Lack of Transparency Is Undermining Europe’s Financial System

The European Central Bank allowed itself to be deceived by a default in the making and now refuses to share with the taxpaying citizens it represents the details of the deception. Secret and opaque financing got Europe into a mess that can only be resolved by the transparency of full disclosure.

As European Union leaders debate a second aid package for Greece, the crisis has widened to Ireland and Portugal and challenges the viability of the confederation of the 17 countries sharing the euro. Greece may need as much as 45 billion euros ($63.5 billion) in new loans to avoid a default even after it got a 110 billion euro lifeline last year from European countries and the International Monetary Fund.

Under the EU’s Freedom of Information rules, Bloomberg News is suing the ECB to release documents showing how Greece used secretive financial instruments in the family of derivatives to paper over burgeoning and undisclosed indebtedness from the central bank -- a pattern of obscure financing spanning at least half a decade.

The two internal documents Bloomberg is requesting from the ECB were drafted for the central bank’s six-member executive board in Frankfurt last year.

The documents reveal what the ECB knew a year before the first bailout for Greece was agreed upon and they can inform citizens about the thinking of monetary officials before taxpayer money was committed to save the country from default. (The EU’s statistics office says it only received full information about the swaps four months after the bailout.)

‘Incendiary Instruments’

Boosting transparency on the derivatives not traded on any exchange -- information that is hidden from European taxpayers despite the scope of the potential liabilities -- would show how governments have used such incendiary instruments to bet on markets and may persuade nations to avoid using them ever again.

While we know how the interest-rate and currency swaps added to Greece’s debt when they were struck, Greece has yet to disclose the current valuations of the contracts or how much money has been lost or made in the context of the country’s attempt to repay its debts.

At a time when European governments and private investors are being asked to contribute to another bailout for Greece, the ECB’s secrecy leaves unanswered questions. Money flees secrecy, and opacity engenders suspicion among investors and the public.

The stakes couldn’t be higher. The euro is the crowning achievement of the European Union, which has maintained peace on the continent and blended the economies of its 27 members in ways undreamed of at its birth more than half a century ago. The 17 nations sharing the euro use one currency and live under one monetary policy -- for better or for worse, as the Greek crisis shows. The 13-year-old ECB is being tested as never before.

Precedent at Fed

The ECB case follows Bloomberg’s success in forcing the U.S. Federal Reserve to disclose details of the emergency loans it provided to banks in 2008.

Those disclosures showed that a European bank -- not a U.S. one -- was the biggest borrower from the Fed’s main funding source during the height of the 2008 panic. The documents also revealed that Bank of America Corp. and Goldman Sachs Group Inc. borrowed more often than they told investors. And the Bank of China Ltd. and Arab Banking Corp., a Bahrain-based bank partly owned by the Libyan Central Bank, both tapped the U.S. central bank’s fund.

The Fed, and a group of the biggest U.S. banks that joined in defense of the lawsuit, warned that the disclosures would weaken Fed loan recipients and possibly lead to bank runs. More than two months after the records were released, nothing of the sort has occurred.

‘Impenetrable Investments’

So-called hedging instruments such as interest-rate swaps have been responsible for billions of dollars of losses for government entities in the U.S., showing their danger. Understanding the role investment banks played in offering these impenetrable investments may help regulators as they write rules for the $601 trillion over-the-counter derivatives market.

The ECB owes a full accounting to member countries and taxpayers whose money has propped up Greece and may yet be used to support other EU countries. Transparency on this issue is the only way we can make sure a debt crisis never again becomes contagious.

(Matthew Winkler is the editor-in-chief of Bloomberg News. The opinions expressed are his own. This article appeared earlier in the Wall Street Journal Europe.)

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