If you’ve ever wondered about the veracity of officially reported figures on national deficits, you have every reason to be skeptical. Satyajit Das explains in the Financial Times that at least two nations have used derivatives to hide the true extent of their borrowing.
The most notorious user of these devices is Greece. But Italy has also used currency swaps and the like to meet its obligations under the European Union’s Maastricht treaty.
While the details get complicated, the core notion behind these swaps is that a government exchanges one stream of future payments for another. By fiddling with the rates and assumptions, it’s possible to arrive at a situation where the country gets a big pot of money up front in exchange for making higher-than-market payments down the road.
What’s the advantage of doing all this? A swap is not considered a loan, so it doesn’t count again a country’s official deficit. The disadvantage, of course, is that it creates an artificial appearance of prosperity. But, as Greece has demonstrated, the game can go on for a long time before anyone gets caught.
Freelance business journalist Ian McGugan blogs for the Financial Post.