Brussels, 05/11/2001 (Agence Europe) - Resorting to the use of "swaps" (contractual contracts between two parties for exchanging financial risks) to reduce budgetary deficit is legitimate in the EU, it was declared on Monday by the spokesperson for Commissioner Pedro Solbes. He was speaking at a somewhat reassuring explanatory session on information relayed the same day by The Financial Times whereby Italy took advantage of this kind of financial transaction to be able to hide the real magnitude of its deficit and thus escape the ban on euro-zone European countries to have a deficit larger than 3% of their GDP. "We can see no problem with this transaction (…) which does not involve the manipulation of figures", said the spokesperson, recalling that the rules laid down in 1979 and revised in 1995 by the Fifteen allowed the technique to be employed in order to make savings on interest rate payments.
The information given by The Financial Times come from a study by Professor Gustavo Piga, from the Italian University of Macerata, carried out under the patronage of the derived products market regulator, ISMA (International Securities Market Association). In the introduction to its report, ISMA considers that, by exploiting the ambiguity of accounting rules that apply to fixed term contracts - hence without explicit breach of the law - this member country of the euro-zone was able to mislead the European institutions, the other European governments and its own public as to the real size of its budgetary deficit. The report does not cite the name of the country incriminated but, according to the FT, the country in question is Italy. The daily gives as proof the issuance of securities in 1995 which corresponds "perfectly" to the case evoked by the report, a fixed term contract with a private partner with a State loan as a guarantee (we recall that Italy reduced its budgetary deficit by over 6% in 1996 and less than 2% in 1999).
Although the amounts apparently saved by "embellishing" issuance with recourse to swaps remain quite low compared to the debt, they can nonetheless make a huge difference at the level of the European Union economy, notes Professor Piga. The difference between the accounting appearances and the reality is enough, he states, to allow a "bad EU pupil" to wrongly give the impression that it has respected the budgetary requirements of the Maastricht Treaty. Mr Piga deplores the fact that the governments are not subject to the same constraints as private banking establishments, and hopes that bodies such as the International Monetary Fund, the World Bank and the European Union will put an end to this anomaly. More often than not, a "swap" agreement covers interest rates and provides for the transformation of fixed rate payment obligations into variable rate payments.