EU Court to Hear ECB Greek-Swap File Suit as Euro Threatened

A court will today hear a lawsuit seeking disclosure of European Central Bank files that may show how Greece used derivatives to hide its borrowings, helping to spark a crisis that threatens the region’s currency union.

The European Union’s General Court in Luxembourg will hear arguments from Bloomberg News, which filed the suit under the EU’s freedom-of-information rules, as well as the ECB’s defense. The ECB should have discretion to decide what is in the public interest, and releasing the papers could damage the ECB’s counterparties, hurt markets and undermine EU policy, the Frankfurt-based central bank has said in court filings.

The files 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 ($300 billion) bailout and the biggest debt restructuring in history. Greece may seek to leave the euro if parties opposed to the austerity measures imposed with the rescue win parliamentary elections on June 17.

“The documents may be proof that there was tacit collusion between the EU and Greece, that no action was taken,” said Georg Erber, a research associate at the DIW Berlin economic research institute. The lack of transparency has “weakened the credibility of the institutions, and the concern is that the same problem will repeat itself again and again.”

Debt Crisis

The euro is now trading close to a two-year low after Spain, the bloc’s fourth-largest economy, was forced to seek aid for its banks, following Greece, Ireland and Portugal into seeking a bailout. Investors are shunning Spanish debt on concern that the state will be overwhelmed by costs to shore up its banking system, sending yields on the country’s 10-year bonds to a euro-era record on June 12.

“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.”

Bloomberg’s lawsuit, filed in December 2010, requested access to two internal papers drafted for the central bank’s six-member Executive Board. The notes 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.

‘Greek Case’

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.

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, which Greece hadn’t disclosed as debt before the crisis began, 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.

“It’s like a husband who knows his wife has a lover and doesn’t do anything about it,” DIW’s Erber said of the EU authorities. “Tacit acceptance makes them accountable as well.”

George Papandreou

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.

German Chancellor Angela Merkel, the main proponent of austerity as a fix to the crisis, said on June 7 that total European aid for Greece amounts to about one and a-half-times the country’s economic output, contrasting it with the Marshall Plan for Europe after the end of World War II, which she said amounted to 3 percent of the continent’s gross domestic product.

In the largest derivative transaction disclosed so far, Greece borrowed 2.8 billion euros from Goldman Sachs (GS) 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 asked us for general clarifications,” Eurostat said, declining to elaborate further.

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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