February 22, 2010

DARN THAT ACORN AND THE UNDESERVING POOR!:

Debt Deals Haunt Europe: Investors Re-Examine Complex Financial Maneuvers Used to Hide Borrowings (CHARLES FORELLE AND SUSANNE CRAIG, 2/22/10, WSJ)

Investors long turned a blind eye to European governments' aggressive bookkeeping, aimed at meeting the euro zone's fiscal ceilings. Countries using the euro currency have a rich history of exotic maneuvers aimed at meeting rules requiring members to cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%. Despite criticism, European leaders deemed many of these moves acceptable as they sought the long-planned currency union.

To try to meet the targets, which were aimed at building trust in the stability of the euro, governments over the years have sold state assets, bundled expected future payments into securities to hawk and even, in the case of Greece, insisted to the Eurostat statistics authority that large portions of its military spending were "confidential" and thus excluded from deficit calculations. [...]

Countries "look for things because it helps their arsenal of techniques used to reduce their budget deficits," says James D. Savage, a University of Virginia professor who is an authority on EU budgeting. "The problem for Eurostat is the flourishing of new financial instruments and techniques. Member states are going to try to take advantage of them." [...]

In recent weeks, countries' use of currency swaps has drawn attention. In such transactions, often benign, countries might borrow in a currency not their own, for example, and use a derivative to offset the risk of currency fluctuations. But these instruments can also be used to artificially massage cash flows and liabilities, to meet debt and deficit thresholds.

Investors paid little attention to the often-opaque derivative deals until concern of a Greek default began to rattle markets.


Posted by Orrin Judd at February 22, 2010 6:54 AM
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