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ECB: Greek swap
files would inflame markets
By Elisa Martinuzzi & Gabi Thesing
The European Central Bank said it can’t release files showing how Greece may
have used derivatives to hide its borrowings because disclosure could still
inflame the crisis threatening the future of the single currency.
Bloomberg News is suing the ECB to provide the documents under European Union
freedom-of-information rules. The papers may help show the role EU authorities
played in allowing Greece to mask its deficit for almost a decade before the
nation’s troubled finances necessitated a 240 billion-euro ($301 billion)
bailout and the biggest debt restructuring in history.
Disclosing the files when Bloomberg News first sought them in 2010 would have
“fueled negative perceptions about Greece’s ability to honor its debt,” ECB
lawyer Marta Lopez Torres said at a hearing of the European Union’s General
Court in Luxembourg today. “It’s the same now with Spain” which “isn’t able to
borrow money,” she said. “Markets are reacting in very volatile ways. It’s
affecting the euro economy.”
Greece may seek to leave the euro if parties opposed to the austerity
measures imposed with the rescue win elections on June 17. Meanwhile, Spain’s
10-year borrowing costs jumped to a euro- era record today after the nation’s
credit rating was cut to one step above junk by Moody’s Investors Service
following Prime Minister Mariano Rajoy’s request for bank aid this week.
“Markets will perform better when they have transparency,” Timothy
Pitt-Payne, lawyer for Bloomberg News, told the court. “The question is who knew
what; and when did they know it?”
Bloomberg’s lawsuit, filed in December 2010, requested access to two internal
papers drafted for the central bank’s six-member Executive Board. They show how
Greece used swaps to hide its borrowings, according to a March 3, 2010, note
attached to the papers and obtained by Bloomberg News.
The first document is entitled “The impact on government deficit and debt
from off-market swaps: the Greek case.” The second reviews Titlos Plc, a
securitization that allowed National Bank of Greece SA, the country’s biggest
lender, to exchange swaps on Greek government debt for funding from the ECB, the
Executive Board said in the cover note.
These documents “played a role” in shaping policy and “highlighted there were
issues” when the ECB undertook a review of its eligibility criteria for
collateral in its funding operations, the ECB lawyer told the court.
The cornerstone of the ECB’s response to the crisis is to give banks as much
money as they needed in return for collateral. In October 2010, the ECB changed
the rules on the asset-backed securities it accepted and gave itself more
discretionary power to reject collateral if necessary.
“The public has a right to know how EU authorities may have allowed Greece to
hide its deficit, which helped trigger Europe’s sovereign debt crisis,” said
Matthew Winkler, editor- in-chief of Bloomberg News. “Greater transparency
results in more accountability, and we seek this information to understand how
this debt debacle unfolded in an effort to avoid repeating it.”
The Greek government didn’t originally disclose the swaps, designed to help
it comply with the deficit and debt rules it agreed to meet when it joined the
euro in 2001. The swaps allowed the country to increase borrowings by 5.3
billion euros, Eurostat, the EU’s statistics agency, said in November 2010.
In April 2009 -- seven months before the Greek crisis erupted -- ECB
officials spotted “a swap operation in unusual terms,” according to the March
2010 document.
Repeated revisions of Greece’s budget figures after George Papandreou ousted
Kostas Karamanlis as Prime Minister in October 2009, spurred a surge in the
country’s borrowing costs, eventually forcing the nation to seek aid from the EU
and the International Monetary Fund. In 2010, Eurostat gained additional powers
allowing it to audit countries’ financial data.
In the largest derivative transaction disclosed so far, Greece borrowed 2.8
billion euros from Goldman Sachs Group Inc. in 2001 through a derivative that
swapped dollar- and yen- denominated debt issued by the nation for euros using a
historical exchange rate, a move that generated an implied reduction in total
borrowings.
“The Greek authorities had never informed Eurostat about this complex issue,
and no opinion on the accounting treatment had been requested,” Eurostat, the
Luxembourg-based statistics agency, said in a statement. The watchdog had only
“general” discussions with financial institutions over its debt and deficit
guidelines when the swap was executed in 2001.
“It is possible that Goldman Sachs (GS) (GS) asked us for general
clarifications,” Eurostat said, declining to elaborate further.
Spokesmen for Goldman Sachs in London couldn’t immediately comment after the
hearing. [Bloomberg] |
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