Greece Is Far From The EU's Only Joker

First there was Enron; then, subprime. Now it turns out that some governments have been just as adept at using financial alchemy to hide debts. Take Greece, a country with a $350 billion national debt that is now under investigation by the European Commission (EC) for underreporting its deficit by as much as 9 percent of GDP in 2009. It used derivatives devised by Goldman Sachs to give itself an off-the-book loan, sold future EU subsidies and lottery earnings to investment banks for upfront cash, and raised money by mortgaging its highways and airports.

But even as Europe's leaders unleashed their fury at the Greeks--and at the bankers who aided and abetted them--it turns out there is hardly any government that isn't guilty of these kinds of tricks, according to OECD and EU officials. Italy has a similarly longhistory of using derivatives and creative accounting to artificially reduce its deficits. Belgium and Portugal have raised cash by selling future tax receipts. Last fall Germany tried to shift up to $60 billion of spending on public health care and jobless benefits into a special-purpose vehicle so it wouldn't show up in the 2010 deficit--before caving to media outrage. Another widespread gimmick is the "public-private partnership," which shifts current outlays to private investors in return for future payments that often don't show up as liabilities. Britain, where this kind of scheme first flourished (prodded along by the London banks), has since moved some of the $80 billion in such deals back on the books, but most remain off-budget.

Most countries, including the U.S., also don't account for all their guarantees to banks and other bailout targets, even though some of this money will turn into debt. When the EC last year tried to force EU members to put bailout funds on the books, a French-led lobbying campaign vetoed the change. France has kept more than $100 billion off its national accounts that way. And then there's the trillions in "boomer debt"--future liabilities for entitlement programs like public health care--which most economists agree should be factored in. If it were accounted for, government debt would reach 500 percent of GDP in some Western countries.

Hiding public debt has been around for as long as politicians have spent money. What's different now is that there are serious worries about the West's ability to repay its IOUs. As the focus shifts from private credit to public debt, expect greater scrutiny of government numbers, and more tricks to come to light. According to an EU official who asked not to be named, in the past, pressures to rein in spending have led governments to rely more on creative accounting. Unfortunately for them, government debt is no longer just a political question, but an existential one.