SALZBURG, Austria An Austrian provincial official accused of secret financial dealings more typical of hedge funds went public on Friday, saying her bosses knew all about the speculative investments and exotic currency trades.
Monika Rathgeber, who until Friday had been known to Austrians only as "Monika R", fought back for the first time in a scandal which has exposed lax supervision of opaque provincial finances, brought on early regional elections and triggered a drive to amend the constitution.
Rathgeber portrayed herself as a civil servant who had worked loyally for over two decades for Salzburg, a province better known for its Alpine scenery and baroque capital.
"In all those years of work the good of the province was the most important thing for me," she told reporters, adding that she was devastated by the accusations and wanted her job back.
"I cannot simply let these things go unchallenged," she said. Dressed in a leather jacket, print scarf, red top, black trousers and high-heel boots, the 41-year-old remained mostly calm although her voice quavered at times.
Described by one acquaintance as a "grey mouse", Rathgeber is a farmer's daughter who worked her way up to become budget and finance manager for Salzburg province.
Rathgeber's employers sacked her late last year and accused her of covertly borrowing 1.8 billion euros ($2.4 billion) over the last decade to run a shadow financial portfolio.
Austria's white-collar crimes unit said it is investigating Rathgeber, her suspended supervisor Eduard Paulus, and a colleague on suspicion of breach of trust. Rathgeber and the colleague also face an abuse of office inquiry.
Paulus has denied wrongdoing and said he will appeal against his suspension. Salzburg's Finance Director David Brenner resigned this week to take political responsibility, saying the province should not have been involved in this kind of business and controls had failed over a decade.
For Austrians, the case has raised the question: if this could happen in sedate Salzburg, why not elsewhere?
"There is a systemic issue," said Professor Stefan Pichler at Vienna University of Economics and Business Administration, calling the case "predictable", given state accounting systems that date from the era of Empress Maria-Theresia 250 years ago.
Provincial authorities have accused Rathgeber, whose last name loosely translates as "adviser", of duping officials and auditors by forging signatures and falsifying documents.
Until Friday, Rathgeber's face had been pixellated in photos to hide her identity. But she waived her confidentiality to dispute her employers' account. Smiling uneasily, she insisted her supervisors knew of all her activities and accused them of making her the scapegoat when the extent of the province's ambitious financial management came under scrutiny.
The case blew up in December when Brenner announced Rathgeber had acknowledged running up a 340 million euro book loss on years of derivatives trades.
The news shocked the country, led provincial elections to be brought forward to May, and set off a frantic search by outside experts for the extent of taxpayers' exposure.
A preliminary report the province released last week concluded that its financial assets exceeded its liabilities by 74 million euros at the end of 2012, although it would take months if not years to unwind the complex deals at uncertain final cost.
Holdings included 531 million euros in foreign-currency debt denominated in Turkish lira, Russian roubles, Brazilian reais and Indonesian rupiah; 837,000 euros in Greek state bonds, and a host of complex structured financial products.
"This was an ambitious portfolio with significant risks," said Willi Hemetsberger, a veteran Vienna banker who runs Ithuba Capital. He was brought in with PricewaterhouseCoopers to sort out the mess in Salzburg.
More than half of the securities were linked to other currencies or had payoffs that depended on moves in yields on different maturities of debt, he said. Many were highly structured private placements that were so complicated that the experts had to value them via computer models rather than actual market prices.
Even before the news broke, Salzburg's active dealing in complex financial products had been the talk of European trading desks, bankers told Reuters.
One banker who asked not to be named said colleagues in Germany and Britain used to compare notes about the rich pickings to be had from selling products to Rathgeber.
"You would meet people who say 'We are earning our annual budget with Salzburg'," he recalled, expressing surprise at how the province best known as home of the "Sound of Music" musical would trade in such exotic investments.
A foreign exchange broker who said he had dealt with the state recalled Rathgeber doing trades in exotic currency pairs such as Norwegian crowns and South African rand.
"We were relatively relaxed because we thought we would always get the money," he said, noting deals were always well documented. Confirmation of trades went to her email address.
He described her as a low-key person whose desk was always piled high with paperwork. "She was not one to show off Gucci shoes, drive a Lamborghini or take fancy holidays," he said.
One source close to the matter said her portfolio was based on two basic bets: that interest rates would fall, which they did, and that emerging markets would outperform, which they did.
"This is not a portfolio that is entirely stupid, it is just not appropriate for the province of Salzburg," he said.
Austrian Finance Minister Maria Fekter and the Financial Markets Authority have said there is no systemic risk from local finances. But she has agreed with state officials that Austria should amend its constitution to rule out high-risk public investing. Details are to be worked out by mid-year.
Bernhard Felderer, head of Austria's state debt watchdog agency, said the Salzburg case arose from a culture that has encouraged state and local agencies to try to maximise revenue by using innovative trading practices.
"Fifteen or 20 years ago these deals were the domain of hedge funds. Hardly anyone else would do them. But around the year 2000 municipalities and provinces began to speculate, with the view that they could make money in the long term. They forgot that more yield also means more risk," he told Reuters.
In Salzburg's case, he said: "The controls failed."
Nevertheless, there had been warning signs. The Austrian Court of Audit (ACA) issued a report in 2009 that found the provinces of Burgenland, Carinthia and Salzburg had been conducting derivatives trades without proper knowledge of the overall risk they posed.
Salzburg's had "value at risk" from derivatives worth 41 percent of its financial debt, the highest in Austria and eight times the level at the federal government, it found.
Events have since shown the Salzburg data were incomplete and wrong, the ACA said when starting a new review of the province's finances that is supposed to end in March.
It has leveled special criticism at the fact that governments' accounts do not need to detail derivatives or require reserves for potential losses.
"Time bombs worth billions could be ticking in the current bookkeeping of provinces and municipalities because neither derivatives nor leasing deals are visible," ACA head Josef Moser told a magazine last month. ($1 = 0.7477 euros)
(Reporting by Michael Shields; Editing by David Stamp)