Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
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Not only Greece is hiding the true size of debts and deficits

Several European countries have used complex fiscal instruments and aggressive bookkeeping in order to meet the euro zone fiscal ceilings, according to an article published in the Wall Street Journal. Indeed, the caps of a debt level below 60% of the GDP and of a budget deficit below 3% is apparently source of trouble even for countries with a reputation of rigorous public finances.

The story of Greece that falsifies its national statistics is well known. What is less known is that countries like France, Portugal or even Germany are also trying to use some not-so-clean maneuvers in order to hide their real financial situation and build confidence in the stability of the euro. For that purpose, governments display great imagination: selling state assets, bundling future payments into securities to hawk, classifying subsidies as equity purchases (Portugal), fiddling with accounts of enterprises about to be privatized (for example, France received 5€ billion from France Telecom in 1997, which helped the country to fill the budget gap and join the euro zone).

Even Germany tried to reappraise gold reserves for a fast fix in 1997, but finally gave up under the pressure of the Bundesbank.

Another instrument of interest appears to be the use of currency swaps. This consists in borrowing in a foreign currency and using a derivative to offset the risk of currency fluctuations. But this can also be used to artificially massage cash flows and liabilities in order to meet debt and deficit thresholds.

With the necessity to finance recovery plans in most European countries, the use of those unorthodox methods is even more likely. A good test of financial markets’ lucidity will be the success or failure of the expected Greek bond emission.

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