Obscure Debt Deals Of Euro Zone Governments Raise Concerns (GS, DB)

The euro zone, which is having a tough time with the crisis in Greece, and the possible risk of contagion spreading to other fragile euro zone economies, has now landed into fresh round of trouble, according to a wall street journal report. According to the report, some euro zone economies have been using complex financial instruments to hide the true size of their debts, and deficits in order to comply with euro zone’s strict guidelines of maintaining debt at 60% of GDP, and deficit at 3% of GDP. Some members of the euro zone have apparently used instruments like currency swaps to show lower levels of debt, and deficit, with help from banks, and financial institutions. Some governments have sold state assets, and securitized future payments to meet the fiscal target. In fact, Greece has gone to the extent of not disclosing its defense expenditure, saying that it is “confidential.” Portugal, another country which is struggling with a mounting deficit, showed the subsidies it provided to Lisbon subway and other state enterprises as equity purchases allowing it to lower budget deficit by almost 2 percentage points. France agreed to assume pension liabilities of soon-to-be privatized France Telecom in return for more than €5 billion lump sum payment, to reduce its deficit in 1997. Euro zone governments have also known to be using currency swaps to borrow in foreign currency, and use derivative instruments to hedge the risk from exchange rate volatility. These instruments are also doubted to be used to artificially manage cash flows, and liabilities to meet the debt, and deficit thresholds. The euro zone governments are not obliged to disclose the precise nature of such derivative transactions until 2008 as Eurostat allowed the governments to use such transactions till that year to adjust debt levels. Goldman Sachs Group, Inc. GS is said to have done 12 swaps for the Greece government between 1998, and 2001, while Deutsche Bank AG DB executed currency swaps for Portugal between 1998, and 2003. Though the banks and corresponding governments decline any role of such swaps to hide the national debt or deficit position, there are now widespread doubts about the actual intent of such instruments. In fact, the payment to be made to Goldman by the Greece government in return for a good deal on currency rates, was also ultimately structured as a swap, so that such payment should not dent the deficit further. The opaque nature of such deals does not bode well for the investors, and could lead to a loss of confidence in a currency that was expected to overtake the dollar, and become a reserve currency.