Financial Regulatory Forum

EU asks Greece to explain derivatives reports

By Reuters Staff
February 15, 2010

By Luke Baker and David Brunnstrom

BRUSSELS, Feb 15 (Reuters) – The European Union has asked Greece to explain reports that it engaged in derivatives trades with U.S. investment banks that may have allowed it to mask the size of its debt and deficit from EU authorities.

According to the New York Times, one contract in 2001 — carried out just as Greece was joining Europe’s monetary union — involved Greece selling forward future lottery receipts and airport landing fees in exchange for cash to write down debts.

The deal was treated as a currency trade rather than a loan, according to the newspaper, allowing Greece to hide it from public view while meeting EU deficit limits.

Greece’s finance minister, George Papaconstantinou, on Monday dismissed suggestions that his country may have played fast and loose with monetary rules, saying the transactions Greece took part in were permissible at the time.

“The kind of derivatives contracts reported by some newspapers were legal at that time,” he told reporters in Brussels. “Greece was not the only country to use them…They were made illegal; we have not used them since then.”

The issue has become a focus of attention as Greece has now acknowledged that it has a budget deficit of nearly 13 percent of gross domestic product — more than four times EU limits — and a national debt equivalent to 120 percent of GDP.

The fiscal problems have led to pressure on Greek debt in bond markets and weakened the European single currency.

The European Commission, the EU’s executive that is responsible for enforcing EU laws, said it had asked Greece to explain what contracts it had engaged in as Eurostat, the EU’s statistics agency, had never been informed.

“I want to state that Eurostat was not aware of such transactions,” Commission spokesman Amadeu Altafaj told a regular briefing on Monday.

“But I can tell you that Eurostat has indeed, following these reports, already requested the Greek authorities for an explanation by the end of February.”

Asked if the derivatives trades that Greece is alleged to have conducted fell within EU budget rules, Altafaj said:

“We need the information on what kind of transactions took place, if they did (take place), and what was the effect on the government accounts of Greece…This is something that we don’t have the information (on) yet and we have requested.”

 

TRANSPARENCY

A senior Greek finance ministry official told Reuters that Greece’s current debt financing operations were transparent and complied with Eurostat rules.

But Eurostat, which already has profound concerns about the reliability of Greek macroeconomic data, is likely to take a very hard look at exactly what transactions took place and when.

“This is why we are requesting more capacity for Eurostat to indeed to have more thorough and deeper view on these statistics. Reliable statistics are a key issue in management of public finances,” Altafaj said.

What Greece appears to have carried out, at least on one occasion, is a currency swap, which Altafaj said would have to be examined to see if it met EU rules.

In particular, Eurostat will assess if underlying exchange rates and interest rates in any swaps were calculated based on observed market rates, which may be necessary for such deals to be considered legitimate, he said.

An article in Risk magazine last week said a deal between Greece and Goldman Sachs, completed in 2002, had effectively allowed Greece to borrow about 1 billion euros without adding to its public debt figures, at a time when the size of its borrowing threatened to attract a fine by Brussels.

Risk said such swaps were legal, common at the time, and widely marketed by a number of banks.

Under the deals, a country could reduce the size of the debt on its balance sheet by issuing euro-denominated debt and swapping it into a foreign currency such as dollars, using an artificially weak or off-market euro exchange rate. The debt would be recognised by Eurostat at the market rate, cutting the country’s recorded debt burden, although the country would end up paying higher coupons on the debt, Risk said.

Goldman Sachs declined to comment on Monday.

At a meeting later on Monday, euro zone finance ministers were expected to exert more pressure on Greece to implement planned budget deficit cuts. EU leaders pledged last week to help Athens resolve its crisis if needed, but they are still hoping to avoid having to provide concrete aid.  (Editing by Patrick Graham and Andrew Torchia) ((Brussels newsroom, +32 2 287 6830; luke.baker@reuters.com))

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