Bloomberg News

ECB: Greek Swap Files Would Inflame Markets

June 14, 2012

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?”

‘Greek Case’

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.

‘Right to Know’

“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.

Additional Powers

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:US) asked us for general clarifications,” Eurostat said, declining to elaborate further.

Spokesmen for Goldman Sachs in London couldn’t immediately comment after the hearing.

To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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