Whatever It Took

by Andrew Stuttaford

The FT:

Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn. While the report leaves out crucial details and appears intended not to give a full picture of Italy’s potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

The report does not name the banks or give details of the original contracts – questions that worried the state auditors – but the experts said they appeared to date back to the period in the late 1990s. At that time, before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999.

Italy had a budget deficit of 7.7 per cent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 per cent, by far the largest drop among the Euro 11. In the same period tax receipts increased marginally and government spending as a proportion of GDP fell only slightly.

The idea that very different economies (Germany and, say, Spain,) could be deemed to have “converged” on the basis of satisfying a number of somewhat arbitrary mathematical tests for a year or two (debt/GDP, deficit, inflation  etc) was always laughable—the sort of thing that only technocrats unwilling to accept reality could have dreamt up. The fact that those numbers were themselves in certain cases unsound (let’s use a kind word) only inserted more insanity into the asylum.

And there is, entertainingly, this:

Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting. Mr La Via left the Treasury in 2000 and returned as its director-general in May 2012 – with the backing of Mr Draghi, according to Italian officials.

An ECB spokesman declined to comment on the bank’s knowledge of Italy’s potential exposure to derivatives losses or on Mr Draghi’s role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002.

The FT adds:

Last year Der Spiegel, a German magazine, obtained official documents which it said demonstrated that in 1998 Helmut Kohl, then chancellor, decided for political reasons to ignore warnings from his experts that Italy was believed to be “dressing” up its accounts and would not meet the Maastricht treaty criteria for entry, including a budget deficit less than 3 per cent.

I posted a bit about Kohl’s involvement here.

And Kohl was not alone:

Italian officials, including former finance minister Giulio Tremonti, have said the EU was aware and approved of Italy’s use of derivatives in the build-up to euro entry.

And nor, it seems, was Italy:

Greece followed suit two years later but irregularities in its accounts only became public in 2009. Bloomberg News lost a case before the EU General Court in 2012 when it used a freedom of information request to obtain files held by the ECB that Bloomberg said showed how Greece used derivatives to hide its debt. The Luxembourg-based court, in rejecting the case, said disclosure of the files “would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece”.

Really? And which public would that be? And in whose interest?

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