Over the past few years, Goldman Sachs and many other investment banks have been secretly assisting Greece to take on a large sum of debt in order to keep the government deficit under the European Union’s requirement.

Although this short term strategy kept Greece in the Euro Zone, it brought about Greece’s long term financial distress. Just before the crisis started, the banks that helped Greece hide its debts started gambling on the default of Greece. Why would these banks bet against the countries they were supporting? It is a hedging strategy. An analogy to this action is that an adventurer buys life insurance before starting a dangerous venture. However, the negative sentiment towards the Greece’s debt market accumulates as more players bet on Greece’s default. This hedging activities of investment banks drove up the cost of debt the Greek government had taken.

The result of all these events is the current high potential of a Greece’s default.

Here are three articles that cover the story more comprehensively:

http://www.nytimes.com/2010/02/25/business/global/25swaps.html

http://dealbook.blogs.nytimes.com/2010/02/25/fed-reviewing-goldmans-moves-on-greek-debt/?utm_source=twitterfeed&utm_medium=twitter

http://www.bloomberg.com/apps/news?pid=20601087&sid=aK1wUM.mdeao&pos=5

It’s time for us to ask some questions as the financial crisis heads towards an end. How should the government regulate the financial industry? Should banks take advantage of a country’s disaster?

David Haisha Chen

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