A court will decide tomorrow whether the European Central Bank should release files on how Greece used derivatives to hide its debt in the first legal challenge to the authority’s bid to shield its workings from scrutiny.
Bloomberg News sued the ECB in December 2010 to obtain the documents under European Union freedom-of-information rules. The papers may illuminate the role the central bank played as Greece covered up its deficit for almost a decade before seeking a 240 billion-euro ($311 billion) bailout and the biggest debt restructuring in history.
The ECB, which puts greater limits on its disclosures about its decision making than its British and U.S. equivalents, withholds minutes from meetings for decades and keeps members’ votes private. The central bank is under pressure from policy makers including governing council member Erkki Liikanen to boost transparency as it becomes both lender of last resort to nations hit by the debt crisis and regulator of the region’s banks. The ECB this week endorsed a package of measures to keep Greece from bankruptcy.
“It’s a momentous occasion for Europe to show its deep commitment to the fundamental principle of accountability in the face of fiscal mismanagement,” said Gustavo Piga, an economics professor at University of Rome Tor Vergata, and former adviser to the Italian Treasury.
Bloomberg’s freedom-of-information request, filed in August 2010, was twice rejected by the ECB. Bloomberg’s lawsuit at the General Court in Luxembourg seeks 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, the country’s biggest lender, to borrow from the ECB by creating collateral from a securitization of swaps on Greek government debt, the Executive Board said in a March 2010 cover note obtained by Bloomberg News.
If the court rules against the ECB, the central bank would have two months to comply. Both sides can appeal the decision at the European Court of Justice.
The ECB said at a court hearing on June 14 that making the two documents public could still aggravate the crisis, putting the future of the single currency at risk. The files contain assumptions and hypotheses that were used to shape decisions and their release could threaten policy making, the central bank has argued.
“There are limits to transparency,” said Ernest Patrikis, a partner at law firm White & Case LLP and a former general counsel at the Federal Reserve Bank of New York. “When things are nurtured enough and old enough that they should be available to scholars, that’s one thing, but too much transparency chills discussion.”
The ECB has been central to keeping Greek banks afloat since the crisis began, providing loans and at times risking European taxpayers’ money in event of an outright default. The central bank owns about 45 billion euros of Greek government bonds after it began buying them in 2010 after the first rescue.
The briefings give officials’ views on the impact of the swaps and analyze how the Titlos transaction would affect “the Eurosystem collateral framework, and associated risk control measures,” then ECB President Jean-Claude Trichet said in his reply to Bloomberg’s initial request for information.
The files “played a role” in shaping policy and “highlighted there were issues” when the ECB undertook a review of its criteria for accepting collateral in its funding operations, the ECB’s lawyers told the court in June.
One of the cornerstones of the ECB’s response to the crisis was to provide banks with as much money as they needed in return for collateral. In October 2010, the ECB changed the rules on the asset-backed securities it accepted, and gave itself more discretionary power to reject collateral.
In April 2009 -- seven months before the Greek crisis erupted -- ECB officials spotted “a swap operation in unusual terms,” according to the March 2010 cover note.
Repeated revisions of Greece’s budget figures starting 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, the EU statistics agency, gained additional powers allowing it to audit countries’ financial data.
“An ECB view on a historical event in Greece is hardly going to undermine its ability to influence markets and is unlikely to undermine the ECB’s credibility,” said Charlotte Gaitanides, a lawyer and head of European Studies at the University of Flensburg in Germany. “If it was a bit more transparent on issues that do not directly affect its ability to conduct monetary policy, it would probably enhance it.”
Unlike the Bank of England and the U.S. Federal Reserve, the ECB doesn’t publish minutes of governing council members’ deliberations at policy-setting meetings. The ECB argues that policy shields policy makers from political pressure in their home countries.
In a separate case, the ECB this year won the backing of the European Ombudsman in a decision to keep its dealings with governments private. The Strasbourg-based EU agency, which handles complaints against EU institutions including freedom-of-information requests, sided with the ECB’s decision to withhold an August 2011 letter to the Spanish government on economic reform in response to a public access filing.
Disclosing the letter could expose Spain to “speculative threats” and undermine its economic policy, the Ombudsman said in its assessment of the case published in July.
Still, the ECB should view transparency as an opportunity to enhance its legitimacy, and not just as a legal obligation, the Ombudsman wrote in its findings.
“When you protect the market to the exclusion of everything else, the only way you find out what’s happening is when everything has collapsed all around you,” said Lucy Dalglish, dean of the University of Maryland’s journalism college and former executive director of the Reporters Committee for Freedom of the Press. “Who’s getting the short stick here? It’s the public, who doesn’t know what its government representatives are up to.”
Public access to information about how the ECB works has become even more constrained since the central bank was chosen in 2010 to chair the European System Risk Board, a pan-EU supervisor that monitors markets and financial risk.
In 2011, months after Bloomberg’s information request, the ECB added a fresh exception to the instances in which access to documents can be refused, allowing it to withhold information if the stability of the financial system or in a member state could be undermined.
“Financial stability is an economic concept and not a legal one and can be applied to pretty much anything,” said Hubert de Vauplane, a partner at Kramer Levin Naftalis & Frankel LLP in Paris.