EU nations mastered tricks of accounting Over the past decade, European governments have refined techniques that mask how they spend beyond their means.
By James Kanter International Herald Tribune
Tuesday, March 22, 2005
Are Greek overruns just honest tallying?
PARIS Did Greek accountants miss a trick?
.
It is possible that by posting the highest deficit recorded so far for any euro-zone country last week, Greece has simply offered a more honest appraisal of its financial woes compared with other countries using the single currency.
.
Over the past decade, European governments have refined techniques that mask how they spend beyond their means. This week they came up with a new one: giving Germany leeway to take its reunification costs into account - even though west and east merged 15 years ago.
.
So far, investors have not noticeably penalized governments for such activity. The euro, which the deficit rules are meant to protect, has strengthened against the dollar even as fiscal discipline weakened.
.
But there seems to be an increasing danger, say economists, of debt traders - so-called "bond market vigilantes" - punishing European governments for giving unrealistic assessments of their accounts.
.
Already, there are signs of that starting to happen.
.
On Friday, so-called reference rates for Greece and Italy - which got bad deficit news from the EU statistics office - widened, showing that markets have less faith than before in those countries' ability to manage their finances. Economists warn that this could lead to higher interest rates for everyone in the euro zone if Europe's central bank fears investors might pull out of Europe or if it sees inflation on the horizon.
.
"The volatility is relatively significant and a strong reminder that deficits can matter," said Hervé Clos, an interest rate strategist at BNP Paribas.
.
Traders are now focused on whether the volatility, which means that governments in Rome and Athens must pay more on their debt, will spread to German and French bonds, Clos said.
.
"Studies show that most euro-zone countries have resorted to a degree of creative accounting at one time or another," said Laurence Boone, a director at Barclays Capital in Paris.
.
Overruns in Greece and Italy, as well as pressure by France and Germany to loosen the rules, suggest the need for "independent fiscal commissions that would properly investigate public accounts in the same way as auditors in the private sector," she said.
.
The driving force behind creation of the euro was that a fixed currency would lower costs and remove exchange-rate uncertainty for businesses within Europe. Political agreement was needed to keep spending among the member states in check and ease fears of a maverick triggering inflation.
.
Lately, countries have been using one-time events to help improve their accounts. The most spectacular example was the sale of next-generation mobile phone licenses. In 2000 alone, euro-zone governments raked in €71 billion, or $94.5 billion, for allowing companies like Deutsche Telekom to carve up the airwaves for high-speed Internet access.
.
That money was "manna from heaven," said Vincent Koen, an economist at the Organization for Economic Cooperation and Development. He calculates that the great telephone sale knocked 1.1 percentage point off the euro zone's average deficit in 2000.
.
He also notes more serious gimmicks, such as booking cash from the sale of state industries but not fully reflecting how the state is stuck with pensions from retiring workers.
.
That is what France did in 1997, when the government agreed to cover France Télécom's pensions as a way to entice investors to take a stake in the company. The sale allowed France to knock half a percentage point off its deficit.
.
This year, France plans a repeat, partly privatizing Electricité de France and Gaz de France and increasing French accounts by around €7 billion while shaving 0.4 percentage point off the deficit. Meanwhile, say economists, the full picture of France's long-term obligations to cover retiring workers probably will not figure in the calculations.
.
Another favored tactic of hard-pressed governments is to book revenues they do not yet have. Koen says Italy counted future revenues from the national lottery in 2001, wiping 0.2 percentage point off its deficit figures.
.
Not all the euro zone's forecasting errors are due to such maneuvers.
.
The economic downturn that started in 2001 contributed to widening government deficits and deepening national debts. But economists are convinced that such sluggishness cannot entirely explain the discrepancies, and many now fear that accounting sleights of hand will only become easier to perform with this week's revisions to the stability pact.
.
"Many instances of government accounting have been abnormal," said Olivier Gasnier, an economist at SG Paris. "It now looks like governments will have lots more possibilities to avoid taking painful decisions."
.
Greece's revised deficit for 2004 came in at 6.1 percent of gross domestic product, or twice the 3 percent EU cap.
.
The Italian deficits in 2003 and 2004 could also be revised above the 3 percent limit, Eurostat, the EU statistics agency, said Friday.
.
.
See more of the world that matters - click here for home delivery of the International Herald Tribune.
.
< < Back to Start of Article Are Greek overruns just honest tallying?
PARIS Did Greek accountants miss a trick?
.
It is possible that by posting the highest deficit recorded so far for any euro-zone country last week, Greece has simply offered a more honest appraisal of its financial woes compared with other countries using the single currency.
.
Over the past decade, European governments have refined techniques that mask how they spend beyond their means. This week they came up with a new one: giving Germany leeway to take its reunification costs into account - even though west and east merged 15 years ago.
.
So far, investors have not noticeably penalized governments for such activity. The euro, which the deficit rules are meant to protect, has strengthened against the dollar even as fiscal discipline weakened.
.
But there seems to be an increasing danger, say economists, of debt traders - so-called "bond market vigilantes" - punishing European governments for giving unrealistic assessments of their accounts.
.
Already, there are signs of that starting to happen.
.
On Friday, so-called reference rates for Greece and Italy - which got bad deficit news from the EU statistics office - widened, showing that markets have less faith than before in those countries' ability to manage their finances. Economists warn that this could lead to higher interest rates for everyone in the euro zone if Europe's central bank fears investors might pull out of Europe or if it sees inflation on the horizon.
.
"The volatility is relatively significant and a strong reminder that deficits can matter," said Hervé Clos, an interest rate strategist at BNP Paribas.
.
Traders are now focused on whether the volatility, which means that governments in Rome and Athens must pay more on their debt, will spread to German and French bonds, Clos said.
.
"Studies show that most euro-zone countries have resorted to a degree of creative accounting at one time or another," said Laurence Boone, a director at Barclays Capital in Paris.
.
Overruns in Greece and Italy, as well as pressure by France and Germany to loosen the rules, suggest the need for "independent fiscal commissions that would properly investigate public accounts in the same way as auditors in the private sector," she said.
.
The driving force behind creation of the euro was that a fixed currency would lower costs and remove exchange-rate uncertainty for businesses within Europe. Political agreement was needed to keep spending among the member states in check and ease fears of a maverick triggering inflation.
.
Lately, countries have been using one-time events to help improve their accounts. The most spectacular example was the sale of next-generation mobile phone licenses. In 2000 alone, euro-zone governments raked in €71 billion, or $94.5 billion, for allowing companies like Deutsche Telekom to carve up the airwaves for high-speed Internet access.
.
That money was "manna from heaven," said Vincent Koen, an economist at the Organization for Economic Cooperation and Development. He calculates that the great telephone sale knocked 1.1 percentage point off the euro zone's average deficit in 2000.
.
He also notes more serious gimmicks, such as booking cash from the sale of state industries but not fully reflecting how the state is stuck with pensions from retiring workers.
.
That is what France did in 1997, when the government agreed to cover France Télécom's pensions as a way to entice investors to take a stake in the company. The sale allowed France to knock half a percentage point off its deficit.
.
This year, France plans a repeat, partly privatizing Electricité de France and Gaz de France and increasing French accounts by around €7 billion while shaving 0.4 percentage point off the deficit. Meanwhile, say economists, the full picture of France's long-term obligations to cover retiring workers probably will not figure in the calculations.
.
Another favored tactic of hard-pressed governments is to book revenues they do not yet have. Koen says Italy counted future revenues from the national lottery in 2001, wiping 0.2 percentage point off its deficit figures.
.
Not all the euro zone's forecasting errors are due to such maneuvers.
.
The economic downturn that started in 2001 contributed to widening government deficits and deepening national debts. But economists are convinced that such sluggishness cannot entirely explain the discrepancies, and many now fear that accounting sleights of hand will only become easier to perform with this week's revisions to the stability pact.
.
"Many instances of government accounting have been abnormal," said Olivier Gasnier, an economist at SG Paris. "It now looks like governments will have lots more possibilities to avoid taking painful decisions."
.
Greece's revised deficit for 2004 came in at 6.1 percent of gross domestic product, or twice the 3 percent EU cap.
.
The Italian deficits in 2003 and 2004 could also be revised above the 3 percent limit, Eurostat, the EU statistics agency, said Friday.
.
.
See more of the world that matters - click here for home delivery of the International Herald Tribune.
.
< < Back to Start of Article |
