure.”

As The Privateer drily notes, “There is no nation on earth that does not fit the three criteria listed by Moody’s.”  Please tell us, Moody’s:  Are we missing something?

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