ECB Wins Ruling to Deny Access to Secret Greek Swap Files

By Stephanie Bodoni, Elisa Martinuzzi & Gabi Thesing

The European Central Bank will be allowed to keep private files showing how Greece used derivatives to hide its debt after defeating the first court challenge using the bloc’s freedom of information rules.

“Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece,” the EU General Court in Luxembourg said today, rejecting a request by Bloomberg News initially filed in August 2010.

Today’s ruling by three judges denies European taxpayers, on the hook for the cost of Greece’s 240 billion-euro ($311 billion) bailout, the opportunity to see whether EU officials knew of irregularities in Greece’s public accounts before they became public in 2009. The decision underscores the ECB’s lack of accountability as it expands its powers to become the euro area’s chief banking regulator, said Georg Erber, a research associate at the German Institute for Economic Research.

“The courts are bending the rules to legalize the policies of the European institutions and help stabilize the region,” said Erber, a specialist in financial-market regulation. “It reveals implicitly that the EU was well-informed about what was going on and didn’t take steps to avert the crisis.”

‘Speculative’ Document

Bloomberg’s freedom-of-information request was twice rejected by the ECB before the news organization sued in December 2010. Bloomberg sought access to two internal papers drafted for the central bank’s six-member Executive Board. The first document is entitled “The impact on government deficit and debt from off-market swaps: the Greek case.” The second reviews Titlos Plc, a structure that allowed National Bank of Greece SA (ETE), the country’s biggest lender, to borrow from the ECB by creating collateral.

The ECB said at a June hearing that publishing the files could still aggravate the sovereign-debt crisis, putting the future of the single currency at risk. The files contain assumptions and hypotheses that were used to shape decisions and their release could threaten policy making, the ECB argued.

“If it was an internal document and not intended for public view, it might have been speculative about what else was lurking out there,” said William White, chairman of the economic development and review committee at the Organization for Economic Cooperation and Development and former chief economist at the Bank for International Settlements. “That might have been what they were concerned about.”

‘Right to Know’

The ECB was entitled to refuse access to protect the confidentiality of the proceedings of its decision-making bodies, the judges ruled after viewing the documents.

“European citizens have the right to know how their money is used to bail out secret financial deals, especially as the European Central Bank takes on more regulatory responsibility for Europe’s banks,” Bloomberg News Editor-in-Chief Matthew Winkler said. “We are disappointed with the court’s ruling to continue the culture of secrecy.”

Officials at the ECB didn’t have an immediate comment on the ruling. The central bank, which puts greater limits on its disclosures about its decision making than its British and U.S. equivalents, is under pressure from policy makers including governing council member Erkki Liikanen to boost transparency. ECB President Mario Draghi last month defended the bank, saying it was already a “very transparent” institution.

Today’s ruling bodes badly for transparency in Europe, said Gunnar Beck, a barrister and a reader in EU law at the University of London.

‘Lip Service’

“The ECB is becoming less transparent, even though it pays lip service to it,” he said.

The briefings give officials’ views on the impact of the swaps and analyzed how the Titlos transaction would affect “the Eurosystem collateral framework, and associated risk control measures,” then ECB President Jean-Claude Trichet said in his reply to Bloomberg’s initial request for information.

Titlos, created in February 2009, allowed National Bank of Greece to borrow from the ECB by creating collateral from a securitization of swaps on Greek government debt, the Executive Board said in a March 2010 cover note to the two documents seen by Bloomberg News. The Greek lender loaned its government 5.4 billion euros as part of the deal, according to the ECB note.

Collateral Rules

One of the cornerstones of the ECB’s response to the crisis was to provide banks with as much money as they needed in return for collateral. In October 2010, the ECB changed the rules on the asset-backed securities it accepted, and gave itself more discretionary power to reject collateral.

Separately, in April 2009 — months before the Greek crisis erupted — ECB officials spotted the “swap operation in unusual terms” involving National Bank of Greece, according to the March 2010 cover note.

Repeated revisions of Greece’s budget figures starting in October 2009 spurred a surge in the country’s borrowing costs, eventually forcing the nation to seek aid from the EU and the International Monetary Fund. In 2010, Eurostat, the EU statistics agency, gained additional powers allowing it to audit countries’ financial data.

Under Eurostat accounting rules, nations were permitted until 2008 to use so-called off-market rates in swaps to manage their debt. The use of off-market swaps, which Greece hadn’t previously disclosed as debt, let the country increase borrowings by 5.3 billion euros, Eurostat said in 2010.

In the largest derivative disclosed, Greece borrowed 2.8 billion euros from Goldman Sachs Group Inc. (GS) in 2001 through a derivative that swapped dollar- and yen-denominated debt issued by the nation for euros using a historical exchange rate.

The case is: T-590/10, Thesing and Bloomberg Finance v. ECB.