LONDON - Goldman Sachs has defended the cross-currency derivatives it conducted for Greece in 2001 which reduced the country's debt as a common currency risk management procedure consistent with EU debt reporting rules.

The US bank said that it did the deals to reduce foreign denominated liabilities of Greece, which had become a priority following the nation's entry into the single European currency.

The Greek government has stated (and we agree) that these transactions were consistent with the Eurostat principles governing their use and application at the time, said Goldman Sachs in a statement on its website on Sunday. here

Details on the nine-year old swaps have re-emerged after several months of concern about Greece's budget and debt levels.

The country has battled to establish credibility over reducing its budget deficit, which at just under 13 percent is more than four times the 3 percent level stipulated by Maastrict.

Goldman has explained the derivatives in the context of EU rules on unhedged foreign currency debt which stated that these had to be converted into euros using the year-end currency rate.

Therefore a rise in the dollar or yen, currencies in which Greece had frequently issued debt, increased the country's reported debt.

To mitigate this currency risk, in December 2000 and in June 2001, Greece conducted cross-currency swaps and restructured its cross-currency swap portfolio with Goldman Sachs at a historical implied foreign exchange rate, the U.S. investment bank said.

This was a practice commonly undertaken by European sovereigns, Goldman Sachs said.

These transactions reduced Greece's foreign denominated debt in euro terms by 2.367 billion euros and, in turn, decreased Greece's debt as a percentage of GDP by just 1.6%, from 105.3% to 103.7%.

To offset a fall in the value of the swap portfolio Greece and Goldman Sachs entered into a long-dated interest rate swap.

The new interest rate swap was on the back of a newly issued Greek bond, where Goldman Sachs paid the bond coupon for the life of the trade and received the cash flows based on variable interest rates.

In total the currency and interest rate hedges reduced the Greece's debt by a total of 2.3 billion euros.

(Reporting by Alex Chambers; Editing by Ron Askew)

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