Pressure Rises on Greece to Explain and Fix Crisis

Pressure Rises on Greece to Explain and Fix Crisis By STEPHEN CASTLE
Published: February 16, 2010
BRUSSELS — European officials told Greece on Tuesday that it must immediately explain how the government used complex financial tactics engineered by Wall Street to mask its rising debt, and warned that they might widen their inquiry to other countries that use the euro.
Elena Salgado, the finance minister of Spain, with, from left, Olli Rehn, Michel Barnier, and Algirdas Semeta of the European Commission at a news conference in Brussels on Tuesday.
Finance ministers gathered here also gave Greece one month to prove it could cut its deficit this year to 8.7 percent of the nation’s economic output, from 12.7 percent. If a review finds that Greece’s blueprint for deficit reduction is too weak, officials will demand deeper spending cuts.

Greece’s huge public deficit and high debt levels have prompted a crisis of confidence in the financial markets, and the European single currency is facing its biggest test since its inception.

Meanwhile, Greek civil servants took to the streets on Tuesday to protest government austerity measures. Customs inspectors, tax collectors, trade unions and other unions have gone on strike in recent weeks, and each new wave of strikes appears to be more strident. On Tuesday, a bomb exploded at JPMorgan Chase’s offices in Athens, The Associated Press reported. No one was injured.

Though European leaders promised last week to take determined and coordinated action to defend the euro if necessary, there was no public discussion Tuesday on what form that could take.

Ireland’s finance minister, Brian Lenihan, said that the 16 euro zone finance ministers had agreed “that we will not talk about what the instruments are. We believe that would be unwise.”

As politicians sift through the causes of the crisis, Europe’s economic and monetary affairs commissioner, Olli Rehn, turned his attention to the use by Greece and other European countries of sophisticated financial instruments that helped conceal the scale of their deficits.

Mr. Rehn told Athens to explain by the end of the week how it relied on derivatives created by Goldman Sachs to allow the government to quietly spend beyond its means. A day earlier the European Commission had given Greece a month to deliver its explanation.

“It is clear that a profound investigation must be done on this matter,” Mr. Rehn said, “and I will ensure that we conduct the inquiry so we see whether all the rules were respected.”

If the use of the financial tactics was “not in line with the rules of the time, then of course we would need to take action,” including investigating whether states that adopted the euro used similar tactics, he said.

On Monday, the Greek finance minister, George Papaconstantinou, said that such swaps were legal when Greece used them. He added that they were no longer being used.

Asked at a press briefing if Spain, another heavily indebted nation, had been approached by big investment banks with similar ideas about using derivatives, the Spanish economy minister, Elena Salgado, replied: “No, absolutely not, and if such a proposal had been made it would not have been accepted.”

European Union officials suspect that investment banks may have exploited loopholes in procedures for reporting debt and deficit figures, which are central criteria for membership to the euro zone.

“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.

It remains unclear what, in addition to the measures already being taken against Greece, Mr. Rehn can do if the answers from Athens are not to his liking.