Swaps and Consequences

by Andrew Stuttaford

Via Bloomberg News yesterday:

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…

Negative” perceptions? “Accurate” might have been a better word.

For those who enjoy strolls down memory lane, here’s this possibly not entirely unconnected story (originally from the FT) from early 2002:

The New York Times reports that Enron received $3.9bn in bank loans between 1992 and 2001, which was never reported on its books as debt. Rather, by using swaps transactions that mimicked loans, but which Enron claimed publicly to be hedges for commodities trades, the company was able to misrepresent an increase in debt as a reduction in risk.

In November, a report by the International Securities Market Association (ISMA) and the Council on Foreign Relations (CFR) documented similar behaviour  [to, uby the Italian government. Facing the possibility of exclusion from the first wave of euro entrants on the grounds of fiscal profligacy, the Italian Treasury undertook highly unusual yen-lira swaps transaction, undervaluing the lira by 44 per cent, which precisely mimicked a large loan. The contract required Italy to make negative interest payments to the bank in the amount of Lira-Libor minus an astounding 1,677 basis points in 1997 (meaning that Italy received funds) and then in effect to reverse the payments in September 1998. This reduced Italy's official deficit in 1997 only by raising it in 1998...


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