In 1997, countries across Europe were struggling to give their finances a last-minute wash and brush up so as to make sure they qualified to join the eurozone - the list of those ready to switch to a single european currency.

According to new research, though, at least one resorted to a secret deal with a corporate bank to disguise the fact that its budget deficit was far too big to meet what were called the "convergence criteria".

According to additional research by several newspapers, that country was Italy.

The report, from the International Securities Market Association, suggests that an unnamed government exploited ambiguity in accounting rules for so-called "swap" transactions to defer interest rate payments on its national debt, thus reducing its budget deficit.

Swaps allow companies - or in this case countries - to manage the interest payments on their debt by agreeing to pay a sum in the future, at a floating rate, to a second party which effectively picks up the bill for the fixed interest costs in the meantime.

Bond controversy

The author, Professor Gustavo Piga from the University of Macerata in Italy, says he uncovered evidence of such an agreement with a private bank using a three-year government bond issued in 1995.

Both the Financial Times and the Guardian say only one bond issued that year matches the criteria: one issued by the Italian government, valued in Japanese yen and worth $1.1bn.

Italy's ability to qualify for economic and monetary union (EMU) was met with some scepticism at the time. In 1996 its budget deficit was 6.5%, well above the 3% ceiling for membership of the euro club.

By 1999, as the euro was launched, it was down to 2%.

Risk

According to Professor Piga, this practice is a risky one, since it distorts national accounts, potentially puts governments in hock to the institutions offering the transactions thanks to the desire for secrecy, and allows administrations to pass on hidden public debt to their successors.

But the European Commission said that swaps were not necessarily a bad thing.

"The simple fact that interest-rate swap transactions have been used in treasury debt management does not amount to cheating," said Gerassimo Thomas, the commission's spokesman on economic and monetary affairs.

"It's not in principle a negative thing," he said. "It is probably a positive thing" since it allows active management of national debt.

In any case, he said, swaps were all accounted for in an officially respected way ahead of EMU.