The European Central Bank’s court victory allowing it to withhold files showing how Greece used derivatives to hide its debt leaves one of the region’s most powerful institutions free from public scrutiny as it assumes even more regulatory power.
The European Union’s General Court in Luxembourg ruled yesterday that the central bank was right to keep secret documents that would reveal how much the ECB knew about the true state of Greece’s accounts before the country needed a 240 billion-euro ($311 billion) taxpayer-funded rescue.
The case brought by Bloomberg News, the first legal challenge to a refusal by the ECB to make public details of its decision-making process, comes a month before the central bank is due to take responsibility for supervising all of the euro- area’s banks. The central bank already sets narrower limits on its disclosures than its U.S. equivalent, the Federal Reserve. The court’s decision shows the ECB has too broad a discretion to reject requests for disclosure, academics and lawyers said.
“It’s a very disturbing ruling,” said Olivier Hoedeman of Corporate Europe Observatory, a Brussels-based research group that challenges lobbying powers in the EU and campaigns for the accountability of EU bodies. “It is such a sweeping, blanket statement that it undermines the right to know.”
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, the country’s biggest lender, to borrow from the ECB by creating collateral from a securitization of swaps on Greek sovereign debt. The bank loaned 5.4 billion euros to the government.
ECB President Mario Draghi said on Oct. 4 that the ECB “is already a very transparent institution,” citing the fact that he holds a monthly press conference after its rate decision, testifies to lawmakers, gives interviews and makes speeches.
In yesterday’s decision, the court upheld the ECB’s opinion that the documents sought by Bloomberg could damage the public interest and aggravate Europe’s financial crisis.
“The ECB must be recognized as enjoying a wide discretion for the purpose of determining whether the disclosure of the documents relating to the fields covered by that exception could undermine the public interest,” the three judges said in their ruling. Exceptions “must be interpreted and applied strictly,” they said. An ECB spokeswoman said the central bank welcomed the court’s decision.
Since Bloomberg made its request in August 2010, the ECB granted itself additional scope to withhold information if the stability of the financial system or a member state could be undermined. The power was added after the ECB was chosen by the European Parliament to chair the European Systemic Risk Board, a pan-EU supervisor that monitors markets and financial risk.
“This is a dummy standard which means whatever it wants it to mean and the courts grant it a margin of interpretative discretion,” said Gunnar Beck, a barrister and a reader in EU law at the University of London. “The ECB is becoming less transparent, even though it pays lip service to it.”
The ECB is under pressure from some policy makers to become more open as it embarks on more so-called non-standard measures aimed at staunching Europe’s crisis. The Frankfurt-based authority has been central to keeping Greek banks alive since the crisis began, providing loans and at times risking European taxpayers’ money in event of an outright default. The central bank owns about 45 billion euros of Greek government bonds, according to data compiled by Bloomberg.
Governing Council member Erkki Liikanen said on Sept. 21 it was no longer sufficient for the ECB to publish just its decisions, but that it needed to “take one step forward and also describe the conversation, what each member has said.”
Unlike the Federal Reserve, the ECB doesn’t publish minutes of its discussions in the run up to a decision on interest rates or non-standard measures for 30 years, arguing that secrecy is necessary to shield its officials from political pressure in their home countries. Instead, Draghi holds a monthly press briefing after the rate decision.
The Federal Open Market Committee meets eight times a year in Washington. At every other meeting, Chairman Ben S. Bernanke holds a press conference following the release of the Fed’s statement to explain the actions. Minutes of each meeting, which summarize the discussions that took place, are released with a three-week lag and transcripts are published five years later.
In Europe, internal dissent only reaches the public if a member chooses to go public, as was the case with Jens Weidmann, the Bundesbank president who has publicly opposed the ECB’s program to buy the government bonds of Spain and Italy if they request it. Weidmann said he wasn’t the only policy maker to have concerns about the proposal.
The ECB’s stance contrasts with the Fed, which has moved toward greater transparency, in part under pressure from the U.S. Congress and a lawsuit by Bloomberg News, said Roberto Perli, a former economist for the Federal Reserve’s Division of Monetary Affairs and a managing director at International Strategy & Investment Group in Washington.
Congress, through the Dodd-Frank Act, forced the Fed to reveal details of its lending through its discount window with a two-year delay. The Fed argued disclosure would stop banks from using the facility. The first release under the act was in September.
That followed the Fed’s release in March 2011 of more than 29,000 pages of documents, covering the discount window and several Fed emergency-lending programs established during the crisis from August 2007 to March 2010 after court orders upheld Freedom of Information Act requests filed by Bloomberg and News Corp.’s Fox News Network LLC.
“Of course it may be crucial to keep some market-sensitive information under wraps” to stop a run on a bank, said Petra Geraats, an economics lecturer Cambridge University who specialises in central bank transparency. “But when the ECB uses such an argument for two-year-old documents, claiming they could aggravate the crisis, one wonders what skeletons are still hidden in the ECB’s closets.”
The case is: T-590/10, Thesing and Bloomberg Finance v. ECB.