The Corner

A Convenient Ruling

The EU’s courts tend to do what Brussels wants. So this news, reported by Bloomberg News, is no great surprise:

The European Central Bank will be allowed to keep private files showing how Greece used derivatives to hide its debt after defeating the first court challenge using the bloc’s freedom of information rules.

“Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece,” the EU General Court in Luxembourg said today, rejecting a request by Bloomberg News initially filed in August 2010. Today’s ruling by three judges denies European taxpayers, on the hook for the cost of Greece’s 240 billion-euro ($311 billion) bailout, the opportunity to see whether EU officials knew of irregularities in Greece’s public accounts before they became public in 2009. The decision underscores the ECB’s lack of accountability as it expands its powers to become the euro area’s chief banking regulator, said Georg Erber, a research associate at the German Institute for Economic Research.

“The courts are bending the rules to legalize the policies of the European institutions and help stabilize the region,” said Erber, a specialist in financial-market regulation. “It reveals implicitly that the EU was well-informed about what was going on and didn’t take steps to avert the crisis.”

Bloomberg’s freedom-of-information request was twice rejected by the ECB before the news organization sued in December 2010. Bloomberg sought access to two internal papers drafted for the central bank’s six-member Executive Board. 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 structure that allowed National Bank of Greece SA (ETE), the country’s biggest lender, to borrow from the ECB by creating collateral.

…in April 2009 — months before the Greek crisis erupted — ECB officials spotted the “swap operation in unusual terms” involving National Bank of Greece, according to the March 2010 cover note. Under Eurostat accounting rules, nations were permitted until 2008 to use so-called off-market rates in swaps to manage their debt. The use of off-market swaps, which Greece hadn’t previously disclosed as debt, let the country increase borrowings by 5.3 billion euros, Eurostat said in 2010. In the largest derivative disclosed, Greece borrowed 2.8 billion euros from Goldman Sachs Group Inc. (GS) in 2001 through a derivative that swapped dollar- and yen-denominated debt issued by the nation for euros using a historical exchange rate.

Technical, but important, at least to those who want to understand how the euro-crisis really evolved. It’s worth reading the whole thing.

A few months ago, I posted here on this case and on the possibly not unrelated story of how “highly unusual” swap transactions had helped reduce the nominal amount of Italian debt outstanding at a time when Italy was struggling to meet the criteria for admission to the single currency.

Then there’s the question of what Germany’s Kohl administration knew about the state of Italy’s finances. Back in May I noted this report from Der Spiegel on the release of “hundreds of pages”  of German government documents on the introduction of the euro and the decision to include Italy in the single currency’s founding group.

Here’s some of it:

The documents prove what was only assumed until now: Italy should never have been accepted into the common currency zone. The decision to invite Rome to join was based almost exclusively on political considerations at the expense of economic criteria. It also created a precedent for a much bigger mistake two years later, namely Greece’s acceptance into the euro zone….The documents show that the [Kohl administration] was extremely well informed about the state of Italy’s finances. Many austerity measures were merely window dressing — either they were accounting tricks or were immediately dialed back when the political pressure subsided.

And were German voters kept in the picture? Well, what do you think?

The Director General of Italy’s Ministry of the Treasury and Budget between 1991-2001 was one Mario Draghi. He, of course, is now President of the European Central Bank.

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