>> this is "bbc newsnight." funding for this presentation is made possible by the freeman foundation of new york, stowe, vermont, and honolulu. newman's own foundation. and union bank. >> at union bank, our relationship managers use their expertise in global finance to guide you through the business strategies and opportunities of international commerce. we put our extended global

network to work for a wide range of companies, from small businesses to major corporations. what can we do for you? >> and now "bbc newsnight." >> is behind the bailout, crisis.ng greece's debt this week, they said the single currency would bring europe together, but it appears to be tearing things apart. nowhere is it more threadbare than in greece. we find out what it is like to live inside of a failed economic experiment that no one knows how to fix. >> greece faces a decade of austerity and few in the

political class think that the plan will work. >> people who invest in greece will take massive losses. we will talk to the bank's chief negotiator. how did greece get into this mess? step forward goldman sachs, the company that helped make the books of looked balanced. -- books look balanced. 130 billion euro bailout for greece which means that they will avoid defaulting on their debt. the money comes with stringent conditions. make sure that athens sticks to the rules. the country's previous round of tax hikes, cuts, and job losses are taking their toll on the people and now they face further

austerity measures. if we report on what austerity feels like from the inside. > there will be a revolution against the government. >> people say that if we continue this, we will back revolt. >> do you back austerity, the greek parliament voted for it, the streets erupted. in the aftermath, greeks were stunned. it is not the scale of the violence but the scale of the uncertainty. nobody knows how the economy can

be rebuilt and that the politics are fragmenting. in a normal crisis, a decisive parliament, and massive riot, and the torching of 17 buildings might bring catharsis' but this is no normal crisis. greece phases may be a decade of austerity and fuel in the political class believe that the plan will work. -- greece faces may be a decade of austerity and few believe the political -- in the political class believe that the plan will work. in the british streets of the port district, you know what it means when you meet one in five people unemployed, cutting health spending, cutting the minimum wage. this clinic, run by volunteer nurses and doctors, was a bridge to set up to treat migrants.

now, one in three patients are greek like this woman who is a cleaner that has lost her job. >> i am here to get food and some vaccinations for my children. >> white can't you access the main -- why can't you access the main greek service? >> i don't work and my husband does not work. >> the government has taken another billion euros off of the medicine budget, meanwhile, in comes are collapsing. >> you have the same problems if you come from africa, india, or if you are a greek citizen. this is a whole new phenomenon for greeks because in the past, these people struggled for daily life, they had some problems, but they could manage it. now, the burden has become more. it is more difficult for them.

if it was in the past to find a job, it is impossible now. >> as the crisis deepens, the oldest and most poor suffered, no more so than those that are not supposed to be increase at all. this is the port that links agrees to western europe. hundreds of illegal migrants live in this shattered a factory. i am taking in nine activists from all local ngo. cutbacks have made to the greek border highly porous. how easy is it to get into greece? >> it is too easy. >> the survive on charity.

the economy has collapsed and so has sympathy for the migrants. >> this is not europe. >> why? >> i used to live in london. this is not europe. the police can hit you. the people can swear at you for no reason. the people treat us like animals. >> some have died from fires lit to keep warm. it is shocking to see this on a continent that prided itself on a social model but the crisis has turned so much of greece upside-down. four greek youth, the situation looks dire. among them, the extremes of politics are growing. in a bar run by one of the far left groups, i meet the people who got together to feed and clothe the migrants.

none are actually a member of the left party or intend to vote for one but all have been participants in disorderly protests. >> there is no future for us. we cannot dream, this is a disaster. >> i have heard the people tell me that for three years. what do you do about that? >> we are fighting. we're trying to make them understand that all of this crisis is a result of the capitalist system. >> do you think there could be a left-wing government in greece? >> i don't think that it will be a non-violent government from the left. there will be a civil war. >> the carpenter, the teacher, the engineer, the social worker, these are professional people but the ideas they are espousing have become commonplace. but it is about is work. there is not any. >> there is no work, there is a

revolution against the government. >> the greek left, the communists, now have a combined poll rating of 43.5%. this country always had a strong left-wing, now is strong enough to have their own tv studios and if there is an election, a previously unthinkable prospect. >> we are talking about a new block of forces which have their internal differences but on the other hand, agree on the memorandum on this policy. >> do you think that they will accept the proposal? >> this is our proposal. they will put a part their differences and after the next election, they will form a new block of power. >> in truth, the left is to

splintered it to attempt to form a government the general atmosphere of despair has called for some politicians to ask -- has resulted in calls for some politicians to ask for elections to be delayed. the backbone of greek capitalism is that the small firm, like this one with six workers. the business plan is just to survive. now, they face new taxes, corruption, rising crime, and the owner detects a nostalgia among his peers for the days of military rule. >> old people, they are thinking about the military government. for us, it is finished. but they have one right, they

stole even one penny. >> they did not steal a penny? >> one of those is still alive and he lives in one room. >> places like this should be the bedrock of support for the center-right but they are not. >> i am talking to my children, and you don't go just for work. go for work, just say -- >> you don't trust any of them? >> know. no one. >> do you think that democracy will survive? >> we like to believe that it will survive. we like to believe it but if the people say that they will continue all of this, we have

to back. >> there is still days when the sun shines and the old lifestyle rekindles and people forget their worries. but for the political class that has tried to guide greece through this mess, there is deep concern. >> they are not looking at the repercussions. we might be ending up with a very very high poverty line. russia had a poverty line which was higher than during the communist time. >> and they had crooks running the country. >> and they had crooks running the country. >> what ever happens, those remain the stakes and they are high. >> well, one of the conditions of the bailout was a debt swap.

banks and investors holding debt take new bonds worth about half as much, so greece get its debt cut and investors might get some kind of return down the road. the man who negotiated on behalf of the banking industry is the managing director for the institute of international finance. we began by asking him how much of this debt is represented? >> we technically represent just under half of that, just under 100 billion euros although we have to vacation with an investor base that is much larger. our formal representation is just under 100 billion euro. >> is this depended on a certain level of participation? >> certainly is. for this program to work and for the cloud of debt burden to be sufficiently cleared off of the greek horizon, we will need a

very high participation in this deal. >> you have no guarantee that you will get a high level of participation, do you? >> no, no guarantee at all. we respect the rights of each investor, including the investors in our steering committee that have approved the basic parameters of this deal, and they have a right to look at the parameters and make their own judgment. we do feel confident that once investors have gone through the documentation, look at the parameters and benefits, which are substantial, that a large number of investors will come in. >> what proportion of their loans will investors lose? >> they will lose just over 50% of the nominal value of their current claims. in terms of the present value, the economic value, they will lose north of 70%.

there is substantial loss in this deal and there is no use trying to hide that. if we were to deal effectively and determinedly with the scale of debt burden, which greece simply is unable to cope with. >> you only represent about half of the total debt exposure here. what is to stop someone like a hedge fund or someone who has fought greek debt trying to trigger the insurance involved in a credit defaults what? >> there is nothing i am aware of that would definitively stops someone who would like to take such action. there is no ironclad guarantee, as we discussed earlier, that individual investors may not contemplate counterproductive activity here. they have the rights, they have

the legal rights, they have their market judgments to make but we are convinced that when you look at the total picture here, that the overwhelming bulk of investors will consider this a fatal -- a favorable transaction which benefits the broader contours' of the marketplace which is much more important in the long run. >> if the insurance system works, they can recover perhaps 100% of the money that they have lent the greeks instead of something like 30%. >> it is not inconceivable. if too many go in that direction, the system breaks down and we will not have a successful conclusion of this deal, and then where would they be? judgment calls have to be made. i am encouraged that the overwhelming bulk of investors we have been in communication with some of those that we have

been in communication with and those outside of the formal umbrella of our steering committee and with whom we have been discussing the broad strategy, we see the benefits of this. we will have to wait and see, of course. it will be up to the greeks, working with their agents, to formalize support. once we see the final details of the offer, we will give support to this deal as best we can. >> thank you very much. >> of course, the great crisis is not an accident. on the one side, is the messianic ambitions of the political class, the other is the alaska to view of what constitutes sound government and good management of the economy. -- the other is the view of what constitutes sound government and good management of the economy. goldman sachs did greece a big favor. now in a report, some of those

who did the deal talk publicly. >> the goldman sachs deal was between two seniors. the european crisis is not a from goldman sachs. perhaps we might have all agreed that this is what we wanted, it is just that we would not have been able to get public opinion. >> greece is on the brink. the poor man of the eurozone, depended on the eu, bailout loans, mistrusted by creditors. how did $2.8 billion of debt just disappear? -- how did 2.8 billion euro of debt just disappear?

the greek authorities were making something out of nothing. now we come back to athens to understand how and why the deal was done. what was the deals cost to greece and its profit to goldman? why where iwatchdogs insisted that they knew nothing about the deal until 10,010? in 2001, as they wrestled how to qualify for your membership, the greek government questioned how they could kick the habit of the debt addiction. in order to join the euro, greece had to promise to show directionality and their debt ratio had to go down. with a the 2004 olympics coming up, that would not be easy. rather than cutting spending and repaid debt, they hid the

borrowing instead. in 2001, this man -- this woman found a way to give the greeks what they were looking for. a way that was legal and completely secret. i'm going to to meet the man task by the government at the time with getting the debt moving and the right direction. the deal in fall swaps, financial bets used to hedge risks. he said that he was not able to disclose the terms of the deal to the market. >> if you go to the carpet -- open market, you want to have investors. if you do a deal with a single bank, you don't make a lot about it. >> the swap, which goldman offered greece, would switch to debt using a foreign-exchange

transaction. in the same way that you and i conferred our foreign currency, international bar was convert their bonds using domestic debt. -- international borrowers convert their bonds using domestic debt. 2.8 billion euros suddenly disappeared giving a false impression that greece was converging to the rules. the dead had not disappeared. in reality, goldman had secretly lend greece 2.8 billion euros as part of the swap. -- the debt had not disappeared. in attempting to pay back the money, greece fell further into debt. the government changed after the deal. the new government revealed the spiraling costs of the deal.

>> the detrimental agreements of 2001 led to the vanishing of 2.8 billion euros of debt. the agreement had a direct cost of 500 million euros and indirect cost of 1 billion euros. >> the new boss of the debt management agency said that the deal achieve what the government had set out to do. >> they set out to height this debt so they were in agreement with the requirements of the agreement of the eurozone. then, they had to come out in the open and acknowledge the debt. >> that is a big debt. >> they were frustrated with the terms of the deal. as a result, the loan had mushroomed to 5.1 billion euros. goldman had included tweaks in a deal that seem to ensure that

that the dies were loaded against -- ensure that the dice were loaded against greece. >> i recommend it to someone high up, asking them to get rid of this without any conversation. they said that they were already positioned. >> he sympathizes over the position his predecessor was then. >> i cannot blame him. he was scared that he could not go to the market. >> you might wonder how such a deal could be allowed but it was perfectly legal. goldman would like to be sure they would not be in trouble for helping greece. the company says it spoke to the eu accounting agency about the deal and has provided us with an

e-mail proving that discussions took place. we asked for an interview but they declined. "we would like to confirm that we became aware of the greek transactions only in the beginning of 2010. the greek authorities had never informed us about the complex issue and no opinion has been requested. it is possible that goldman sachs asked us for general clarifications and this is our interpretation." >> for many, questions remain. why were they looking out for greece in the interest of the eu as a whole? how could they stay blissfully unaware until 2010? even the greeks themselves are concerned about the dodgy statistics. >> we wrote a letter effectively.

kosh the government at the time for what they were doing. three months later, we got a letter back saying that they have investigated and everything is above board so we had better shut up. >> the 5.7 billion euros now owed was only a small piece of the 350 billion euros that greece owns today, only a fraction of which will ever be repaid. that symbolizes a twist in incentives in the heart of the year rose -- part of the euro. the incentive to cut deals, the incentive for regulators to look the other way. >> would you do it again? no, because of the economic situation. i would never do this step with business according to political risks for these type of

transactions. >> we approached goldman sachs for an interview but they declined. in the state did, they told us -- >> greece was already passed the euros on wednesday initiated the swaps. they were required to show improvement in the public finances. this is one of several techniques that many governments need to meet the terms of the treaty. these were done in accordance with the rules." >> the greeks agree that they were atoxic imported that played on the country's weaknesses. as with subprime in the u.s., investment bankers played on the weaknesses. the institutions that were supposed to protect the eurozone failed catastrophically and they felt the greek people. germany and eu institutions expressed outrage.

in 2003, the story of how legalized financial trickery was writing the eurozone from the inside was not something that the guardians of the euro wanted to hear, so they ignored it. it is tempting to ask whether a single currency held together with such toxic blue is actually worth it. -- toxic glue is actually worth it. >> that is all for us this week. goodbye. >> funding for this presentation is made possible by the freeman foundation of new york, stowe, vermont, and honolulu. newman's own foundation. and union bank. >> at union bank, our relationship managers use their expertise in global finance to guide you through the business strategies and opportunities of international commerce. we put our extended global network to work for a wide range of companies, from small businesses to major corporations.

what can we do for you? >> "bbc newsnight" was presented by kcet, los angeles.

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