The latest revelation of deception by derivative came in Italian government documents leaked this week to two European newspapers, La Repubblica and The Financial Times. The Financial Times said it appeared that Italy had used derivatives in the 1990s to allow it to make its budget deficit seem smaller, thus enabling it to qualify for admission to the euro zone. The report said it appeared those derivatives, now restructured, might be exposing Italy to a loss of 8 billion euros ($10.4 billion).

La Repubblica noted that the director general of the Italian Treasury Department at the time, Mario Draghi, is now running the European Central Bank.


What seems to have happened in Italy is similar to something that we already know Greece did. Rather than borrow money -- which would increase the reported budget deficit -- the country entered into a derivatives contract that called for the banks to make large upfront payments in return for larger payments later from the government.


There is some evidence that Europe knew what was going on and chose to ignore it. Joining the euro was seen as more of a political event than an economic one, a symbol of European unity.

The effect of the funny accounting was similar to that of a student cheating on college entrance exams. The student may get into a university where he or she cannot compete, just as Italy and Greece find themselves in a currency bloc where their economies are at a significant disadvantage.

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