Greece faces deadline on debt-masking deals

Crisis-hit Greece has two days to explain its use of complex financial deals to mask debt and just a month to prove that its drastic budget cuts go far enough to reassure markets and EU governments.

Greece’s troubles have plunged the 16 nations that use the euro into a crisis by breaking rules on debt and deficit that underpin Europe’s currency union amid worries that its problems could be even bigger because its public finance figures cannot be trusted.

The European Union’s commissioner for economic and monetary affairs, Olli Rehn, said yesterday that he wanted the Greek government to supply answers by Friday on how it used currency swaps and how that affected debt and deficit figures.

EU finance ministers also gave Greece a deadline of March 16 to show that it can make big spending cuts to bring its deficit down from the EU’s highest, 12.7% of economic output, to 8.7% this year.

They said this was essential to “remove the risk of jeopardising the proper functioning of economic and monetary union”.

Eurozone nations, which have pledged to bail out Greece if needed, said they would demand new spending cuts, higher value-added and fuel taxes and new taxes on luxury goods including cars, if Greece could not make the deficit reductions it has promised.

Greece now has a month to show that it can make real savings from a freeze on public sector salaries, cuts to bonuses and stipends and promises to reform pensions and health care.

Meanwhile the government was facing opposition at home as customs officials walked off the job yesterday for a three-day strike which will hamper imports and exports.

Finance ministry employees went on strike for four days, including staff at Greece’s much-maligned statistics service, accused by the EU of helping cause the crisis by faking the country’s economic statistics.

Last week, striking civil servants shut down schools, grounded flights and walked out of hospitals in a 24-hour protest. A broader strike is planned for February 24.

But finance minister George Papaconstantinou insisted he was already ahead of schedule on sweeping budget reductions and public finances reported a slight surplus last month thanks to a one-off tax on large companies.

“It’s a matter of credibility for the country,” he said. “The execution of the Greek budget for the month of January, based on preliminary figures, is going quite well. We have actually a surplus.”

Greece says it is not asking for financial help and will not need any – but it is facing a credibility crisis as a February 1 report commissioned by the finance ministry warns of “significant debt revisions” for 2009 statistics due to swaps, debt to suppliers and state-guaranteed loans that may default.

The report said some swaps were now “being done in order to transfer interest from the current year to the future, with long-term loss to the Greek state”.

Mr Rehn said “it is clear that a profound investigation must be done on this matter”, promising that he would check to see if all rules were respected.

“If it turns out that there is such kind of securitisation of swaps that are not in line with the rules of the time, then of course we would need to take action,” he said.

The EU can take Greece to court, under threat of daily fines, to change its statistics methods. It is already threatening legal action for Greece’s failure to report accurate public finance figures last year.

Mr Papaconstantinou said on Monday that such swaps were legal when Greece used them and that it was not using them now and would stick to EU statistics rules on new financing deals.

He also claimed Greece was not alone among EU nations in using such deals. Mr Rehn said he was not aware of similar problems with other countries but that “this has still to be verified”.

Mr Rehn also lashed out at the investment banks that advised Greece to mask debt.

Reports in The New York Times and Germany’s Der Spiegel said Greece used US financial institution Goldman Sachs to engage in the swaps. The bank did not comment when contacted last week.

“I think the banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics,” Mr Rehn said.

Traders’ fears that Greece might not make debt repayments increased yesterday, with the spread of the Greek government bond widening to 3.35 percentage points against the benchmark German bond.

The spread was below 3.00 points last week on hope of a detailed eurozone bailout plan.

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