s astonishing how short our collective memories have become. It was once well-known that Greece, Italy and other countries had used dodgy tricks to embellish their public finances prior to the launch of Economic and Monetary Union to meet the entry requirements; yet now everybody is pretending to be surprised or even shocked.
Even the latest twists – Goldman Sachs helped Greece push some debt off balance sheet and JP Morgan did the same with Italy – are old stories. The Italian transaction dates back to 1995; it was first revealed in 2001 by Gustavo Piga, professor at the University of Rome. A row ensued, with the European establishment cracking down on anybody who dared talk about this; but the full details soon emerged. Italy miraculously cut its deficit from 6.7 per cent of GDP to 2.7 per cent in 1996-97; and the establishment, desperate to pretend that the euro was on track, turned a blind eye to the shameless window-dressing.
Greece’s equally controversial swap trade was first revealed by Risk magazine in 2003. The deal, completed in 2002, allowed Greece to borrow €1bn without adding to its public debt. Goldman sold the swap to National Bank of Greece in 2005. Other banks and countries were involved in similar schemes. Goldman last year tried to sell Greece a different type of plan based on securitisation but this was turned down.
In fact, it was not until March 2008 that Eurostat – the EU’s statistical agency – banned the main practice used by Italy and Greece – even though it had known about it for years. One wheeze was to issue euro-denominated debt – and then to swap it into a foreign currency at an artificially low exchange rate, in return for sky-high interest payments. Because Eurostat booked the new foreign currency debt at the market exchange rate, the country’s national debt looked lower than it was – even though it was saddled by very high future interest payments. In his 2006 tome Traders, Guns and Money, Satyajit Das explains that the basic concept originated in post-bubble Japan where so-called Tobashi interest rate swaps allowed firms to avoid disclosing bad debts.
So it was bizarre to hear the EU defend Eurostat yesterday on the grounds that it knew nothing of the practice. In fact, its own 2002 accounting guide talked about it at length and confirmed that it was legal. Even by Brussels’ standards, this sort of nonsense beggars belief.
Everybody has also forgotten (so let me “reveal”) how in 1996 the French government was desperately asking every bank for help in “cutting” its deficit. It subsequently grabbed £4.7bn from France Telecom – in return for the transfer of its pension liabilities to the public sector budget. The accounting switch was worth 0.5 per cent of GDP and allowed France to join the euro. The UK government has also long been an expert in camouflaging its debt, thanks to the private finance initiative (PFI) and the ability to keep massive pension liabilities away from the main accounts. At least Gordon Brown never used Greek-style currency swaps; and securitisations were done transparently.
Politicians spent the crisis rightly criticising dubious private sector debt concealment accounting practices; yet all along their own behaviour was even worse. We need much stricter public sector accounting rules, real transparency – and above all less hypocrisy.